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Also, check out: "IGS Profits, Productivity Surge," "EDS: Growth Slows, Equity Grows,"  "CSC: A Mouse That Roars?", "A Solid Quarter", "EDS Sets New Records", "Andersen: Another Super Year", "Cap Gemini: The Most Improved?"

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An Analysis of CSC's 1998 Survey of Global CIOs

CSC: A Mouse That Roars?

Practically "Busting" in Europe; Doing Well in U.S. Government, Too

PHOENIX - By the standards of traditional computer industry vendors, Computer Sciences Corp. (CSC) is a mere mouse that occasionally roars, such as when earlier this year, for example, Computer Associates (CA) stepped on its tail.

If in doubt about CSC's "mouse" status, compare its $6.6 billion FY98 revenue to that of other global IT industry leaders, such as IBM, NEC, Fujitsu, Compaq, Hitachi, etc. - all of which report tens of billions of dollars of revenues every year.

Do that, however, and you'll be comparing "apples and oranges." For, CSC is at the very top of the IT industry's food chain, along with other global "general contractors," such as IBM Global Services, EDS, Andersen Consulting, Cap Gemini, Unisys, Perot Systems, etc.

What Wall Street doesn't seem to realize is that these very companies are also the IT industry's biggest CUSTOMERS - i.e., the "megabuyers" who help set global trends in motion, whether or not even they are aware of it. Because they act as sort of a giant global "IT price club," acquiring technology on behalf of large customers.

How large? About 90% of all outsourcing deals are less than $20 million, according to Brad Sweet, CSC's managing director of the consulting group, one of the speakers at CSC's conference for industry analysts held at Falls Church, VA, last month.

But the deals tend to get larger as the companies get larger. EDS' investor relations director, Myrna Vance, said in late October that 75% of EDS' "pipeline" - the deals which the company is trying to close - are the contracts worth less that $500 million. Last year, however, they represented only 49% of such a pipeline.

Which suggests that IT services are starting to trickle DOWN the business pyramid. In part, this is due to new methods of services delivery at lower costs, such as the Internet, for example.

Which is pure goodness. For, it offers the "IT Price Club" membership to small and medium size companies which have not so far generally benefited much from the outsourcing trend. Which, in turn, promises to lower the costs of doing business in the American and global economy.

CSC's 1998 CIO Survey

But lowering the costs was not the foremost issue on the minds of the CIOs (Chief Information Officers), the IT Czars at 594, mostly large enterprises which CSC has surveyed this year. Getting along with the boss was their preeminent worry.

Of course, neither the CIOs nor CSC quite put it that way. The CSC report said that the number one concern on CIO's minds was "aligning I/S and corporate goals" (I/S - Information Systems). Logic 101 would suggest that they are, therefore, out of alignment. And have been for the last four years, according to CSC surveys.

No wonder so many CIO are out of jobs, too. Some 36% of North American companies which CSC surveyed have replaced their CIO in the last two years. In the Asia/Pacific region, the turnover was even higher - with 44% CIOs being new on the job (in Europe, the corresponding number is 26%). No wonder, therefore, that getting along with the boss is the CIOs' top priority. Except in Europe, where the top priority is "connecting electronically to customers, suppliers and partners." Getting along with the boss is only the third most important worrywart of the European CIOs. (Note the lowest CIO turnover percentage in Europe as further evidence of this).

It's important to understand that the CSC survey results should be analyzed only on a region-by-region basis, such as in the above example, rather than as an indicator of global trends. That's because the participation of Asia/Pacific companies is disproportionately high (48%) relative to their share of global business, while that of North American and European enterprises is understated (36% and 16% respectively).

After their job security, the North American CIOs seem to fret the most about "improving the IT human resources," while their Asia/Pacific counterparts worry next about "organizing and utilizing data."

Meanwhile, Europeans second most important challenge is "integrating systems." Should one be surprised about that, considering that they are being hit with the European Union integration, the "euro," and the "y2k" problems all at once. But also look for increased ulcer rates among the European CIOs, even if most do get to keep their jobs.

(Further on the topic of challenges which Europeans face, you may wish to check out this writer's CHRONICLES Dec/98 column, "A Bear in Sheep's Clothing," which deals with Europe's geopolitical and economic position).

