by Adam Hartung | May 31, 2015 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Web/Tech
Information technology (IT) services company Computer Sciences Corporation (CSC) recently announced it is splitting into two separate companies. One will “focus” on commercial markets, the other will “focus” on government contracts. Ostensibly, as we’ve heard before, leadership would like investors, employees and customers to believe this is the answer for a company that has incurred a number of high profile failed contracts, a turnover in leadership, vast losses and declining revenue.
Oh boy.
After years of poor performance, and an investigation by the UK parliament into a failed contract for the National Health Services, in 2012 CSC brought in a new CEO. Like most new CEOs, his first action was to announce a massive cost-cutting program. That primarily meant vast layoffs. So out the door went thousands of people in order to hopefully improve the P&L.
Only a services company doesn’t have any hard assets. The CSC business requires convincing companies, or government agencies, to let them take over their data centers, or PC deployment, or help desk, or IT development, or application implementation – in other words to outsource some part (or all) of the IT work that could be done internally. Winning this work has been an effort to demonstrate you can hire better people, that are more productive, at lower cost than the potential client.
So when CSC undertook a massive layoff, service levels declined. It was unavoidable. Where before CSC had 10 people doing something (or 1,000) now they have 7 (or 700). It’s not hard to imagine what happens next. Morale declines as layoffs ensue, and the overworked remaining employees feel (and perhaps really are) overworked. People leave for better jobs with higher pay and less stress. Yet, the contract requirements remain, so clients often start complaining about performance, leading to more pressure on the remaining employees. A vicious whirlpool of destruction starts, as things just keep getting worse.
Immediately after taking the CEO job in 2012 Mike Lawrie declared a massive $4.3B loss. This allowed him to “bring forward” anticipated costs of the anticipated layoffs, cancelled contracts, etc. Most importantly, it allowed him to “cost shift” future costs into his first year in the job – the year in which he would not be fired, regardless how much he wrote off. This is a classic financial machination applied by “turnaround CEOs” in order to blame the last guy for not being truthful about how badly things were, while guaranteeing the end of the new guy’s first year would show a profit due to the huge cost shift.
True to expectations, after one year with Lawrie as CEO, CSC declared a $1B profit for fyscal 2013 (about 20% of the previous write-off.) But then fyscal 2014 returned to the previous norm, as profits shrunk to just $674M on about $12B revenues (~5% net margin.) For 4th quarter of fyscal 2015 revenues dropped another 12.6% – not hard to imagine given the layoffs and ensuing customer dissatisfaction. Most troubling, the commercial part of CSC, which represents 75% of revenue, saw all parts of the business decline between 15-20%, while the federal contracting (much harder to cancel) remained flat. This is not the trajectory of a turnaround.
CEO Lawrie blames the deteriorating performance on execution missteps. And he has promised to keep his eyes carefully on the numbers. Although he has admitted that he doesn’t really know when, or if, CSC will return to any sort of growth.
No wonder that for more than a year prior to this split CSC was unable to sell itself. Despite a lot of hard effort, no banker was able to put together a deal for CSC to be purchased by a competitor or a private banking (hedge fund) operation.
If none of the professionals in making splits and turnarounds were willing to take on this deal, why should individual investors? In this case, watching people walk away should be a clear indicator of how bad things are, and how clueless leadership is regarding a fix for the problems.
The real problem at CSC isn’t “execution.” The real problem is that the market has shifted substantially. For decades CSC’s outsourcing business was the norm. But today companies don’t need a lot of what CSC outsources. They are closing down those costly operations and replacing them with cloud services, cloud application development and implementation, mobile deployments and significant big data analytics. Or looking for new services to solve problems like cybersecurity threats. CSC quite simply hasn’t done anything in those markets, and it is far, far behind. It is a big dinosaur rapidly being overtaken by competitors moving more quickly to new solutions.
One of CSC’s biggest competitors is IBM, which itself has had a series of woes. However, IBM has very publicly set up a partnership with Apple and is moving rapidly to develop industry-specific software as a service (SaaS) offerings that are mobile and operate in the cloud. These targeted enterprise solutions in health care, finance and other industries are designed to make the services offered by CSC obsolete.
