CSC Splits in Two for Sharper Focus. Is this its End Game?

CSC, a leading global information technology service provider, announced this week it will divide the company into two publicly traded entities: one to serve global commercial and government clients and one to serve public sector clients in the U.S. Is this move the culmination of a three-year transformation journey in a bid to turn around CSC’s fortunes? Or is this simply another step in a journey that has still more dramatic news to come?

CSC’s public sector and commercial businesses have always operated as separate groups with minimal interdependency, so the split will likely have little operational impact. It will, however, enable each company to better align its strategy with its own distinct client base and its own unique market conditions. Indeed, increased attention to specific accounts advances CSC’s stated transformation objective.

As a critical part of its aggressive comeback plan, CSC has made significant investments in emerging technologies, from multivendor hybrid cloud orchestration, to improved analytics through strategic acquisitions, to modernized applications through its partnership with HCL. It has also invested heavily in cybersecurity in support of the government. These capabilities are critical to both of its major markets. The challenge for CSC now is to ensure its spun-off companies are able to leverage these investments.

CSC’s U.S. public sector business generates one-third of the company’s total revenue every year. While it has seen a downward trend over the past three years—due primarily to reduced federal government spending— the profitability of the public sector revenue has been the highest among all its businesses. It remains to be seen whether the reduced operating margin and diminished scale of the commercial business—along with the $10/share dividend it has promised investors—will impact its capacity to further invest in cloud, automation and other technologies that are key to CSC’s ability to compete in deals with providers such as IBM, Amazon and Wipro.

What do we think? ISG believes the split will simply formalize the operational segmentation that has always existed between CSC’s two business lines and have little immediate impact on its clients or market position. Though this move jibes with CSC’s transformation strategy to align with clients’ business objectives and focus on profitable accounts, its clients need to understand how it affects their specific situation and their anticipated future state. If this move is a precursor to a buyout of either one or both of the spun-off companies by a private equity firm or IT service provider, the eventual restructuring will be sure to create a measure of uncertainty and may affect CSC’s ability to attract and retain talent and clients—a scenario that certainly will call for further analysis.

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Editor’s Note: Suvodip Datta, Consulting Manager, contributed to this post.

About the author

Kimberly Fey is a Director at ISG and has responsibility for ISGs Sourcing Industry Relations. In this role, Kimberly leads the relationship development with the service provider and law firm community. Kimberly has created platforms that promote dialogue and education with the other industry influencers. Through this program, ISG has regular interaction with all the leading multi-national, India heritage, geographic and niche service providers. Kimberly has developed relationships with the top executives at these firms and orchestrates relationship development between ISG executives and their industry, functional and geographic counterparts. She manages the only advisor industry event, Sourcing Industry Conference, that allows for candid, open dialogue with the service provider community about the industry issues, challenges and opportunities.