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The CSC Split: More than What Meets the Eye | Sherpas in Blue Shirts

May 20, 2015

Yesterday, Computer Sciences Corporation (CSC) announced that it was splitting the company into two independent, publicly-traded entities – U.S. Public Sector and Global Commercial. The split, expected to be completed by October 2015, will be accompanied by a special cash dividend of US$10.5 per share. After the bifurcation, the U.S. Public Sector business will focus on federal, state, and defense customers within the country, and employ 14,000 people. The remaining 51,000 employees will be a part of its Global Commercial business that will focus on commercial customers, and public sector organizations outside the United States. The two businesses generated US$4.1 billion and US$8.1 billion, respectively, in annual revenue during FY2015. Everest Group’s CEO Peter Bendor-Samuel shared his top-level insights shortly after the announcement. Following is our evaluation of the different potential scenarios arising out of the split.

Last attempt to avoid a buyout?

The announcement comes after the latest set of rumors about CSC’s potential sale. In February 2015, Carlyle Group and Capgemini were reported to be in talks to jointly acquire the company. Around the same time, CSC was said to be working with Royal Bank of Canada to review buyout options. Similar reports emerged in September last year with CSC exploring leveraged buyout via multiple private equity firms, including Bain Capital and Blackstone Group. CSC’s buyout (if it had materialized) would have been the largest leveraged buyout since Dell went private for US$16 billion in 2013. However, the talks over the year fizzled out as buyers baulked at CSC’s expected valuation.

If this move is a precursor to a possible sale, the question comes around to the identity of the suitor. Rumors have floated about interest from HCL and Accenture, but things don’t add up with those two suggestions for a number of reasons. HCL already has what it needed from CSC through its alliance, and Accenture already enjoys pole positon in the consulting markets, so they would have to radically depart from their infrastructure strategy to take on the CSC asset base. Given that Accenture is integrating infrastructure with operations as part of its GTM (go-to-market) strategy, we do not see the change in strategic direction that would indicate acquisition of an asset like CSC. A more plausible candidate would be someone looking for scale in the North American enterprise market with allied economic models creating scale and IP synergies.

Driving rationale

The decision to split can be viewed as the culmination of CEO Mike Lawrie’s efforts to revitalize this ailing company. Since his inception in 2012, CSC has witnessed firm-wide cost takeout measures as a part of the “Get Fit” phase of its turnaround efforts. Attributable to these efforts, the company managed slight melioration in its operating margins during FY2014 and FY2015. Recognizing the fact that the cost takeout measures have already liquidated as enhanced bottom-line, and in the absence of a successful buyout, the management has settled on forming two separate business entities catering to different customer segments. Increasing profitability and value for shareholders could also shore up CSC’s valuation.

Apart from catering to different customer segments, the two entities have inherently exhibited great divergence in terms of their growth profiles and cash flow dynamics. The Global Commercial business has faced strong tailwinds, with revenue in FY2015 declining due to contract completions and lack of new opportunities. On the other hand, the Public Sector business managed to maintain the figures, backed by demand for next-gen IT solutions such as cloud. As it gears up for a potential sale, the government business is potentially value dilutive, and may not find many takers. There’s also an aspect around risk compartmentalization – troubled contracts in the federal marketplace can get service providers stuck in long-drawn out lawsuits and punitive damages.

The future

Keeping this context in mind, splitting the overall businesses can play out in a number of different ways for CSC. It can help offload the new entities of assets not core to their business, enabling them to be more strategic in serving clients and pursuing new opportunities. The new entities will be in a better situation to position themselves as specialists in their respective markets. While this may not be a pivotal factor for the Global Commercial business, it could be a turning point for the Public Sector business, wherein, organizations increasingly seek to engage with specialized technology partners. Despite the split, both entities stay as multi-billion dollar businesses, thus, ensuring that none of the two entities face any scalability issues in the market.

