Tuesday, 28 August 2012

CSC continues its senior management clean-out


CSC continued its senior management clean-out by removing Donald DeBuck from his position as Vice President & Controller.

 
He will be replaced by Thomas Colan who is joining CSC from Discovery Communications where he served as Controller, having earlier been Controller of AOL/Time Warner.  Colan will report to CSC Chief Financial Officer Paul Saleh.


Further details, including Colan’s  remuneration package, are shown in CSC’s SEC filing on


 
DeBuck will apparently stay with the company with the role of  “supporting the CFO’s systems enhancement activities”.  We do not know whether this is a real position or just a nice title and a way of allowing DeBuck to quietly leave the company with dignity in a few months.


DeBuck has served as Corporate Controller for about a decade, during which time CSC has suffered major accounting irregularities principally in Europe. He is a named defendant in Class Action lawsuits brought against CSC and some of its officers.   His departure is no real surprise. Many people in CSC wonder how the Chief Accounting Officer survived so long after the disclosure of these irregularities. 

 
Maybe former CFO Mike Mancuso wielded the real authority inherent in the position of Controller and Chief Accounting Officer.  If this was the case, it is hard to see how CSC could have terminated DeBuck for failing to prevent the accounting irregularities without first firing Mancuso. That DeBuck is apparently staying with CSC suggests that CEO Mike Lawrie believes there are some mitigating circumstances in his favor.


Another recent senior executive departure is that of VP Investor Relations Bryan Brady. We understand that, unlike DeBuck, Brady was given no option to remain with the company. 

Mr. Brady had been the Head of Investor Relations for 3 years, having earlier served as VP Finance for Europe from 2002 to 2009, during which time many Country Finance Heads left the company.  Apparently not many tears have been shed in CSC over his departure. We are told that he was viewed by many of his colleagues as being difficult to work with.  His term as Head of Investor Relations had been defined by CSC’s investor communications around its profit warnings, NHS fiasco and share price collapse,  which we have described in earlier blog  postings as a mixture of confusing waffle and unjustified optimism.  CSC’s mishandling of the Investor communications of these problems harmed the company’s image on Wall Street and destroyed whatever credibility Brady had with the analyst community and within CSC.   

We do not know how many more senior CSC managers CEO Mike Lawrie intends to remove.  But all the highly paid CSC executives who just kept quiet as Mike Laphen mismanaged the company  close to ruin  deserve whatever Lawrie hands out to them.

Thursday, 16 August 2012

CSC plans to exit Italy? Questions in the Italian Parliament.


 
CSC is planning to sell its Italian business and exit the country, according to sources in Italy.

CSC entered Italy via a series of acquisitions in the mid and late 1990’s but has struggled to establish itself there, suffering significant losses and constantly downsizing over the past years.

CSC’s plans to exit the country have raised questions and concerns in the Italian Parliament.
MP Pier Paolo Baretta has asked the Minister of Economic Development what steps the Ministryintends to take to protect the 1,080 employees of CSC Italy.

Mr. Baretta questioned CSC's decision to sell its Italian business, expressing concerns that "CSC has benefited from years of tax breaks that only last year led to the company obtaining benefits of more than $100 million".
Selling the Italian business may not be easy for CSC even at a low price. The country’s economic outlook is troubled and CSC’s business there is not profitable.   In addition to any price to be paid to CSC, buyers will probably need to fund further reductions of the workforce and strengthen sales skills. Additionally CSC will need to guarantee its contractual commitments to service Italian operations of its key multi-national clients. CSC will also seek to avoid or at least minimizeongoing financial commitment or contingencies towards the buyer.

Is Italy the only European country CSC plans to exit? We doubt it. One must wonder about CSC’s intentions in Sweden, Norway, Austria, Portugal and Spain among others, and how
it intends to support global customers operating in these countries. 

Monday, 13 August 2012

Questions about Mike Lawrie as CSC gives 50% increases in retainers for its failed Board of Directors




CSC has further increased the generous remuneration of its non-executive directors, an SEC filing of August 10 has disclosed.


They will each receive an annual cash retainer of US$90,000, (up from US$60,000) plus an annual grant of shares worth US$135,000 (up from US$125,000); there are additional retainers ranging from US$10,000 to US$25,000 for serving on the various committees of the Board, plus provisions for attendance fees.


