Director of Equity Research
Technology (DXC) is an information technology (IT) outsourcing firm created on
April 1, 2017, from the merger of Computer Sciences Corporation (CSC) and
Hewlett Packard Enterprise Services (HPS).
Both firms had long and infamous legacies as pioneers of
outsourced IT services for corporations and governments. Outsourced IT services run the gamut from operating
data centers, to writing and maintaining applications, down to providing help
desk personnel, who get workplace laptops to recognize the company Wi-Fi
network. Historically, these engagements involved large, bespoke and intricate
contracts for various activities, and often involved the re-badging of clients' employees to those of the IT outsourcer.
To diversify their product lines,
many IT outsourcers expanded into business process outsourcing (BPO) and
consulting services, but for firms such as CSC and HPS, IT outsourcing remained
the core. The offering mix contrasts with long-term Weitz portfolio holding
Accenture, for example, which has a significant consulting business that
complements its IT and BPO services, allowing for higher sales growth and
Customers chose to outsource their IT
and back office functions using BPO because operating environments were
becoming increasingly complex and expensive. The hope was that an outsourcer
could create scale across multiple customers while delivering better
performance at a lower cost. While lower costs were realized by customers in
the form of low pricing, IT and business complexity only grew as new technology
was layered on top of legacy systems. Any savings created through purchasing or
learning curves were typically given back to the customer at contract renewals.
These developments meant that IT outsourcing and BPO firms became businesses
with a lack of standardization, high labor intensity and low profit margins. IT
outsourcing and BPO became, in the words of DXC CEO Mike Lawrie, “Your mess for
During the 1990s and 2000s, CSC and
HPS predecessor firms HPE and EDS faced additional pressure from India-based
firms, who were able to offer many services, such as network and application
management, to customers for a much lower price due to the labor arbitrage available
from using programmers from their home country. The India-based firms proved
equally capable of performing BPO services at a much lower cost.
With numerous complex contracts, poor
service levels and pressure from Indian firms, CSC found itself near bankruptcy
by 2012. Mike Lawrie was hired at this time as CEO of CSC. Immediately, Mr.
Lawrie began to rationalize CSC's business by renegotiating or exiting
unprofitable contracts, cutting out multiple layers of management created to
oversee the overly complex contracts, and investing in lower-cost IT
outsourcing facilities in India and the U.S. while also modernizing CSC's
underlying technology infrastructure. During Mr. Lawrie's term as CEO of
stand-alone CSC, until the merger with HPS, margins increased from zero to
approximately 8 percent, while its 2,000 customized offerings were reduced to
230 standardized services. Further value was created by spinning off CSC's
federal government business.
Following the merger, DXC has focused
on rationalizing its cost structure, aligning go-to-market and delivery
operations, and further simplifying service offerings. In the fall of 2017, DXC
announced the spin-merger of the legacy HPS federal government services
business (representing 10 percent of revenue) into a new company called
Perspecta, which began trading on June 1, 2018. DXC is now focused on serving
global businesses and state and local governments.
Today the company continues to focus
on reducing costs. For example, only 54 percent of its outsourcing workforce is
based in low-cost locations, but the goal is to increase it to 70 percent in
the next few years. Additionally, the company is ahead of its goal to achieve
the $2.1 billion of cost savings (adjusted for the Perspecta spin) it projected
at the time of the merger with HPS.
Looking ahead, Mr. Lawrie and his
team are in the process of repositioning the overall business to take advantage
of new technologies and business opportunities. The emergence of new
technologies and processes, such as cloud, artificial intelligence and robotic
process automation, has allowed DXC (and others) to realize true scaling
impacts, as previously labor-intensive activities are replaced by software and
algorithms, many of which include proprietary DXC intellectual property. The
company has been applying these helpful technologies to standardize processes
across the customer base, reduce labor and management oversight while providing
more consistent levels of service, all at a lower cost.
DXC's customers are using the savings
from basic services to purchase higher-margin digital transformation
capabilities such as cloud, mobile and analytics. The company has also expanded
and fortified its industry-specific practices in healthcare, travel and
financial services to create a differentiated BPO business. These specialized
practices help customers using DXC developed software, processes and services,
which drive higher revenue and margins while increasing customer “stickiness.”
DXC expects the combination of its digital transformation and industry-specific
services to eventually generate half of total revenues as these practices grow
and it actively shrinks traditional IT outsourcing services.
While on the
surface the legacy businesses of DXC looked severely challenged, Mr. Lawrie's
excellent track record at CSC, and the similarities between CSC's challenges
then and DXC's now, gives us confidence that DXC's future should be much
improved. To date, DXC appears on track with our investment thesis that good
management, significant cost savings and a change in business mix will
eventually result in the stock price approximating our business value of around
performance is not a guarantee of future results. All investments involve risks,
including possible loss of principal.
of 09/30/2019, each of the following portfolio companies constituted a portion
of the net assets of Value Fund, Partners Value Fund, Partners III Opportunity
Fund, Hickory Fund, and Balanced Fund as follows: Accenture plc-Class A: 1.9%,
0%, 0%, 0%, and 1.1%. DXC Technology Co.: 1.5%, 2.9%, 2.8%, 0%, and 0%.
Perspecta Inc.: 0%, 0%, 1.2%, 0.9%, and 0%.
are subject to change and may not be representative of the Fund's current or
opinions expressed are those of Weitz Investment Management and are not meant
as investment advice or to predict or project the future performance of any
investment product. The opinions are current through the date of publication,
are subject to change at any time based on market and other current conditions,
and no forecasts can be guaranteed. This commentary is being provided as a
general source of information and is not intended as a recommendation to
purchase, sell, or hold any specific security or to engage in any investment
strategy. Investment decisions should always be made based on an investor›s
specific objectives, financial needs, risk tolerance and time horizon.