With its decision to split, CSC joins the league of technology companies that have lagged in adapting to the changing market dynamics (shift to mobile, cloud computing, and the As-a-Service economy), and are splitting up in response to market pressure. Last year, HP, another service provider plagued by similar challenges, announced a similar split. Two years ago Science Applications International Corp. (SAIC) went down the same path and spun off its government technology services business as SAIC and rebranded itself as national security and engineering company Leidos Holdings Inc.

While the ultimate success or failure of such a strategic move is murky at best, it is beyond doubt that a rapidly disruptive and evolving services landscape will lead providers to ponder hard choices. In the last year we have seen multiple instances of this realization translating into different maneuvers – movement towards an integrated value proposition (Cognizant-TriZetto), geographic/vertical expansion (Atos-Xerox and Capgemini-IGATE), and focus on next-generation tenets (Apple-IBM). As this continues to happen, expect more industry churn, realignment, and consolidation.

CSC Splits Itself Apart | Sherpas in Blue Shirts

May 20, 2015

CSC announced it is splitting into two companies. One will provide service to commercial and government organizations worldwide; the other will serve the U.S. public sector businesses. What are the implications for the services industry?

CEO Mike Lawrie has been running CSC’s turnaround. The story line he drove was that he would first drive earnings and then fix growth. He has been spectacularly successful in driving earnings, but the pivot to growth hasn’t worked so well.

Certainly there were rumors that CSC was up for sale, but it didn’t transpire. We believe this split into two entities is the natural next step, especially since it comes at a time when the industry is maturing. The separation allows CSC to behave differently.

Everest Group believes the federal component will become an attractive acquisition target with both defense contractors and private equities interested in the consistent cash flow and book of business.

The commercial side may also attract interest, but from a different group. Certainly there has long been speculation that one or more Indian-based service providers may have an interest in acquiring CSC’s infrastructure-based business. It would be a large acquisition with substantial adjustments as the Indians move the book of business to their labor arbitrage model.

For both of the new entities, whether they are acquired or remain independent, the split should allow them to focus more strongly on growth at time when growth is coming at a premium.

As to the implications for the industry, we see this split as playing into the industry’s ongoing story of maturing and playing also into the theme of industry consolidation and industry realignment.

Capita’s German Gambit | Sherpas in Blue Shirts

May 19, 2015

Over the years we have seen Capita successfully expand from one market sector to another in the UK and Ireland. Since 1984 when it only served the UK local government sector, it has expanded into seven major verticals and over 15 segments of those. The latest expansion plans take it beyond the UK and Ireland borders into DACH, with Germany being a primary target market.

Acquisitions

Capita’s new geographic growth strategy has seen it make three acquisitions in the DACH region (Germany, Switzerland and Austria) in the past year:

tricontes – the £6.2m acquisition of this Munich-based company in June 2014 brought Capita specialist contact centre services across the retail, telecommunications, utilities and insurance sectors in Germany
SCHOLAND & BEILING – a customer care consulting company also based in Munich, Germany
avocis – announced in February 2015 and if successfully completed, at £157m, avocis would be one of the bigger Capita acquisitions. It would bring Capita 6,500 employees and a portfolio of customer contact management services contracts in DACH. Although headquartered in Switzerland, Germany is avocis’ biggest market, accounting for 53 percent of revenue. The rest comes from Switzerland.

Capita has a formulaic approach to acquisitions with a budget of £200m to £250m per annum. It considers many potential acquisitions each year, selecting a dozen or more that fit its formula to:

Increase scale
Add new expertise to enhance its propositions
Take it into new markets.

In addition, the acquisitions have to make a Return on Capital Employed (ROCE) of 15 percent post tax return after 12-months integration into the group.

Capita recently also acquired 700 skilled, multi-lingual FTEs in Krakow and Lodz, thanks to its acquisition of SouthWestern in Ireland. It can tap into these centres to further boost its presence in DACH for outsourcing services, including insurance, finance and legal administration, and customer management.