This is quite amazing, coming just days after CSC’s CFO told the Wall St analysts about the positive impact on cash flow of the decision not to pay certain FY2012 employee bonuses.


The non-executive directors are the group which appointed Mike Laphen as CEO in 2007 despite the evidence that he did not have the appropriate skills. They aggravated that error by investing all executive power in Laphen, naming him Chairman, CEO and President.   They then brought in the retired Mike Mancuso as CFO, with the consequences we know.


They watched but took no action as Laphen’s mismanagement started destroying CSC, leading to a drop of over 50% in CSC’s share price and to thousands of employees losing their jobs. They watched the financial meltdown, the accounting irregularities, the SEC investigation, the Class Action lawsuits, the reputational damage of the NHS fiasco and the torture/rendition allegations and did nothing. They watched competitors grow as CSC moved backwards with no revenue growth and no vision of the future. They watched as their chosen CEO micro-managed expense detail while CSC headed for disaster.  They watched while CSC alledgedly supported anti-humanitarian rendition flights. They only acted to remove Laphen when it was clear his position was untenable. He had lost credibility with the customers, the employees, the IT industry and with Wall Street.


The Board of Directors should have recognized their responsibility for CSC’s situation and offered their resignations. Instead they stood for re-election and have now voted themselves a massive 50% increase in their base retainer compensation.


We have mentioned in earlier blog entries our hopes that recently-appointed CEO Mike Lawrie would turn CSC around and deliver on his plans to create a new set of values and behaviors.  


We are hugely disappointed that he has allowed these increases in non-executive director compensation to happen.   Massive rewards for failure at the top of CSC while screwing down employee compensation was part of the Laphen culture. We hoped Lawrie would represent the wind of change. Maybe our hopes are naïve. Maybe Lawrie is just a Laphen clone but with a bit of charisma.   These increases when employees are being laid off shows a total lack of sensitivity.


Full details of the SEC filing  in question can be found on:

Sunday, 12 August 2012

CSC shares 16% higher after its Q1 FY2013 earnings release

CSC shares jumped almost 20% immediately after its Q1 FY2013 earnings release and analyst conference, eventually closing the day up 16%.


The Q1FY2013 performance was not stellar, but was better (or less bad) than analyst expectations and marked a halt in the continuous deterioration CSC has treated us to in the past few quarters. Here are some highlights:

·         Revenue at $3.96bn was essentially flat with Q1 FY2012.

·         Earnings per Share (EPS) were US$ 0.26c, compared with analyst expectations of US$0.21c. This after 3 consecutive quarters of losses.

·         Gross margin was up 1.2% after 2 consecutive quarters of shrinkage.

·         Free cash flow was negative US$25million, compared with over US$400million negative in Q1 FY2012.

·         New business won in the quarter was US$4bn up 70% on Q1FY2012.

·         Unlike previous quarters, there were no surprises, exceptional items or tax adjustments to confuse everybody about the real state of the business.

·         The company’s EPS guidance for FY2013 was increased to a range of US$2.10 to US$2.30.

·         New senior executives have been named.
But more than the numbers themselves, the big positive was the attitude of the CSC management, Mike Lawrie and Paul Saleh, to the conference itself and especially to the questions. They gave the impression of honesty and transparency, which was so different from the confusing non-answers of the previous management era.