Although it may have had a huge client base of 1,000 customers. And CSC brags that 175 of the Fortune 500 buy some services from it, exactly what does CSC bring to the table to keep these customers? Years of cost cutting means the company has not invested in the kinds of solutions being offered by IBM and competitors such as Accenture, HP and Dell domestically – and WiPro, TCS (Tata Consulting Services,) Infosys and Cognizant offshore. Not to mention dozens of up-and-coming small competiters who are right on the market for targeted solutions with the latest technology such as 6D Gobal Technologies. CSC is still stuck in its 1980s consulting model, and skill set, in a world that is vastly different today.
CSC has no idea how to “focus” on clients. That would mean investing in modern solutions to rapidly changing client needs. CSC failed to do that 15 years ago when most outsourcing involved heavy use of offshore resources. And CSC has never caught up. Leadership overly relied on selling old services, and discounting. It’s model caused it to underbid projects, until the UK government almost shut the company down for its inability to deliver, and constantly hiding actual results.
Now CSC lacks any of the capabilities, people or skills to offer clients what they want. Its diffuse customer base is more a liability than a benefit, because these customers are “end of life” for the services CSC offers. Years of declining revenues demonstrate that as value declines, contracts are either allowed to go to very cheap offshore providers, lapse completely or cancelled early in order to shift client resources to more important projects where CSC cannot compete.
This split is just an admission that leadership has no idea what to do next. Customers are leaving, and revenues are declining. Margins, at 5%, are terrible and there is no money to invest in anything new. Some of the world’s best investors have looked at CSC deeply and chosen to walk away. For employees and individual investors it is time to admit that CSC has a limited future, and it is time to find far greener pastures.
by Adam Hartung | Jul 7, 2009 | Current Affairs, Defend & Extend, General, In the Whirlpool, Leadership, Lock-in
"Tribune Company Profitability Continues to Deteriorate" is the Crain's headline. Even though Tribune filed for bankruptcy several months ago, its sales, profits and cash flow have continued deteriorating. The company is selling assets, like the Chicago Cubs, in order to raise cash. But its media businesses, anchored by The Chicago Tribune, are a sinking ship which management has no idea how to plug. While the judge can wipe out debt, he cannot get rid of the internet and competitors that are reshaping the business in which Tribune participates. Bankruptcy doesn't "protect" the business, it merely delays what increasingly appears to be inevitable failure.
"GM Clears Key Hurdles to Bankruptcy Exit" is the BusinessWeek headline. In record time a judge has decided to let GM shift all its assets and employees into a "new" GM, leaving all the bondholders, employee contracts and lawsuits in the "old" GM. This will wipe out all the debt, obligations and lawsuits GM has complained about so vociferously. But it won't wipe out lower cost competitors like Kia, Hyuandai or Tata Motors. And it won't wipe out competitors with newer technology and faster product development cycles like Toyota or Honda. GM will still have to compete – but it has no real plan for overcoming competitive weaknesses in almost all aspects of the business.
It was 30 years ago when I first head the term "strategic bankruptcy." The idea was that a business could hide behind bankruptcy protection to fix some minor problem, and a clever management could thereby "save" a distressed business. But this is a wholly misapplied way to think about bankruptcy. In reality, bankruptcy is just another financial machination intended to allow Locked-in existing management to Defend & Extend a poorly performing Success Formula. Bankruptcy addresses a symptom of the weak business – debts and obligations – but does not address what's really wrong - a business model out of step with a shifted marketplace.
The people running GM are the same people that got it into so much trouble. The decision-making processes, product development processes, marketing approaches are all still Locked-in and the same. GM hasn't been Disrupted any more than Tribune company has. Quite to the contrary, instead of being Disrupted bankruptcy preserves most of the Locked-in status quo and breathes new life into it by eliminating the symptoms of a very diseased Success Formula. Meanwhile, White Space is obliterated as the reorganized company kills everything that smacks of doing anything new in a cost-cutting mania intended to further preserve the old Success Formula.
Everyone in the bankruptcy process talks about "lowering cost" as the way to save the business. When in fact the bankrupt business is so out of step with the market that lowering costs has only a minor impact on competititveness. Just look at the perennial bankruptcy filers – United Airlines, American Airlines and their brethren. Bankruptcy has never allowed them to be more competitive with much more profitable competitors like Southwest. Even after 2 or 3 trips through the overhaul process.
Bankruptcy does not bode well for any organization. It's a step on the road to either having your assets acquired by someone who's better market aligned, or failure. Those who think Tribune will emerge a strong media competitor are ignoring the lack of investment in internet development now happening – while Huffington Post et.al. are growing every week. Those who think the "new" GM will be a strong auto company are ignoring the market shifts that threw GM to the brink of failure over the last year. Both companies are still Defending & Extending the past in a greatly shifted world – and nobody can succeed following that formula.
