Computer Sciences Corporation

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Computer Sciences Corporation

2100 East Grand Avenue
El Segundo, California 90245
U.S.A.
(310) 615-0311
Fax: (310) 322-9805

Public Company
Incorporated: 1959
Employees: 22,500
Sales:$ 1.74 billion
Stock Exchanges: Boston New York Midwest Pacific

Computer Sciences Corporation (CSC) is one of the largest software developers and computer systems integrators in the United States. The firm operates, designs, and installs computer-based information systems, offers consulting services, and processes medical insurance claims.

CSC was formed in Los Angeles in 1959 by Fletcher Jones and Roy Nutt with only $100 in capital. Jones entered the infant computer industry by chance. He had taken a job as a mathematical analyst in the data processing section of Chance Vought Aircraft Company because it was the best job offer he received after graduating from college. From there Jones became director of the Columbus division computer center for North American Aviation. His acquaintance, Roy Nutt, a top member of United Aircraft Corporation’s data processing staff, shared Jones’s opinion that large amounts of new software would soon prove a crucial need for the growing computer industry. A number of computer manufacturers were coming out with new models, and the two felt the manufacturers would never be able to write the necessary software in house.

Computer Sciences Corporation stepped in to offer its software writing services to major computer manufacturers, among them International Business Machines (IBM). One of the firm’s early jobs was to design a large software system for Honeywell. It later wrote a complete package of programs for Univac. From the start, however, Jones felt that the biggest profits in software lay in creating proprietary software (software to which they would hold exclusive rights) that could be sold to a large number of users, not in custom-written programs for specific customers. More than a decade later, firms like Microsoft Corporation, Lotus Development Corporation, and Computer Associates proved the validity of Jones’s assessment, but CSC has never managed to tap this market.

The firm’s first major proprietary software was Computax, a large, complex set of programs used to calculate individual income taxes and prepare a tax return. It was used chiefly by accountants doing corporate and personal tax returns. Computax proved popular and was turned into an independent company, with CSC holding a 38 percent interest. By 1965, with company profits at $2.7 million, the 34-year-old Jones was worth $20 million and appeared in Time magazine as part of a cover article on young millionaires.

Government contracts have been the most important source of CSC revenue, and the firm started signing them early in its history. In June of 1966, for example, CSC signed a $5.5 million contract with NASA (National Aeronautics and Space Administration) to support a computation laboratory in Huntsville, Alabama. Annual sales reached $53.5 million by 1968, and the firm became the first software company to go public. Software development had become the fastest-growing segment of the flourishing computer industry, and CSC dominated the market.

The firm moved into new ventures, introducing Computicket, which made it possible for consumers to buy computerized tickets to entertainment events through non-box-office vendors. In 1968 only about one percent of U.S. computers were linked to each other, so the plan was an ambitious and formidable task for a small, young company to realize alone. CSC had been working with Western Union for four years to develop methods for transmitting computerized information over telegraph wires. Jones and Russell W. McFall, president of Western Union, agreed in principle to merge their companies in 1968.

Although it was only one-sixth of the size of Western Union, CSC was to be the dominant partner. The 117-year-old Western Union was growing very slowly, while the nine-year-old CSC was soaring. The merger fell through, but CSC decided to continue with Computicket anyway. It also continued to grow, reaching $6.8 million in profits on $80 million in sales in 1968. William R. Hoover, who had been with CSC since 1964, took over daily operations in 1969, leaving Jones free to concentrate on long-term strategy.

Jones forged ahead with an even more challenging plan— dubbed the Infonet system—to create a nationwide computer network offering customers computer power and software via communications lines. Jones planned 20 centers to be opened by mid-1970. CSC was forced to expand its services by the beginning of the 1970s because computer makers had added to their in-house programming staffs and no longer required much work from outside companies. As a result, CSC’s profit growth fell, and it searched for new markets, particularly time-sharing (leasing computer time to companies that did not own their own units).

