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DXC will be damned if it lets cloud cannibalise the IT outsourcing biz before DXC does

Frankenfirm sets up 'integrated practice' with AWS to eat its lunch before others do

DXC Technology, fed up with the cloud brigade eating into its own IT outsourcing (ITO) business, has set up an "integrated practice" with AWS to get in on the action itself.

The unit will "deliver IT migration, application transformation and business innovation to global enterprise clients", DXC CEO Mike Lawrie promised analysts on last night's conference call to discuss Q1 results.

Basically, the practice – in which DXC and AWS people will jointly develop, market, sell and deliver the tech and services – will seek to update creaking infrastructure and move applications to Amazon's cloud or a hybrid setup.

Lawrie concurred with one Wall Street type on the call that the advent of the cloud "does cannibalise the ITO business. But in my way of thinking, you've got two choices. You are going to let somebody else cannibalise you or you can do it yourself. We're doing it ourselves."

To be fair, some of the 20,000 staffers laid off by DXC in its first year of life may feel their employer took a chunk out of them already. But that's another matter.

The CEO continued: "What we're doing with Microsoft [Azure] and what we're doing with Amazon is we're also going in and beginning to move applications. And that application movement is essentially net new business for DXC."

Deutsche Bank, signed by HPE's Enterprise Services business back in 2015, is working with DXC on this app migration to a "modernised IT infrastructure around cloud", Lawrie added.

"Our long-term revenue model is to do this ourselves and, in the process, take on this additional workload around applications, and over time, give us growth as opposed to just a steady declining IT business."

Clearly not all customers will jump with both feet into the cloud – this is a hybrid world, we are constantly told – but the move with AWS, Microsoft and VMware, coupled with DXC's private cloud, will "bridge that".

Lawrie said the AWS practice "formalised" the love-in, and "most importantly, put a management system in place, and we are integrating each other's resources in front of the client".

It all seems eminently sensible, rather than waiting for others to keep eating into the outsourcing business – evidence of which was seen in the financials for DXC's Q1 ended 30 June.

Group revenue crossed the quarterly finishing line at $5.28bn, up 0.9 per cent year-on-year as reported but down 1.8 per cent in constant currency.

Global Business Services declined 2.4 per cent to $2.213bn but was actually down 4.6 per cent in constant currency, so DXC got a uplift by converting overseas currencies into US dollars. Bookings dropped to $2bn from $2.4bn in the prior year.

DXC CFO Paul Saleh said the top-line decline was "primarily driven by the completion of HPE and HPI integration projects associated with their respective separations as well as completion of several application contracts in the UK". He added that a 14 and 18 per cent respective hike in enterprise/cloud apps and analytics mitigated the drop.

Global Infrastructure Services grew 3.4 per cent to $3.069bn but was up just 0.3 per cent in constant currency, which DXC said "reflected a continued moderation of the decline in our IT outsourcing services business", but cloud and platform service, security, workplace and mobility more than balanced things. Bookings were $2.6bn, down from $3.7bn.

The "multi-cloud" business grew 42 per cent but DXC didn't reveal from what and to.

The cost of delivering services fell from $4.3bn to $3.867bn and total costs and expenses were clipped from $5.15bn to $4.92bn. Operating income of $360m was up from $91m a year ago and net profit was $259m up from $159m, once the tax collector took a slice.

CFO Saleh said the profit bounce was "primarily" due to "cost actions" including – a new one on us – "best shoring, labour pyramid rebalancing, benefits from our Bionic automation programme and supply chain savings".

Pyramid rebalancing was about having fewer decisions makers in management and more workers doing the work.

DXC said it laid off 3.7 per cent of the workforce globally in Q1 – we estimate that to be a little over 5,000 globally – and claimed to have hired 6,000 new staffers.

"The headcount reduction was driven by automation, overhead rationalisation and productivity improvements," said Saleh.

Restructuring expenses cost the business $185m in the quarter. This related to severance pay and rationalisation of facilities including offices and data centres.

"In supply chain, we continue to drive additional procurement efficiencies," said the CFO. "This includes vendor rationalisation, rate optimisation, contract conversion and detailed reviews of thousands of purchase orders. Over the last year, we've consolidated roughly 30 per cent of our vendor base."

Investors and employees can expect more of the same – the synergy plan – throughout this year, said Lawrie.

"These include location, mix shift, labor pyramid optimisation, automation and continued supply chain efficiencies."

The CEO added: "On location mix, roughly 54 per cent of our employees are in nearshore and low-cost locations. We're planning to increase that mix by 10 to 15 per cent in our traditional business. We're also making progress off-shoring work provided by third-party contractors, while at the same time investing in our digital centres in the US, the UK and other countries." ®

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