Don't forget to download the ebook "The Fall of GM: What Went Wrong and How To Avoid Its Mistakes" for a primer on how to keep your business out of bankruptcy court during these market shifts.
by Adam Hartung | May 15, 2009 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Lifecycle
"Chrysler delivers the bad news to 789 dealers" was yesterday's headline. Today the headline read "GM notifies dealers of shutdowns" as the company sent 1,100 dealers the notice they would no longer be allowed to stay in business. Thousands are losing jobs. Chrysler is bankrupt, and GM looks destined to file shortly. But wait a minute, GM was the market share leader for the last 50 years!! These big companies, in manufacturing, were supposed to be able to protect their business and become "cash cows." They weren't supposed to get beaten up, see their cash sucked away and end up with nothing!
About 30 years ago a fairly small management consultancy that was started as a group to advise a bank's clients hit upon an idea that skyrcketed its popularity. The fledgling firm was The Boston Consulting Group, and its idea was the Growth/Share matrix. It created many millions of dollars in fees over the years, and is now a staple in textbooks on strategic planning. Unfortunately, like a lot of business ideas from that era, we're learning from companies like GM and Chrysler that it doesn't work so well.
The idea was simple. Growth markets are easier to compete in because people throw money at the companies – either via sales or investment. So it's easier to make money in growing businesses. Market share was considered a metric for market power. If you have high share, you supposedly could pretty much dictate prices. High share meant you were the biggest, which supposedly meant you had the biggest assets (plant, etc.) and thus you had the lowest cost. So, low growth and low share meant your business was a dog. High growth and low share was a question mark – maybe you'd make money if you eventually get high share. High growth and high share was a star. And low growth but high share is a cash cow because you could dominate a business using your market clout to print money – or in the venacular of the matix – milk the money from this cow into which you put very little feed.
In the 1970s/80s, looking at the industrial era, this wasn't a bad chart. Especially in asset intensive businesses that had what were then called "scale advantages." In the industrial world, having big plants with lots of volume was interpreted as the way to being a low-cost company. Of course, this assumed most cost was tied up in plant and equipment – rather than inventory, people, computers, advertising, PR, viral marketing, etc. The first part of the matrix has held up pretty well; the last part hasn't. We now know that it's easier to make money in growth. But it doesn't turn out that share really gives you all that much power nor does it have a big determination in profitability.
We know that having share is no defense of profits. The assumption about entry barriers keeping competitors at bay, and thus creating a "defensive moat" around profits, is simply not true. Today, companies build "scale" facilities overnight. They obtain operating knowledge by hiring competitor employees, or simply obtaining the "best practices" from the internet. Distribution systems are copied with third party vendors and web sites. Even advertising scale can be obtained with aggressive web marketing at low cost. And so many facilities are "scale" in size that overcapacity abounds – meaning the competitor with no capacity (using outsourced manufacturing) can be the "low cost" competitor (like Dell.).
Thus, all markets are overrun with competitors that drive down profits any time growth slows. As GM learned, even with more than 50% share (which they once had) they could not stop competitors from differentiating and effectively competing. Not even Chrysler, with the backing of Mercedes, could maintain its share and profits against far less well healed competitors. When growth slows, the cash disappears into the competitive battles of the remaining players. Unfortunately, even new players enter the market just when you'd think everyone would run for the hills (look at Tata Motors launching itself these days wtih the Nano). Competitors never run out of new ideas for trying to compete – even when there's no growth – so they keep hammering away at the declining returns of once dominant players until they can no longer survive.
Competition exists in all businesses except monopolies, and threatens returns of even those with highest share. Today it might be easy to say that Google cannot be challenged. That is short-sighted. People said that about Microsoft 20 years ago – and today between Apple, Linux and Google Microsoft's revenue growth is plummeting and the company is unable to produce historical results. People once said Sears could not be challenged in retailing. Kodak in amateur photography. And GM in cars. Competitors don't quit when growth slows – until they go bankrupt – and even then they don't quit (again, look at Chrysler). High share is no protection against competition.
And thus, there is no "easy cash in the cow" to be milked. It all gets spent fighting to stay alive. Trying to protect share by cutting price, paying for distribution, advertising. And if you don't spend it, you simply vanish. Really fast. Like Lehman Brothers. Or Bennigans.