Meanwhile CSC continued to make its money developing software packages for customers and received $118 million in revenue in this area in 1972 out of a total of $127.5. This included a broadened relationship with various U.S. government agencies. The firm also developed a computerized air cargo handling system for Heathrow Airport in London and did work for large corporations like General Electric and Travelers Insurance.

CSC was still the biggest computer software and services company in the United States, but not all of its customers were happy. The firm signed a contract with New York City’s Offtrack Betting Corporation in 1970 to develop a system that would enable wagers on horse races to be placed by telephone and at branch offices. CSC took several months to get the system off the ground, however, allowing competitors like Control Data to get into the race. By 1972 CSC operated 462 betting terminals, only about half of Off-track Betting’s total, and soon thereafter, Offtrack Betting canceled CSC’s contract.

But the capital-intensive development of Computicket and Infonet posed far worse problems for CSC. Without the resources of a company like Western Union to help it, the costs of developing these network-based services was devastating. Computicket ran into stiff competition from Control Data’s Ticketron, and CSC wrote off $12.7 million in Computicket development costs in 1970 and scrapped the project. At that point the firm’s long-term debt was $82 million, while its equity was only $42 million.

Largely because of this cash crunch, CSC sold Computax in 1971. The firm took a $62.8 million write-off on product development costs in 1972, mostly for the expensive Infonet venture. By mid-1972 only six Infonet centers were in operation, and they were running at less than 50 percent of capacity. CSC was forced to pay a penalty to Sperry Rand because it had to cancel an order for $13 million worth of Sperry computers. Takeover rumors circulated, but the firm remained the leading independent software company in contract services, with 90 percent of revenue coming from services rather than proprietary software, which had not sold nearly as well as expected.

CSC was overextended and facing another cash crisis in late 1972. That same year, Jones died when his single-engine plane crashed into a California hillside. Hoover, then 42, was named his successor, though some analysts thought the firm might go bankrupt. A well-timed government contract probably saved the company, however. The 51-month contract to supply computer services to the General Services Administration was highly profitable, bringing needed cash and an infusion of credibility to the beleaguered CSC. The contract was for remote computing services, and CSC used Infonet to fulfill it. Although the contract was renewed in February 1976, the firm remained only moderately profitable, making $7 million on sales of $220 million in 1975. The software market had grown from $997 million in 1967 to about $5.5 billion in 1976, but competition had increased dramatically and CSC’s market share had shrunk.

About half of the firm’s revenue was coming from the U.S. government by the mid-1970s, prompting industry analysts to warn that CSC was overly dependent on government contracts. Critics pointed out that government contracts were usually short-term and that bureaucrats faced constant pressure to diversify their sources of computer services. The critics were proven at least partially right in 1977 when the General Services Administration contract expired and was put up for bids, making it a far less profitable deal.

CSC lost $1.9 million after the 1979 Iranian Revolution when its operations there ceased. It also lost millions of dollars after it bought the troubled computer services businesses of Itel Incorporated. CSC was forced to spend an additional several million dollars in legal fees defending itself against Justice Department charges of fraud. The margin of the firm’s data services division declined to about 15 percent by 1981, from a high of 22 percent. Despite these difficulties, CSC remained the largest independent computer services company in volume, with sales of $600 million in 1980.

The company did well, if not spectacularly, by selling time-sharing. Infonet, the primary component of this system, accounted for 50 percent of sales in 1980, but this niche disappeared quickly, buried under the rapid spread of desktop computer networks that took over many of the functions of mainframe computers. As a result, Hoover shifted CSC’s focus again, this time towards systems integration—the use of computers as the base for communications networks— usually for government agencies like the Navy or NASA.

CSC was NASA’s fourth-largest customer and benefitted from the defense buildup that took place in the early 1980s under President Ronald Reagan, winning a $45.6 million contract in 1981 for work at Cape Canaveral. It also signed a $221 million contract to computerize the Saudi Arabian ministry of the interior. CSC soon got into hospital information systems as well, after winning a large contract to take care of California’s Medicaid computer services. In late 1981 it landed a $20 million five-year contract for processing Medicaid claims in Tennessee. Though CSC was doing well in this niche, other firms, including Ross Perot’s quickly growing Electronic Data Systems, were aggressively aiming for many of the same markets.