Interestingly, "cost cutting" was only the 12th most important CIO challenge in North America; fourth in Europe; and third in Asia/Pacific. You would think, wouldn't you, that one way of aligning the IT better with both the corporate goals, and the bosses' mindsets, would be to elevate the priority of this issue? Guess the fact that cost-cutting is evidently not high on CIOs' minds, helps explain the CIO turnover, too.

Perhaps one reason for the CIOs' relatively lackadaisical attitude toward the IT costs is that the IT budgets keep rising. In North America, they were up by 8% in 1998; in Europe up by 6%; while in Asia/Pacific they rose by 5%. And they have been increasing every year in the 1990s, with 1994 being the troth of the growth in North America (2.3%); and with 1993 being the same in Europe (0.3%).

The retail, financial services and health sectors lead all others with respect to budget increases, with 66%, 65% and 61% of CIOs in these industry groups respectively reporting increased budgets.

Top among the industry sectors which expect their IT budgets to decline are, perhaps surprisingly, the telecoms. But since they also lead all other groups in percent of revenue they spend on IT (7.7% - followed by government 5.2% and health care 3.4%), the telecoms' budget cuts are merely a sign of temporary moderation of their voracious appetite for new technology and integration services.

Besides, even within the telecoms, 64% of the companies actually have IT budget increases. It's just that the 36% of those planning cost cuts happens to be the biggest percentage of all 11 industries which CSC surveyed.

The telecoms were followed by resource industries, such as mining, utilities and energy/chemical companies, on the ladder of IT budget cutbacks.

Analysis by Geographies

The IT spending as percent of the company's revenue also varies from continent to continent. It's the lowest in North America (2.4%); and much higher in Asia/Pacific (3.7%) and Europe (3.4%). At a first glance, this may appear to be a dichotomy - the world's leader in IT technology is spending the least on it.

But looks can be deceiving. For two major reasons. First, the North American multinationals are much larger than their European counterparts. Thus a smaller percentage of revenue despite bigger IT budgets. Second, North America has a bigger IT structure already in place, thanks to heavier prior investments. Third, as we've already pointed out, Europe has swallowed its own tricolor poison pill - tackling the EU integration; the "euro" and the "y2k" all at once. No wonder they are spending themselves out of house and home.

To the European taxpayers, all we can say is - "ouch," and "condolences." We, American ratepayers, despite all our gripes, are enjoying a tax holiday by comparison.

But one man's loss is another man's gain. While the European taxpayers are hurting, the IT services companies' doing business on the Old Continent are booming.

CSC, for example, has grown in Europe from $200 million per year revenues to over $2 billion. EDS and Cap Gemini are also booming in Europe (see Annex Bulletins 98-38, 10/29/98, and 98-17, 4/07/98). And even IBM's European business has been picking up lately, after prolonged sluggishness.

"CSC is the fastest growing IT services business in Europe," boasted Ron Mackintosh, who heads up CSC Europe. Guess if a business unit records an order of magnitude surge in five years, one can understand if its head is a little boastful.

In Germany, for example, CSC had been only doing about $20 million per year after operating in that country for 25 years. Then in 1994, CSC acquired Ploenzke, a German IT software company with 1,400 technology professionals who specialized in SAP application software. Now CSC's revenue in Germany is over $450 million.

"You cannot be successful in the German market unless you're perceived to be BOTH a German AND a global company," explained Mackintosh.

True. But the best of both worlds in Germany is, of course, if you're a German global company, like SAP. Or Daimler Benz. Or BASF. Or... The point being that, despite over four decades of European integration and the commensurate brainwashing, economic nationalism is still alive and well on the Old Continent. As it is, by the way, on other continents as well. Just consider the looming EU-US "banana war" as another case in point.

Considering that the European CIOs seem to be busier than one-arm paperhangers, it is to their credit that they lead the world in getting a head start on the "y2k" problem with "only" 12% of the enterprises only now starting to assess the implications of the "millennium bug" on their businesses.

The word "only" is in quotes because 12% is still a large number of companies which are only at the "y2k" starting gate, considering that there is only a year left before the time will run out for them. Of course, things are even worse in North America and Asia/Pacific, where the CSC survey found 17% and 28% of the companies it surveyed to be in a similar, starting position.

But when it comes to completion rates of the "y2k" project, the North American CIOs lead the world, with 21% of the total having done the job already. The Europeans and Asia/Pacific CIOs, on the other hand, reported 16% and 12% completion rates respectively.

