“Watch the turtle,” Lou Gerstner, architect of IBM’s (NYSE:IBM) wildly successful turnaround strategy, once said. “He only moves forward by sticking his neck out.”
That lesson hasn’t been lost on Gerstner’s former global sales chief — new Computer Sciences Corp. (NYSE:CSC) CEO Mike Lawrie.
Investors cheered the announcement that Lawrie, CEO of U.K. information-technology company Misys, would lead the embattled CSC, replacing Michael Laphen, who is retiring. CSC shares have risen more than 20% since the news broke on Wednesday — the stock’s biggest gain in 32 years. The Lawrie announcement helped to offset the company’s disappointing third-quarter earnings.
CSC reported a quarterly loss of $1.4 billion, compared with a $242 million profit for the same quarter a year ago. Revenue was also down nearly 6%, to $3.8 billion for the period. The company also announced Wednesday that CFO Michael Mancuso will leave the company in May.
There’s no doubt about it — CSC has had a challenging year. Its managed-services business struggled mightily as it failed to meet some of the targets in its service-level agreement. Most notably, the electronic patient record (EPR) systems CSC has been developing for the U.K.’s National Health Service (NHS) are years behind the original schedule, leading the U.K. government to reevaluate the deal. CSC has written down the nearly $1.5 billion value of the NHS contract.
The company also is grappling with an Securities & Exchange Commission investigation over its accounting practices, a high number of terminated and concluded managed-service contracts and uncertainty about future sales opportunities from its cash-strapped federal government customers.
These and other challenges recently have fueled rumors that CSC could be broken up into separate entities. The company also faces stiff competition from the likes of IBM Global Services, Accenture (NYSE:ACN), Ingram Micro (NYSE:IM), and Hewlett-Packard’s (NYSE:HPQ) Information Technology Services unit (formerly EDS).
Enter Lawrie. His hiring follows a four-month search for Laphen’s successor and at a minimum has fueled optimism that the information-services firm can revive its flagging fortunes. Lawrie has already successfully applied at Misys some of the lessons he learned from Gerstner at IBM.
His strategy included focusing on Misys’ profitable banking market, developing new products, leveraging an integrated product-and-services portfolio to deliver solutions and fostering a more collaborative culture. Lawrie also strengthened Mysis’ health-care IT business by orchestrating mergers with Allscripts and Eclipsys — then selling off the combined entity for a cool $1.3 billion.
Expect Lawrie to go back to the Gerstner-IBM playbook as he drafts his turnaround strategy at CSC. Here are five things he can do to shake things up:
1. Quash the Break-Up Rumors
Rumors have been rampant that CSC would split up its government IT business and its private-sector enterprise IT services, the argument being that two businesses would grow faster than one. When Gerstner landed at IBM, the idea of breaking that company up into multiple “Baby Blues” was pretty popular, too. Lawrie, who built an integrated, total solution-oriented strategy at Misys, knows firsthand that being able to provide the size and scope of a broad-based IT integrator and solution provider is an advantage in a fragmented IT services market.
2. Focus on a Key Vertical
At Misys, Lawrie had two key vertical markets — the health-care and banking/treasury-capital markets. Lawrie maximized the opportunity in both sectors, integrating professional services and support to deliver vertical market-targeted IT solutions. That gives him an edge in helping CSC gear up to assist government agencies and private enterprises comply with health-care reform deadlines.
3. Revitalize the Corporate Culture
A 27-year IBM veteran, Lawrie remembers corporate life before Gerstner — a workforce segregated into product or line-of-business “silos” that did things the way they’d always been done. Gerstner spilled a lot of blood — layoffs alone reportedly totaled 100,000 — but in the end, IBM became leaner, meaner and more collaborative. CSC, a company that some employees joke stands for “collection of small companies,” is ripe for a makeover that embraces change, provides strong leadership, encourages teamwork and fosters employee collaboration.
4. Invest in Innovation
At Misys, Lawrie believed the key to righting the ship was to continually innovate in order to capture global market opportunities. Misys boosted its play in the software-as-a-service (SaaS) and services-oriented-architecture (SOA) markets, as well as in its open-source solutions business. Expect CSC’s innovation plays to include cloud computing, server consolidation and IT service management.
5. Refocus On IT Services
Gerstner and Lawrie both saw services as providing greater value than products alone — particularly when integrated as a robust solution. But to accomplish this, CSC must be able to boost its quality-of-service performance so it doesn’t lose managed IT service contracts to rivals.
Action To Take: Lawrie is bringing positive buzz to CSC right now, and Wall Street gave the shares a bounce as a treat. But buzz-based stock bounces are like ice cream cones: soft, sweet, and they melt in five minutes.
CSC is too pricey for a new long play right now, but if you’re already in, it’s probably a good idea to hold. With all the uncertainties about the NHS deal, the SEC investigation, and the impact of federal government spending cuts, though, a wait-and-see approach makes sense. With a market cap of about $5 billion, CSC is trading at around $34 — 39% above its 52-week low last December. It has a current dividend yield of 2.5%, and its P-E is -1.8.
This company faces a lot of challenges — including Europe and reductions in U.S. government spending — and the turnaround will be neither quick nor easy. One of CSC’s strengths, however, is its new business, which rose 71% in the last quarter and is likely to lift the company to some degree in 2012.
As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.