Unisys Hits Its Stride

Company Focuses on Services as Decade Comes to a Close

• 12/17/1998

Network services that had been a stepchild to IT hardware and software firms just a few years ago have come fully into their own. Since enterprise computing has become increasingly decentralized and the global marketplace more competitive, major hardware providers have come to the conclusion that customers need business solutions - not just technology - to address the huge challenges in the enterprise.

After some years of uncertainty, Blue Bell, Pa.-based Unisys has scrambled successfully to reinvent itself for this new environment. The company has kick-started growth and overhauled its balance sheet as it has focused on providing services and solutions with a strong technology arm. The company, according to some industry observers, may now be the closest thing to a complete end-to-end IT services and solutions provider in the IT services industry.

Corporations worldwide will spend $39 billion on IT services and solutions in 1999 says the Mountain View, Calif.-based research firm INPUT (see chart). That figure will grow to over $83 billion by 2003, and that doesn’t include software and internal costs that these enterprises will incur. Most of that growth will occur between now and 2000, according Sandra Short, INPUT’s senior analyst for enterprise application solutions.

"There is less need for companies to just get a piece of iron to address a business problem these days," says Gopi Bala, the Yankee Group’s Director of Management Strategies Research.

Providing a comprehensive solution is precisely what Unisys is trying to offer its customers. These services - delivered through its Global Customer Services Unit – now make up over two-thirds of the company’s revenue.

The company’s greatest strength may be its ability to exploit expertise in deploying solutions in specific strategic markets Unisys serves: financial services, communications, commercial, transportation and the public sector. Unisys refers to these business units as "information services," made up of systems integration, outsourcing and repeatable solutions. The latter can be deployed pretty much the same within a given industry with just a little tweaking to suit the particular client, says Brian Daly, Marketing Representative for Unisys.

The other important service area for Unisys is called distributed computing Support services. That includes network consulting, integration, management and third-party maintenance of other vendors equipment in an enterprise network environment, such as help desks. "These are services that provide a real value-added [benefits] for the clients, and are services sectors that are growing," says Daly.

The goal, he says, is to provide enterprise clients with the elusive "end-to-end" solution set. Beyond routers and servers, Unisys wants to offer a complete package encompassing hardware and professional services that range from outsourcing to remote management of systems that are in demand by clients.

"So with Unisys you can be really sure that your transactional services systems that run your business - whether its SAP, Oracle, or whatever - is running optimally 24 hours per day," says Lisa Tomlinson, a Yankee Group analyst for enterprise applications. "I can’t think of another company that offers that."

The shift in Unisys’ strategy reflects a changing dynamic in the marketplace. It used to be that IT companies operated in well-defined hardware, software or service niches. The hardware people wanted to shop boxes, the software vendors wanted to license applications, and service vendors, such as the "big five" accountants and systems integrators, wanted to send out consultants and pile up billable hours.

Today, those areas of activity have become so intertwined that it is impossible to unbundle them and still deliver value to the enterprise. That doesn’t mean that hardware no longer matters. Even though the hardware business has become largely commoditized, companies do not want to risk the business simply to get a good deal on a server when implementing an entire enterprise system representing a multi-million dollar commitment.

"You want a vendor that knows how to link the server and network infrastructure together and who can support it once it is in there," says Tomlinson.

This, she says, should give Unisys an on-going advantage in the market that could very well lead to greater market share. After all, an increasing array of companies are adopting ERP. Many of these enterprises want a vendor that manages infrastructure for transactional systems.

"Companies have started to understand that if they are going to be running a computer intensive transactional system 24 hour per day, they better take infrastructure seriously," says Tomlinson.

But Unisys hasn’t abandoned the hardware business altogether. They company has simply begun to focus on strengths.

For instance, it has shed a dormant PC development and manufacturing business that never reached the scale to be a serious contender. Instead, the company has positioned itself squarely in the middle of some of the fastest-growing hardware markets in the industry by focusing on enterprise-class servers.

The company’s ClearPath servers combine mainframe, Microsoft Windows NT, and UNIX systems on a single platform, and are increasingly well thought of by Industry experts. A recent Yankee Group study showed that Unisys mainframes compare very favorable with IBM products from a cost of ownership perspective. The Yankee Group findings showed that ClearPath executes applications with fewer MIPS and staff compared to CMOSS. In some cases, ClearPath performs with as much as 80 percent fewer MIPS and 77 percent fewer staff, according to the Yankee Group findings.

"From a technical sense, the high-end mainframe operating environments offered

by Unisys offer advantages," says Bala.