The Drivers for DACH expansion

The key drivers for Capita’s German gambit include:

Small growth in the UK market – we estimate that contact centre outsourcing (CCO) to be growing at circa 5 percent. Capita posted decent growth in this business, but given the overall market conditions, Capita must be looking for an alternative growth trajectory outside its comfort zone
Continental Europe is growing – Everest Group research shows a rise in CCO adoption within Continental Europe. Germany has the largest economy in Europe with an under-penetrated and fragmented market, and only in certain verticals such as utilities, retail and telco. Germany, therefore, presents ample room for sustainable CCO growth for Capita
The DACH region represents a large CCO market with 110m German speakers. Yet there is only small levels of outsourcing. Capita sees good opportunity for a transformational CCO partner in the region
Ability to engage existing UK clients – this also provides Capita with opportunities to extend its existing contracts within UK with firms that have European parents and subsidiaries and vice versa
Access to the in-house contact centre market through SCHOLAND & BEILING’s existing portfolio of enterprise clients, enhancing the breadth of Capita’s footprint in the broader contact centre market.

The three acquisitions add scale to Capita’s existing customer management services in the service-line’s key sectors of retail, telecom and utilities. We expect to see some sharing of resources and skills across country units, driven by multi-country client requirements.

The combination of both customer care outsourcing and consulting services represented by these acquisitions also bodes well for CCO clients, who increasingly look to their service partners for guidance in strategic areas, such as the deployment of multi-channel services, enhanced uses of analytics and stronger vertical industry specificity.

Expansion into German local government is a possibility with avocis that has a number of contracts in the sector. This is Capita’s founding market and Andy Parker, the CEO, has already said that he sees much similarity between the UK and German local government sectors. However, expansion into this sector will be after that of avocis’ bigger private sector market. It is unlikely to target the German local government for the first 12 months after the acquisition.

Challenges

Capita’s biggest challenge is integration of these companies along with all the other acquisitions that it has made recently. In recent years Capita has spent:

£271m on 13 acquisitions in 2013
£310m on 17 acquisitions in 2014
£199m spent on 4 acquisitions to date in 2015

These have been in a diverse set of companies, ranging from software and data for utilities and transport sectors to residential and commercial mortgage administration. The company is also expanding its services portfolio into new verticals such as agriculture and science services.

Managing this expansive empire while building efficiencies into services and workforce management is not going to be easy.

Yet Capita continues to deliver growth year after year. In previous years, it managed to significantly boost its CCO business with the acquisitions of Ventura and Vertex in the UK. In DACH, it has to deal with challenges of a different culture and languages as well as the usual aspects of integrating businesses, so we will be watching this space with interest.

There is no doubt that Capita is a master at business expansion. Service providers that want to expand into new service lines and geographies would do well to follow Capita’s German gambit.

Which Service Provider Will Be Acquired Next? | Sherpas in Blue Shirts

May 7, 2015

Capgemini’s announcement that they have an agreement to acquire iGate is the most recent evidence that the consolidation pace in the services market is picking up. Slowing growth, collapsing margins, and availability of capital with interest rates close to zero are only intensifying the M&A activity. How will the consolidation happen? And which service provider will be acquired next?

At Everest Group, we believe there are three likely scenarios that answer these questions.

Certainly we expect the big to get bigger. We expect the French (CGI, for example) and Japanese providers to continue to grow through acquisition. CSC put itself up for sale at least once in the last year, and that’s likely to happen again. We think Atos and Capgemini have completed their acquisition activities.

We also expect the Indian firms to play a more prominent role in the consolidation activity. Cognizant has demonstrated it’s in the market and will likely strike again. Wipro, Infosys and TCS certainly have the capital to move, and we may see some of these players combining.

And finally we expect some smaller firms to acquire one another and build scale. Potential market consolidators are bound to view EPAM, EXL, Virtusa and WNS as targets. And Syntel is not too big to be sold.