The average North American company will spend more money than its overseas counterparts on fixing the "y2k" problem -$16.6 million versus about $13 million for European and Asia/Pacific companies.

Honeycutt: Only 3-5 Verticals

Unfortunately, the CSC survey did not report the "y2k" completion rates by industry, so it cannot be used as a gauge how severe the impact will be on the world's population at large (obviously, failures of utilities or telecoms, for example, will have a greater impact than say, that of mining companies).

Nevertheless, CSC's CEO, Van Honeycutt, warned in a press release which accompanied the survey results that, some of those companies which are now still only at the starting gate of the "y2k" issue "will clearly suffer negative consequences in 2000, some possibly as severe as interruptions of mission-critical business processes." In other words, business failures.

Perhaps that's why CSC has been rather selective as to what types of industries it has chosen to focus. Besides the federal government business, which has been CSC's traditional strength, CSC is today especially strong in financial services, chemical/energy and health care sectors (the latter only in the U.S.).

Nor does there seem to be a great push to go much beyond that. Honeycutt told the analysts at the Falls Church meeting that he could see only about three to five vertical markets (i.e., industry groups) over the next five years. A telecom vertical could be added to the above four.

At which point we told Honeycutt that there are various ways to skin a cat. "What if you became a part of a telecom vertical because a telecom company decides to buy you, just as CA had attempted earlier this year? Do you have a strategy for such an eventuality?"

Honeycutt replied that CSC is not actively soliciting telecom bids. "But we are 73% own by (Wall Street) institutions," he added. "So anything is possible."

"Does CSC plan any 'branding strategies'?," a "yuppy"-looking analyst asked Honeycutt at the end of a day-long meeting. "Branding strategies," at an IT services company? Like a Chevy versus a Cadillac "y2k" solution? Ye gods!

Seemingly stunned by the ignorance which the question betrayed, the CSC CEO, for a moment seemed at a loss for words.

"Well, the CSC logo lends itself as a suitable 'branding iron'," this writer volunteered a lighthearted comment. Everybody laughed.

But it wasn't a laughing matter. For, ignorant analysts, such the "yuppy" in question, pass judgments about companies like CSC. Upon which even more ignorant investors or customers exercise their judgments, mistaking such analysts' comments for wisdom. No wonder solid performers and the top-of-the-food-chain companies, like EDS or CSC, end up being virtually ignored by Wall Street, while the stock of mediocre companies, like IBM, is pushed to record highs. Despite its recent rise, CSC is off about 12 points from its 12-month high of about $75 per share, set in September, while EDS has been off by 20 points or more ever since September 1996. It's all a part of the financial perversion which the stockmarket has become these days. Which is why the "branding" comment was no laughing matter.

Happy bargain hunting!

Bob Djurdjevic

Highlights of Some CSC Executives' Comments

Jim Saviano, president of CSC's Consulting Group, which provides the commercial systems integration services in North America, and accounts for abouyt 15% of CSC revenues, said that back in 1991, "85% of (CSC) revenue was mainframe based. Two years later, 85% of our revenue was client-server based." No wonder, considering the 40% compound annual growth, which Saviano's unit recorded in North America during 1991-1997; almost double the industry average (21%). This CSC executive's data provided new "meat" for our argument that CSC is one of the IT industry's most rapidly transforming companies (see Annex Bulletin 98-20, 5/05/98).

Tom Madison, the head of CSC's Financial Services Group, the company's largest "vertical" unit, said that he can count among his clients 50% of the Fortune Global 500 financial services companies; 60% of the world's top 50 banks; 70% of the top 50 insurance companies and 70% of the top U.S. banks and insurers. In other words, the man's due for a raise, Mr. Honeycutt!

Milt Cooper, the head of CSC's Federal Government sector, which accounted for about $1 billion, or two-thirds of the company's business, in 1991, yet is now a "mere" quarter of CSC despite its $1.7 billion in revenues, said that CSC's federal sector has already booked $1.8 billion through October 1998, representing a 61% "win rate." And that his 30-month "pipeline" of future deals is worth over $14 billion.

Annex Research is a well respected consulting firm serving the information needs of today's senior IT executives, for over 28 years. For more information please call 602/824-8111.

Volume XIV, No. 98-42
December 7, 1998

Editor: Bob Djurdjevic
Published by Annex Research;

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