The only way to make money, long term, is to keep growing. To keep growing you have to move into new markets, new technologies, new services – in other words you have to keep moving with the marketplace. And that produces success more than anything else. It's all about growth. Forget about trying to have the "cash cow" – it's like the unicorn – it never existed and it never will.
by Adam Hartung | Apr 7, 2009 | Current Affairs, Defend & Extend, General, In the Whirlpool, Innovation, Leadership, Lock-in, Science
"GM, Segway unveil Puma urban vehicle" headlines Marketwatch.com. The Puma is an enlarged Segway that can hold 2 people in a sitting position. Both companies are hoping this promotion will create excitement for the not-yet-released product, thus generating a more positive opinion of both companies and establish early demand. Unfortunately, the product isn't anything at all like the iPod and the comparison is way off the mark.
The iPod when released with the iTunes was a disruptive innovation which allowed customers to completely change how they acquired, maintained and managed their access to music. Instead of purchasing entire CDs, people could acquire one song at a time. You no longer needed special media readers, because the tunes could be heard on any MP3 device. And your access was immediate, from the download, without going to a store or waiting for physical delivery. People that had not been music collectors could become collectors far cheaper, and acquire only exactly what they wanted, and listen to the music in their own designed order, or choose random delivery. The source of music changed, the acquisition process changed, the collection management changed, the storage of a collection changed – it changed just about everything about how you acquired and interacted with music. It was not a sustaining innovation, it was disruptive, and it commercialized a movement which had already achieved high interest via Napster. The iPod/iTunes business put Apple into the lead in an industry long dominated by other companies (such as Sony) by bringing in new users and building a loyal following.
Unfortunately, increasing the size of a product that has not yet demonstrated customer efficacy, economic viability or developed a strong following and trying to sell it through an existing distribution system that has long been decried as uneconomic and displeasing to customers is not an iPod experience. And that is what this GM/Segway announcement is trying to do.
Despite all the publicity when it was first announced, the Segway has not developed a strong following. After 7 years of intense marketing, and lots of looks, Segway has sold only 60,000 units globally – a fraction of competitive product such as bicycles, motorized scooters, motorcycles and mass transit. Segway has not "jumped into the lead" in any segment of transportation. It has yet to develop a single dominant application, or a loyal group of followers. The product achieves a smattering of sales, but the vast majority of observers simply say "why?" and comment on the high price. Segway has never come close to achieving the goals of its inventor or its investors.
This product announcement gives us more of the same from Segway. It's the same product, just bigger. We are given precious little information about why someone would own one, other than it supposedly travels 35 miles on $.35 of electricity. But how fast it goes, how long to recharge, how comfortable the ride, whether it can carry anything with you, how it behaves in foul weather, why you should choose it over a Nano from Tata or another small car, or a motorscooter or motorcycle — these are all open items not addressed.
And worse, the product isn't being launched in White Space to answer these questions and build a market. Instead, the announcement says it will be sold through GM dealers. This simply ignores answering why any GM dealer would ever want to sell the thing – given its likely price point, margin, use – why would a dealer want to sell Puma/Segways instead of more expensive, capable and higher margin cars?
Great White Space projects are created by looking into the future and identifying scenarios where this project – its use – can be a BIG winner that will attract large volumes of customers. Second, it addresses competitive lock-ins and creates advantages that don't currently exist and otherwise would not exist. Thirdly, it Disrupts the marketplace as a game changer by bringing in new users that otherwise are out of the market. And fourth it has permission to try anything and everything in the market to create a new Success Formula to which the company can migrate for rapid growth.
This project does none of that. It's use is as unclear as the original Segway, and the scenario in which this would ever be anything other than a novelty for perfect weather inner-city upscale locations is totally unclear. This product captures all the current Lock-ins of the companies involved – trying to Defend & Extend one's technology base and the other's distribution system – rather than build anything new. The product appears simply to be inferior in almost all regards to competitive products, with no description of why it is a game changer to other forms of transportation. And the project is starting with most important decisions pre-announced – rather than permission to try new things. And there is absolutely no statement of how this project will be resourced or funded – by two companies that are both in terrible financial shape.
The iPod and iTunes are brands that turned around Apple. They are role models for how to use Disruptive innovation to resurrect a troubled company. It's really unfortunate to see such wonderful brand names abused by two poorly performing companies without a clue of how to manage innovation. The biggest value of this announcement is it shows just how poorly managed Segway has been – given that it's partnering with a company that is destined to be the biggest bankruptcy ever in history, and known for its inability to understand customer needs and respond effectively.