One of the most interesting scenarios to watch will be what happens with Genpact. They must take a “go big or go home” strategy. If they go big and become acquisitive, they will likely buy one or more IT firms. Short of that, Genpact isn’t too big to be sold and will become a highly attractive candidate for acquisition.

Capgemini Acquires IGATE to Power North American Ambitions | Sherpas in Blue Shirts

April 27, 2015

Today, Capgemini announced the merger agreement to acquire IGATE for $4.04 billion. IGATE is a US-listed technology and services company headquartered in New Jersey with US$1.27 billion in revenue in 2014. The sale of IGATE has been in the offing for a while after private equity company, Apax Partners, which financed most of IGATE’s US$1.2 billion acquisition of Patni Computer Systems in 2011, converted its debt into equity in November 2014 (becoming its largest shareholder) and also filed with the U.S. Securities and Exchange Commission to have the option to sell its stake. The combined group will have nearly US$13 billion in annual revenue and 177,000 people globally. Capgemini aims to realize revenue synergies of US$100-150 million (through cross-selling and account farming) and cost savings of US$75-105 million over the next three years. The deal’s size and cross-ranging implications make it one of the most significant transactions in the IT-BPO industry. Capgemini is paying a premium for its North American ambitions, over 3x revenue multiple. It outstrips other such deals in the marketplace, notable CGI-Logica (2012) and IGATE-Patni (2011), indicative of the scale and urgent imperative driving deal rationale.

Major acquisitions in the IT-BPO market (US$ million)

What works?

Prima facie it gives Capgemini a sizable foothold in the North American market, the biggest IT outsourcing market in the world. North America becomes a significant market for the combined entity, comprising nearly one-third of 2015 projected revenue, up from 20% for Capgemini earlier. Europe will still account for over half of the combined revenue. The North American region contributed nearly 80% to IGATE’s revenue in 2014, with marque clients such as GE and Royal Bank of Canada. This had increasingly become important for the company since its French-rival Atos bought Xerox’s North American ITO business late last year. That deal also made Atos the primary IT services provider to Xerox (~US$240 million annual revenue) and also have the right to first refusal on collaborative opportunities with Xerox.

It enhances Capgemini’s delivery presence in offshore/low-cost regions specifically India, where most of IGATE’s 33,000-strong workforce is based. Capgemini had earlier acquired Kanbay in 2006 with a focus on increasing India operations. It also bought Unilever’s India GIC – Unilever India Shared Services Ltd (UISSL) – in parts over 2006-2010. Around two-fifths of Capgemini’s global workforce of 144,000 employees is based in India, with the combined group having an offshore leverage of nearly 55% by the end of 2015, comprising over 90,000 people.

The move adds greater definition to the verticalization maneuvers Capgemini had been driving of late. IGATE’s strong BFSI client roster (CNA, Royal Bank of Canada, MetLife, UBS, Morgan Stanley), comprised over two-fifths of its revenue last year. Similar synergies are expected in manufacturing, healthcare, and retail sectors.

Capgemini’s functional spread stands to gain on account of IGATE’s mixture of IT and BPO services. Specifically, Capgemini has been looking to grow its ADM and BPO business, as enterprise clients exhibit a preference for integrated services stacks led by an expanding As-A-Service economy, combine infrastructure, application, and business process service needs. This is the driving force behind IGATE’s business model – ITOPS or Integrated Technology and Operations, which will help Capgemini position itself as a fully integrated service provider. The deal also holds Capgemini in good stead, bolstering its industrialization play. As the value proposition in the global services space moves beyond labor arbitrage, service providers are looking at non-linear IP-driven revenue sources through products, platforms, and solutions. IGATE has monetized the ITOPS value proposition through productized applications and platforms – IDMS (for BFS), IBAS (for TPA clients), and SIB (for retail customers) – which are distinct P&L-plays for the company. Capgemini is also likely to receive additional tax benefits from the deal, as it is carrying a large deferred tax asset in the U.S.