It’s hard for top executives at Unisys to hide their excitement these days. And with good reason. The company reported third-quarter 1998 net income of $95.6 million compared to net income of $50.9 million in the third quarter of 1997. Revenue during the same period increased 10 percent to $1.78 billion from $1.62 billion a year ago.

Total worldwide orders continue to show gains led by very strong growth in U.S. orders. Unisys reports that the turmoil in the Asia-Pacific region has not yet had a drastic impact on the company’s growth. While the company’s Asia-Pacific business was down against year-ago levels, profitability in this region remains basically on plan while the company’s Latin American business continues to grow.

The company’s Information Services business has posted sharp increases in revenue and profitability. Customer revenue is up 25 percent in 1998, driven by growth in systems integration and repeatable solutions. The Information Services business recorded a third quarter 1998 profit of $27 million compared to an operating loss of $10 million in the third quarter of 1997. For the first nine months of 1998, operating profit in this business has improved approximately $136 million over the losses incurred in the first nine months of 1997.

Meanwhile, customer revenue in the Global Customer Services unit grew 12 percent in the quarter as the business continues to shift toward higher-growth distributed computing support services (DCSS).

Its a good thing, however, because Unisys revenue in its Computer Systems Business declined 5 percent in the third quarter of 1998. Earlier this year, the company outsourced the supply of notebooks, PCs and entry-level servers as it focuses on its profitable enterprise server business. Excluding the products that have been outsourced, Computer Systems revenue would have increased 1 percent over the prior year period.

Unisys’ management continues its campaign to reduce expenses and simplify business processes. Debt levels and interest-related expenses have came down as part of ongoing efforts to strengthen the company’s balance sheet. Operating margins are at the highest levels in many years, while cash flow is strong.

The repositioning of Unisys has been a long time in coming, and now that it is has been achieved, Wall Street and market analysts are looking on the company in a new light. In the process, though, the company has had to unload some baggage.

When the company was first formed, back in 1986, as the result of the ungainly merger of defense oriented computer suppliers, Sperry and Burroughs, it was difficult for many industry watchers discern its value proposition. Many saw it as a bloated union of two large bureacracies dabbling in all kinds of businesses from Aerospace to financial services. Cost structures were out of line, and sometimes different Unisys product lines even competed with one another.

"Unisys was thought of in the IT marketplace as lacking focus," says Bala. "They were a company looking for a strategy."

It wasn’t until the early part of the decade that a clear strategy began to form. In 1992 Unisys formed a unit to deliver IT services when everyone was jumping on the services bandwagon, showing that sometimes it pays to follow the pack rather to be first.

That year, Victor Millar - the systems integration and IT guru of Andersen Consulting fame - joined Unisys, bringing with him much of the intellectual capital and savvy that underpinned Andersen’s worldwide practice. Though Millar moved on to AT&T Solutions in 1995, his presence provided the critical impetus that Unisys needed.

Meanwhile, by the mid 1990s the outsourcing phenomenon began taking hold, and companies like Andersen, EDS and Computer Sciences Corp., grew huge and profitable businesses in the services realm. Unisys was able to get in on the act too, and as early as 1994, services and solutions became the company’s single largest business.

Lawrence Weinbach was named the company’s chairman, president and CEO in 1997, the same year that Unisys’s Windows NT servers became widely known for their low cost in relation to performance. He is credited for leading Unisys to a clean break with its past, and for finally articulating a clear strategy for the company. He has gotten high marks for his performance so far.

"Larry Weinbach has been aggressive in refocusing the company, which has been a net benefit and has reflected in the company’s performance," says Bala. "He has brought that absolutely market driven perspective that wasn’t there in the past."

Things are looking good these days for Unisys, but they have chosen to compete in a crowded market. Though offering a mainframe product that many think is the rival of any available, the company still owns less than 10 percent of this market.

Along with everyone else in the IT services business, analysts believe that Unisys’ success will depend on its ability to nurture and support a dedicated customer base, even as company executives think up newer server-based offerings that revolve around platforms like Windows NT.

The good news for Unisys is that technical performance of its high-end mainframe operating environment will keep the customers in the fold. The bad news is customers are already asking what’s next.

"Their technical talent is as good as anyone," says Bala. "Focus and more focus is the key for Unisys."

But there is plenty to look forward to, especially in the services realm. Unisys has not yet fully harvested its hardware customer base. And, there are new playing fields, such as NT-based services, where Unisys has as good of an opportunity to build share as anybody else.