Let’s face it: Outsourcing is one of the most difficult businesses where you can charge a premium. Margins are constantly squeezed, and the only way to increase profit is either to become more efficient, or win lots of new business (lots is important, because the cost of sales is through the roof, too). CSC, with its latest results, has failed to do either, with flat revenues and declining profits.
It’s hard to be CSC. A perennial subject of acquisition chatter, it has built in poison pills in the form of gnarly government contracts with lots of limitations on who can own them and what can be done with them. This represents a disproportionate part of their revenue when compared to their competitors. This is not all bad. Government work tends to be stable, durable, and high margin, if notoriously slow to close. But acquiring government work is expensive, and if CSC has operationally squeezed out all the margin that it can out of its behemoth public sector contracts, then investors should prepare for many more quarters of bad news. An outsourcing company that is not getting more efficient at constant revenue might just be in trouble.
Again, its hard to be CSC. It lacks the scale of IBM and HP, the brand and loyalty of Accenture, and the relatively low overhead of the leading Indian IT providers. It is, effectively, stuck in the middle, similar in size and approach to European competitors that most of the time don’t bother to compete with these companies we listed. But even those European competitors have a more defined brand and mission in the enterprise world (as opposed to strength in the public sector).
So what can CSC do to show the world better numbers three months from now?
- Be absolutely ruthless in streamlining operations. Review every account for opportunties and have the difficult conversations with the clients and account managers.
- Turn on the enterprise sales engine. If the excuse for poor performance is “government contracts are slow,” well, then, get out there and win some non-government business!
- Invest in the brand, especially in the enterprise market.
- Study larger acquisitions that will create a splash while adding scale, new capabilities and price competitiveness. Heaven forbid, maybe it could even start to look at developing some BPO expertise that could be very effective in some of its core industries such as healthcare and manufacturing. It could even look to support public sector shared services initiatives as it seeks to streamline operating costs.
CSC is a capable, trusted veteran of this industry, and it need not disappoint the market—but it does need to refocus and find a new direction, if it is going to keep pace with the competition.