After a surge in business in the early 1970s, CSC’s growth remained flat until about 1986, when revenue approached $1 billion. Then, when government contracts began moving toward large, fixed-price deals, CSC benefitted, winning 60 percent of the large contracts that it bid on. In early 1986 it signed a $278 million agreement to develop a secure data network for the U.S. Customs Service. New contracts for 1986 added up to $1.3 billion, about as much as the previous three years combined.

Growth in the commercial segment of the systems integration market, standing at 38 percent a year, was by far outstripping the federal segment’s 17 percent annual growth. Large corporations like Eastman Kodak, Kmart and Exxon were using systems integrators to choose their hardware and develop their software, but their contracts were generally much smaller than government deals, making marketing and selling that much more important. Government contracts, with their safe but low-margin work, still accounted for about 70 percent of revenues, but CSC was diversifying and aimed to increase commercial work significantly—to about 50 percent of total contracts—by 1995.

To move toward that goal, the firm began an acquisition spree, hoping to quickly build its technical staff and marketing ability. Targeting companies in the health care and systems integration fields, CSC built upon areas in which it was already active. One of the first acquisitions was Computer Partners Incorporated; in 1986, CSC paid $20 million for this small Boston company, which specialized in designing systems for corporations and had strength in the retail and distribution market. Two years later, CSC bought a consulting firm, Index Group Inc., hoping to compete with large accounting firms that advised corporate management on what computer systems and software to buy.

Hoover also spruced up CSC management, appointing six new managers to important positions and focusing on large contracts. One of those contracts was a $186 million office-automation deal it signed with the U.S. Air Force, a deal that included linking 13,000 telephones with computers. By 1988 CSC had become the fifth-largest supplier of information technology to the federal government, with sales for the year reaching $1.2 billion.

To better compete in the commercial arena, the firm formed a new commercial-systems group in 1989 to offer systems integration in the United States and Europe. Despite this move, most of CSC’s important contracts continued to be government-related. It negotiated a $170 million contract with NASA to provide software for the Ames Research Center in 1989. In 1990 CSC renewed a $65.7 million deal with NASA for engineering services at an experimental center at Wallops Island, Virginia; won a four-year contract worth up to $70 million with the U.S. Army Communications and Electronics Command; and signed a five-year data-processing and telecommunications services contract with the Environmental Protection Agency worth an expected $347 million.

In 1991 CSC won a five-year contract worth up to $68 million from the Defense Information Systems Agency to maintain and operate systems supporting the command and control of U.S. forces worldwide, and the firm beat out Xerox Corp. for a U.S. Army contract to develop a computer information system for weapons parts. That contract was worth an estimated $744.2 million. Riding this wave of large contracts, the firm’s sales reached $1.5 billion in 1990 and $1.74 billion in 1991.

Helped by a resurgence in corporate outsourcing in the early 1990s, CSC did sign some large corporate contracts, including a 10-year deal with General Dynamics valued at about $3 billion. General Dynamics contracted its entire information systems division to CSC, which acquired 2,600 General Dynamics employees. CSC also paid $200 million for General Dynamics’ nationwide data center infrastructure. In 1992 the firm signed another big corporate deal: a $64 million 10-year contract with WCI Steel Inc. to do data processing. Nonetheless, revenues from the U.S. government were $1.07 billion in 1991, compared with revenues of $423 million from commercial sources.

Operating income reached $130 million in 1991, up from $107 million in 1989, and CSC used its cash to continue acquiring information companies. The firm acquired Saatchi & Saatchi’s Cleveland Consulting Associates for $12.7 million in 1989 and spent over $100 million on acquisitions in 1991, buying Moria Informatique, a Paris-based systems integrator and software firm, for $32.4 million; Butler Cox PLC, an information technology consulting firm, for $22.5 million; and Intelicom Solutions Corp., a software development firm specializing in telecommunications, for more than $60 million. Aided by its continuing acquisitions, CSC hoped to make further inroads into the corporate market.