The uncertain

The adage “culture eats strategy for breakfast” couldn’t be truer for this merger. There is a stark cultural tension with a Europe-heritage firm struggling with offshoring trying to integrate an Indian IT service provider with a strong North American client roster. Plus all is not rosy with IGATE. One of its largest clients, Royal Bank of Canada, has been facing problems for its use of IGATE services while GE’s contribution to revenue has been falling. CEO Ashok Vemuri’s hire-for-growth plan witnessed a bump when Q4 2014 headcount actually fell by about 900 employees. IGATE registered an annual revenue growth of just 10% to $1.27 billion in 2014, lagging other IT peers. On the executive front, the merger means uncertainty for Ashok Vemuri, who left Infosys specifically to take over as CEO after Phaneesh Murthy left. His dream of staying a CEO might be curtailed, and he will be tempted to move on, as he wouldn’t want to occupy a role similar to what he held at Infosys, with even less leverage with the leadership. This potential void in leadership could pose a major hurdle for the integration process.

The road ahead

The move is indeed a bold one by Capgemini to catalyze growth, plug delivery/regional/vertical gaps, and streamline operations. IGATE is the right size for Capgemini to absorb – not too small so it does not have a tangible impact but not so big that to create an integration struggle. The sizable deal size could spur U.S. giants to action. Given Capgemini’s European legacy, other regional service providers could mull their options in a bid to expand their operational footprint. We have already seen recent activity in Europe with the Steria-Sopra merger last year. MNCs struggling for growth and looking at globalizing delivery could start thinking of mid-sized players as possible targets. Some of these players have growth issues, significant PE investments, scaling problems – all of which make a good rationale for a merger with a bigger player. On the other hand, the deal lacks some specific attributes when it comes to next-generation technology tenets such as cognitive computing, automation, digital, and analytics. Moreover, Capgemini will need to bridge the inherent disconnect between two different cultures, systems, processes, and people, to make this integration successful. The deal is certain to spark further consolidation and conversations, as service providers witness pricing pressures, evolving engagement models, and increasing anti-incumbency, in a bid to adapt to the As-A-Service construct.

Photo credit: Capgemini

Sell Digital Services, Not Apps Rationalization | Sherpas in Blue Shirts

April 1, 2015

After coming back from Nasscom and discussing the inflection change coming to the services industry, I’ve observed a lot of service providers preparing for the shift – especially the apps providers. But I see them making a mistake: putting too much emphasis on apps rationalization and rearchitecting.

It’s not that apps rationalization and rearchitecting isn’t happening. But providers are justifying it as a necessary step for digital readiness, advising clients that they need to do this if they are looking into a digital agenda. I know of a few situations where it was necessary, but I believe those instances will be the exception rather than the rule.

Here’s the issue: If you go to market and emphasize apps rationalization and rearchitecting, you’ll likely end up in – at best – an interesting conversation without sufficient sales coming out of it, for the following reasons.

First, for the most part, you don’t have to rearchitect the client’s legacy systems to run a digital agenda, at least not with where the digital agenda currently is. You have to interface the apps, too. So you end up making unsubstantiated, incredible claims.
Second, in a world where business stakeholders have greater influence, they don’t want to spend their money and time on rearchitecting old functionality; they want new functionality. They are impatient to get to the benefits of changing their customer experience, and they are far less willing to listen to proposals that involve enduring long timeframes. They expect that their digital revolution will happen quickly, but rearchitecture is a long, three- to five-year journey.
Third, rearchitecting doesn’t fit in with the CIO’s agenda; CIOs are trying to rebuild their relevance to their business. It also doesn’t play to the business stakeholders’ agenda.

It’s just not what organizations are buying right now, and it will confuse and slow down your sales process. So my advice is to be very careful about pushing apps rationalization and rearchitecting linked to a digital agenda. I’m not saying that customers won’t ask for it, but it’s likely that they’re really asking for just a connection into digital.

