10 Milestones In The Transformation Of CSC

The Tough Transition

Overhauling your business model is a tall order for any company, but when you're a multibillion-dollar organization with tens of thousands of employees, it's a massive undertaking. Over the past three years, CSC has worked to position itself to take advantage of major industry trends such as cloud and big data, as well as return the company to profitable growth. The road has been filled with both success and major challenges for the solution provider, No. 4 on the CRN 2014 Solution Provider 500. Take a look back at some of the major milestones in the company's transformation.

Before The Change

Prior to 2012, CSC yearly earnings reports showed consistently declining earnings on steady sales. In 2012, CSC lost $4.2 billion on $15.9 billion in sales. In the prior year, CSC reported earnings of $759 million, a drop of 11 percent, on $16 billion in sales. Between 2008 and 2010, the company reported steady sales of between $15 billion and $16 billion, with earnings fluctuating from $559 million in 2008 to $1.1 billion in 2009 to $834 million in 2010.

Mike Lawrie Hired As CEO

On March 19, 2012, CSC appointed Mike Lawrie as president and CEO after he had joined the company's board of directors the month before. He succeeded retiring CEO Michael Laphen.

Lawrie brought extensive IT leadership experience to the solution provider and a strong reputation in the industry for helping turn around international companies. In addition to more than 27 years at IBM, Lawrie was CEO of Misys, a financial services application software company in the U.K. While there, Lawrie helped drive significant revenue for the company, and said upon his hire that he hoped to bring the same success to CSC.

Performance Is 'Unacceptable'

Two months after Lawrie took over as the head of the company, he had some strong comments about CSC's performance during his first earnings call as CEO. Lawrie called the company's recent performance "poor" and "unacceptable," stating that he'd implement "immediate actions to begin to move in a different direction."

Cutting Costs

In 2012, Lawrie started making some big changes to spark a company turnaround. In addition to hiring Paul Saleh as CFO, Lawrie unveiled plans for major cost-cutting across the Falls Church, Va., company, with the removal of $1 billion in costs over 12 to 18 months. That reduction in costs has manifested itself in layoffs, cutting back on multiple layers of management, and cutting administrative costs. CSC sold off multiple areas of its business in 2012, including its Australian IT staffing unit, its credit services business, and Italian IT services business.

Transformation Phases

At an analyst day after coming on board Lawrie outlined two phases for the company transition. First, CSC would go through a period of aggressive cost-cutting. In the second phase, the solution provider would focus on revenue growth and expand margins. Lawrie predicted at the time that CSC would begin the second phase in fiscal 2015, which began in July 2014.

Growing Key Partnerships And Contracts

CSC has been focusing on key partnerships as it positions itself around next-generation technologies. Over the past year, those partnerships have included companies such as IBM, VMware, Workday, Amazon Web Services, SAP and others. These partnerships centered mostly on cloud and big data solutions.

CSC has also won key contracts over the past year, including a $90 million contract with the DynPort Vaccine Company and an $86 million blanket purchase agreement with U.S. Customs and Border Protection.

Making Key Investments

More recently, CSC has been launching key investments around cloud, big data and analytics and security. For example, in 2013, CSC bought enterprise cloud management company ServiceMesh for an undisclosed amount. Jacob Gordon, research analyst who covers CSC at Technology Business Research, said that acquisition was an example of CSC building a next-generation services organization around the cloud.

"That really put them on the map, to some degree," Gordon said. "Those acquisitions over the past year have allowed the company to gain some traction," he said.

SEC Probe

After a four-year probe by the U.S. Securities and Exchange Commission, CSC was hit with a $190 million settlement penalty, earnings restatement and review of its accounting compliance practices on Dec. 29, 2014. The probe, starting in January 2011, looked into possible "historic errors and irregularities" around CSC's profit margins for its U.K National Health Service (NHS) contracts, according to an 8K SEC Filing. CSC will have to restate goodwill and impairment charges in fiscal year 2011 and fiscal year 2012, as well as reduce net income by $50 million in fiscal year 2010 and $3.69 billion in fiscal year 2011. That, in turn, will increase net income in fiscal year 2012 by $3.9 billion.

'Execution Issues' Lead To Revenue Miss

Lawrie blamed "unforeseen delays and execution issues" for a revenue shortfall in the third fiscal quarter ending Jan. 2. The company reported sales of $2.95 billion, down 8 percent year over year. Lawrie said the missteps were due to difficulties hiring the required personnel in time to complete contracted IBM RPG programming language work. Lawrie said he has put steps in place to make positions more attractive to candidates and recruit the right talent, such as higher salary rates for new employees.

"We have to take responsibility for our execution issues," Lawrie said on the recent third-quarter earnings call. "[Going forward], we will not have so many execution missteps."

CSC Buyout Rumors Heat Up

There has been much talk about CSC exploring its buyout options with private equity firms since the fall of last year. Reuters brought those rumors back to the forefront in late February with a report that CSC held talks with both private equity firm Carlyle Group and solution provider behemoth Capgemini to buy out the company. Other reports have included Blackstone Group and Bain Capital as potential acquirers, but CSC itself has declined to comment on "rumors and speculation" to this point.

Bonus: What Analysts Say CSC Should Do Next

Going forward, analysts said they would like to see CSC reinvest in the business to drive growth. They told CRN that CSC should accelerate new offerings and clean up the contract issues that emerged in the last quarter's earnings. Other analysts predicted that CSC would be a smaller organization in five years as it makes changes to navigate the shift to the cloud and next- generation technology, such as cybersecurity, cloud and big data and analytics.