Comments on points that Mike Lawrie made in the question and answer session:
·         A major cause of CSC’s “problem projects and contracts” was not that the lack of proper processes, but that the company had simply stopped using them. Input we have received suggests that a big problem was that CSC’s top management simply rejected any truths or facts that did not fit with what they wanted to hear, and they kept asking different people to re-do the work until somebody gave them the answers they wanted. This is also one reason CSC lost so many of its best project managers over the past few years.
·          The inappropriate “regionalization” of global business processes created further problems. The Cassandra team will address this issue in a separate blog posting in the coming days. 
·         Mike Lawrie felt that CSC’s current problems did not arise overnight, but had been building up over the past 5 or 6 years.  We agree, and ask once more why CSC’s highly-paid non-executive directors could not see what was clear to many CSC followers and employees, namely that Mike Laphen’s mismanagement was destroying CSC.
·         Mike Lawrie was also complimentary about the quality and dedication of CSC’s employees. We hope this statement was sincere; it is a big change from his predecessor who gave the impression that he viewed the employees as a major part of the problem;
This financial report is all positive, but let’s not gets too enthusiastic yet.  CSC has hit bottom (perhaps) with one quarter without surprises or disasters; the newly-appointed CEO and CFO seem to understand what needs to be done to bring CSC back to health, and have developed plans to achieve that. They are more articulate and convincing than their predecessors.  But that is all that has happened so far. They need to be clearer about individual business unit results, and the quality of new business contracts. For instance we are aware of only one significant new deal this quarter, Alsthom. What are the others that make up the $4bln?
Another issue that CSC has to deal with is a reputational one in that it stands accused of supporting rendition flights for suspected terrorists. The news media have not forgotten and indeed The Guardian newspaper in the UK referred to it just this week: Last year iSoft was taken over by Computer Sciences Corporation, a US company accused of helping to organise covert US government flights of terror suspects to Guantánamo Bay and other clandestine "black sites" around the world.
Nevertheless these results are so much better than has been seen from CSC over the past 5 years. Let’s hope that Lawrie and Saleh’s achievements will match their good words and intentions. Time will tell.  
Details of CSC’s Q1 FY2012 financial statements, accompanying slides and webcast of the Analyst call can be found on CSC’s website here.

CSC 'New' Organisation Model

In July 2012 Mike Lawrie the new CEO of CSC announced a new 
operating model for the company. This model is a global
matrix of business, country and functional teams supporting one another across the globe on behalf its customers. This is obviously an exciting development as it is the first step in Mr Lawrie’s plans to turn around CSC. This plan does indeed upon first reading look ambitious. It talks about work teams, new values and more. But for anyone steeped in global business in large corporations or with experience of CSC either as an employee or customer,  this new model can be seen as nothing of the sort. It is very similar to the model espoused by previous CSC leaders in the previous century. All that has really changed is some terminology. Thus Mr Lawrie has to ask himself what ishe doing so that is so different this time and will succeed where others have failed.

Here is an outline description of the model:
Lawrie’s overall theme in his “new” operating model is global standardization. CSC will have 5 global verticals responsible for the Global 1,000 clients and representing CSC across its client base. These verticals will be responsible for delivering all CSC’s capabilities to that client base. The geographies or countries will have the same role as the verticals, but will focus on regional and local accounts.
Both the geographies and verticals will interact with an Offerings organization which includes application services business, software products (eg FSG, iSoft), BPO and IT consulting.  They will also interact with Infrastructure Services, which is made up of end user services, connectivity services, unified communications services, data center services, storage and compute offering, as well as global enterprise management services.
These Operating units are supported by Global Sales and Marketing operations, and our other staff functions including HR, Finance, Legal.

Earlier attempts to introduce a global operating model in CSC over 10 years ago failed for a number of reasons.
Firstly the definition of the model was never taken down to the ground level. It remained a “30,000 feet” headquarters view of the world and avoided addressing awkward or contentious specifics.
Secondly there was no implementation plan.  Amazingly, CSC’s leaders thought that the fact they had announced the model meant it was in place and working. They continued with this pretence for many years, keeping well away from internal conflicts caused by the model. This led to the complexity and confusion Lawrie complains about today.
Thirdly, the model immediately ran into fierce opposition from certain powerful Country barons in CSC Europe who threatened resignation if they lost their omnipotence in their territories. Mike Laphen, who was Head of Europe at that time, responded by fudging the issue and telling these barons they were still responsible for everything in their countries. This obvioulsy brought them into conflict with global businesses and lines of services. However. as long as they made their budgets, the barons were allowed to continue ignore the new model with total impunity. Indeed their incentives and bonus criteria were never changed to bring them in line with the principles of the “new” global operating model. Over the years, CSC lost many good employees who tried to live by the spirit of a global operating model and in doing so fell foul of the country barons.
In previous posts we have given Mr Lawrie the benefit of the doubt about his intentions to make real and lasting change to CSC. But to successfully implement this new operating model, he must make full implementation non-negotiable throughout CSC; he must have a real implementation plan and executive it; he must bring incentives and reward schemes into line with the model, and with the management behaviors he wants in the future. Lastly, he must change out the bullying management that created the mess in the first place (yes many of them are still in place),  this management which deliberately blocked team working, resource sharing, goals sharing, and appropriate incentive schemes and ensured the failure of the earlier attempts to turn CSC from a Collection of Small Companies into one global organization.