A better story might be:“Let’s drive your digital agenda and connect that back to the apps.”

I think a lot of providers are not resonating with their clients and not getting the kind of growth because they are confusing clients on this issue of apps rationalization and rearchitecting. This may change. But this is my belief about where the market is right now. We’ll keep our eye on it.

Silver Bullets Don’t Drive Growth in Services | Sherpas in Blue Shirts

February 12, 2015

Every service provider is looking for the one, simple thing they need to do to change their growth trajectory. They think they may need to change their messaging or perhaps they should incorporate automation into their finance and accounting offering. Or they think moving from FTE-based pricing to transaction-based pricing will grow their business. If a silver-bullet answer existed for the question of how to grow a service business, it would be a wonderful thing. But here’s the sad truth: none of these actions will change the game.

Insanity is doing the same thing again and again and expecting a different result. Are service providers going insane? It appears so, since they keep looking for simple, one-dimensional answers over and over again. I think by now they should be willing to step back and realize that their growth problems are much bigger than getting their messaging right or delivering the right combination of offshore and onshore resources or even adding a host of new service offerings in cloud, as-a-service, digital and automation platforms.

We talk with providers that are very enthusiastic about their new offerings and say they’ve signed dozens of new deals. But when we ask how much revenue comes from the new deals, the answer paints a very different picture. Often these are small sales, pilot situations and small revenue with the hope that they will grow into something larger. That may be where the market is heading, though not always.

Does a provider’s future success depend on moving to new technologies, new offerings? Providers need to recognize they can drive bigger sales by focusing on well-established areas that customers are already buying. For example, businesses will spend small amounts of money experimenting with cloud and social media, but they will spend huge amounts of money extending their CRM system so it supports the provider’s new offering. Evolving established technologies drives much larger revenue than experimenting with new technologies or new business models. That said, this still won’t change the game.

I believe providers need to stop their insane search for silver bullets and look, instead, at the fundamental tenets of how their customers perceive them and then change the nature of those relationships.

Providers that want to change the trajectory or the nature of their customer relationships and move into a deeper relationship on a larger scale likely need to change how they treat customers. Today’s customers want deeper, more intimate relationships.

But when we at Everest Group talk to providers about this reality, we find very few service providers are willing to step back and do that. Providers tell us they can’t afford to allocate more resources to customer relationship development and customer care functions because their cost of sales will rise too fast. So they just keep treating customers the same way but expecting a different outcome.

The dilemma for service providers is that they have a shareholder mandate to drive growth today. Sure, they get rewarded for growth in the current quarter, but their future ability to drive growth depends on their ability to position themselves should new technologies catch hold. When that happens, having already established deep, intimate relationships with customers will drive growth.

The Illusion of Services Growth in the Midmarket | Sherpas in Blue Shirts

December 15, 2014

As the services industry struggles more and more with growth, providers naturally think: “We’ve saturated the large clients, so let’s go to the midmarket clients. After all, there are so many more midmarket companies than large ones. So if we can sell to midmarket companies, happy days are here again. We can reignite our growth curve and continue to grow at the pace we want to return to.” Unfortunately this violates the Dillinger principle.

When John Dillinger — an infamous gangster and bank robber during America’s Great Depression — was asked why he robbed banks, he replied, “That’s where the money is.” By analogy, that is why the services industry rarely are able to take services designed for large enterprises and build successful growth strategies in midsize companies — they don’t have the money.

As any number of providers have found out, it costs a similar amount to sell to midsized companies as large ones; however, the resulting contracts are much smaller. Furthermore, the provider has very little ability to scale that relationship to a large footprint as it could do with large companies.

My observation is that the providers that attempt to shift from large enterprises to the midmarket in an attempt to reignite growth almost always fail to achieve their goals. It’s complicated, expensive and time-consuming to sign up midsize clients. And there is lower profitability because the cost of the sale and the cost of client interaction overwhelm the potential profit.

