It’s been a busy few days for CSC with acquisitions, customer wins and some mixed fortunes in its latest financials.
The numbers make for the gloomiest reading. Some ‘highlights’:
- Overall revenues for Q1 to 3rd July down 15% to $2.76 billion.
- North American Public Sector (NAPS) revenues down 6%.
- The soon-to-be-independent Global Commercial (GC) down 19%.
- Global Infrastructure Services unit revenues down 22%.
- Global Business Services revenues down 16%.
Just another set of poor numbers for a legacy outsourcing provider in transition to a digital cloud services world? Perhaps. In May CSC announced that it planned to split into two separate publicly traded companies, with one focused on commercial businesses and another focused on the US public sector. That process is underway.
But while the road to the ‘new’ CSC is proving bumpy, the firm is pushing ahead into new areas to shore up its capabilities.
Yesterday, for example, the firm beefed up its FinTech credentials with the planned acquisition of London-based provider of front-office managed trading solutions Fixnetix. This will enable the firm to offer as-a-service utility models in the financial services sector.
The outsourcer also got some skin in the widening service management market plans to acquire Fruition Partner, the largest ServiceNow-exclusive service management consulting firm. (This is in itself further validation of the growing lucrative nature of the service management space.)
CEO Mike Lawrie says both are:
prime examples of how CSC is continuing not only to invest but we're beginning to shape our post separation commercial business to capitalize on growth opportunities in the marketplace and continue to narrow this gap between our traditional offerings and these new next generation offerings from a revenue standpoint.
Fruition Partners will join our GBS business as the foundation of CSC ServiceNow practice, broadening our consulting capabilities, and opening up new cross-sell opportunities.
The combination of CSC's global presence and capabilities and Fixnetix's highly specialized industry solutions presents significant growth potential as the capital markets industry continues to pursue cost reductions and increased efficiency through outsourcing.
These businesses that we bought today are what I'd classify them as tuck-ins. These aren't huge acquisitions by any stretch of the imagination. But they're examples of new offerings that we think can grow fairly rapidly over this period of time and help shrink that gap between our traditional business and these new businesses.
So all of this, the message we're sending here is, we're beginning to really position the commercial business post separation.
The allure of the FinTech sector is also behind CSC’s joint venture with rival outsourcing firm HCL. Lawrie explains:
We have an asset, Hogan, which is a core banking platform that continues to run and delivers a lot of functionality and a lot of capability to still a significant number of big banks around the world. We were struggling being able to make the investment ourselves in modernizing that platform.
So, we've created this joint venture. We're contributing the intellectual property by licensing Hogan to HCL. HCL is putting money, capital, into the joint venture so that we can help modernize that platform. More importantly, jointly provide the engineering and the integration skills so that we can help the install base begin to migrate to this next generation platform.
So, it's really a combination of their capital, their engineering prowess coupled with our industry expertise and our client relationships.
The next generation
Never-knowingly-under-selling, Lawrie remains his usual relentlessly upbeat self, arguing that while revenues are down overall, margins are up and the firm is making strides in ‘next generation’ business:
But the outsourcing industry is undergoing a shift, he adds, which is putting pressure on traditional IT and ERP services revenues:
This quarter CSC won new application and infrastructure work with a number of leading insurance and financial services providers as well as one of the U.S.'s largest food retailers. These deals alone include nearly $60 million in cloud, cyber and application modernization work which I think continues to demonstrate that we are getting good traction with this portfolio of new generation offerings as we continue to close the gap between the legacy business and these next-generation offerings. And in the quarter we added 85 new logos, almost two-thirds of which were outside the United States.
You've got a fundamental shift in the composition of the industry. And it's new offerings, like Workday and ServiceNow and Salesforce.com and others that are the new generation of enterprise class applications.
You just have to go through that transition and continue to make the investment so that you can participate in those segments of the market that are growing. But they start out smaller and they grow over time as opposed to very large deals that you manage over a five or ten year period of time.
So the whole composition and the financials and the capital requirements of the business are shifting. I happen to think they're shifting to a better model, a more sustainable model, but that shift is still underway.
Meanwhile the work towards breaking up CSC is empowering some internal next generation changes, he adds:
We're really beginning to take advantage of the separation to transition Computer Sciences Government Services to a next generation IT infrastructure.
For example, through our partnership with AT&T, we're rapidly provisioning the secure network connectivity to Computer Sciences Government Services.
In addition, with our partners like Amazon, Microsoft and IBM, we're migrating over 40 business applications and 170 collaboration and workflow applications to cloud environments meeting U.S. federal standards.
A perfect example of how the traditional ‘big ticket’ outsourcers are having to make an at times painful transition to a new world order. It’s a transition that requires ongoing investment in key markets, such as FinTech, but one that carries its own risks.
For example, Techmarketview’s Peter Roe says of the Fixnetix acquisition:
Realising value from this acquisition may well take time. Fixnetix will probably not have come cheaply and its success will depend on a number of key individuals who will need to be retained and motivated in the new organisation.
The market outlook is also uncertain. Although the demand for sophisticated, low-latency systems is still rising and the proposed as-a-Service model makes good sense, the high costs of doing business (including regulation) and the low commissions and trading spreads available could depress overall growth.
This bold acquisition broadens CSC’s offering into financial markets and offers significant potential in terms of utility offerings. But it will need careful handling and some time before the CSC management team can be sure of success.
That said, CSC, in common with rivals, has the benefit of longstanding relationships at the highest levels of business and government, so it has a customer base it can build on and work with to make its own and its clients transitions to a world of cloud services.
A prime example aired this week when CSC UK signed a ten-year contract for £25 million with Autoglass, the UK vehicle glass replacement provider, to migrate the firm’s IT estate over to an Infrastructure-as-a-Service (IaaS) platform.
What’s striking here is that CSC first signed a deal with Autoglass back in 1994, so this is a 21 year old relationship between provider and client that has evolved from traditional ITO through to this latest move into the cloud services era. I’ve been fiercely critical of CSC about a number of things over the years, but that kind of customer loyalty has to mean it’s doing something right.