Unfortunately, the idea of heading into the midmarket and finding a big services market is consistently disappointing.

Trends Reshaping the BPO Marketplace | Sherpas in Blue Shirts

December 3, 2014

The BPO segment of the services marketplace has been undergoing significant change in its growth trends. As we lean into 2015, here’s a look at how and where BPO is experiencing the biggest growth.

Industry-specific offerings lead growth, and horizontal BPO growth comes from newer segments.

Industry-specific segments

The industry-specific segments are growing significantly faster than the traditional horizontal offerings. For example, our study of the three-year CAGR of various segments reveals that:

	Industry-specific	Horizontal
	Capital markets – 20-22%	FAO – 8-10%
	Insurance – 14-16%	Contact centers – 6-8%
	Banking – 14-16%	Multi-process HRO – 2-4%

This data underlines the shift that I’ve commented on in previous blogs. Customers not only expect industry expertise and relevant industry solutions but also favor them over the horizontal segments of generic process-oriented offerings.

Fast-growth process-oriented segments

Nevertheless, some process-oriented segments are growing very quickly. Examples of segments on the adoption fast track include:

Analytics BPO segment – 30-32%
RPO segment – 16-18%

Go-to-market strategy

Although most service providers now structure and deliver a horizontal offering, they bring it to market to their vertical orientation. For example, they sell their analytics offering through their manufacturing, retail or healthcare verticals. This allows the horizontal segment to capture the growth benefits of the vertical orientation while getting the scale benefits of the horizontal delivery model.

Midmarket

Another factors shaping BPO growth for 2015 will be adoption by buyer size. Our research tracking new BPO contracts points to this trend. For example, in Banking BPO contracts signed as of December 2013, midmarket customers signed 57% of the contracts in 2011-2013, a sizeable increase over 43% signed up to 2010.

Influence factor

Underpinning the shift to more industry-focused and customer-focused offerings, is another shift I’ve blogged about several times — the shift of influence from the central buying organizations to the business units. This trend has been a major factor in BPO adoption during 2014 and will continue to exert pressure that creates both upticks and downward trends in BPO for 2015.

Photo credit: Andy

IBM Takes Steps to Ensure It Will Be Relevant for the Future | Sherpas in Blue Shirts

October 30, 2014

IBM is taking some bitter medicine right now in its series of divestments. Big Blue recently exited the chip manufacturing business by spinning off that division to Globalfoundries. The move comes on the heels of having exited its server business and voice and transaction BPO business. There’s a lot of media attention to “IBM’s blues” and a lot of water cooler talk about what IBM is up to. Are they going to be viable, or do they have a foot in the grave? I look at it as they are ensuring that they have both feet on a very solid growth platform.

But the series of divestments raise a lot of eyebrows and create shareholder discomfort. It takes time for shareholders and customers to process what IBM is doing.

Here’s what’s happening:

The divestments were not failed businesses. They just are not the future of IBM. The company is simply pruning back its operations that have been a drag on earnings and siphoning their management attention and resources.
IBM has been acquiring almost one company per month, largely in the areas of cloud software, analytics and Big Data.

Often the assets IBM sells do well in other hands. Lenovo has done very well with IBM’s former PC business and looks to do well in the server business. And I expect Globalfoundries to do well with the chip business.

Simply put, IBM is remaking itself and making very deliberate and assured steps for its future. It is rare for large organizations to have the discipline to exit businesses. Most large organizations are eager to buy new growing businesses but struggle in the divestment of businesses that are no longer strategic or are struggling to perform. But IBM has managed to remake itself a number of times in their long, historic journey.

IBM now clearly has both feet in the future, whether it’s a growth platform for cloud, analytics, or high-value IT and BPO services.

I think this should be a comfort to IBM customers. Big Blue is taking necessary steps now to not become a Kodak and not consign itself to irrelevance for customers’ future needs.

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Tag: growth strategy