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Convergys' star not dimmed by stumbles

Wall Street appears unfazed by the company's problems in taking over Florida's personnel services.

By JONI JAMES
Published February 27, 2005

TALLAHASSEE - Gov. Jeb Bush's rare moment of self-reflection made big news last month.

Bush acknowledged that his big idea to hire a private company to handle the state's personnel system wasn't yet working as he envisioned, adding momentum to a growing wave of discontent over the snarled People First system created by Cincinnati-based Convergys.

But on Wall Street the next day, the governor's comments barely registered. More than a dozen financial analysts dialed in for Convergys' fourth-quarter conference call but only one noted "some negative press out this morning from the state government."

She went on to ask if the Florida contract was hurting Convergys' operating margins in its customer management business. Chief Financial Officer Earl Shanks said yes, but not for long. The People First system was finally online, he assured, so state payments were flowing in.

That was it. The analysts moved on - even if Florida lawmakers and state employees haven't.

Welcome to the reality of privatized government. Florida's $350-million, nine-year Convergys contract is causing seismic shifts in Tallahassee, splitting some Republican lawmakers from their governor and forcing a re-examination of some of the fundamental questions about how free a hand the free market should have in running government operations.

But on Wall Street, the controversy is no big deal. With annual revenues last year of $2.5-billion, Convergys' biggest problem is that it still gets most of its business from a telecom industry that is consolidating. The contract to run Florida's payroll system is seen as an important first step into a burgeoning new market, but the Tallahassee turmoil over botched paychecks and dropped benefits is a mere curiosity.

"I think the Florida contract is an important deal for them, because they are counting on that sector being a growth market for them," said Todd Rosenbluth, an analyst with Standard & Poor's. "It's a high-profile piece of business, but it's not a huge share of it."

In hindsight, Bush and Convergys seemed destined to shake up Florida's state bureaucracy together.

Convergys, born in 1998 as the spinoff marketing and billing departments of Cincinnati Bell, quickly emerged as a Wall Street favorite. Investors saw Convergys as a natural beneficiary as nascent telecom companies fought to grab a share of the deregulated industry.

Its proprietary billing systems could easily serve the exploding markets of wireless and paid TV providers. Its call centers in Orlando and elsewhere would easily adapt to the customer service needs of retailers and others. And its recent acquisition of AT&T Solutions Customer Care - which provided outsourced personnel services for major companies - could easily grow across industry lines.

By the end of that first year, Convergys' initial public offering at $15 a share was topping $20. Within another 18 months, the share price would hit $50. Its stocks closed Friday at $14.85.

Convergys' bread-and-butter was managing billing for telecom giants such as Sprint PCS, Verizon, AT&T and ALLTEL. But it also was attracting work from Ann Taylor, Gateway, Toys "R" Us, Pfizer and Compaq.

But by mid 2000, as the fortunes of telecom companies began to wan, so did Convergys. That September, its stock price dropped 18 percent in one day on news that an Israeli competitor, Amdocs, had won the wholesale billing business of Sprint PCS.

Soon, Convergys executives were plotting a business plan outside of telecom: Find government jobs, ideally in personnel services.

Florida's governor was on a parallel path. Since his election in 1998, he'd pledged to privatize any service that could be done by the private sector. Within a few years he had privatized park maintenance, toll-road collection and elevator inspections.

He aimed higher: Outsource the state's labor-intensive payroll and personnel services - everything from collecting resumes for job applicants and advertising openings to administering the payroll and benefits for state employees. In one deal, Bush could slash up to 900 state jobs and save at least $60-million needed to update state computers.

Perhaps more important, Bush would have his talisman: Florida would become the first major state in the country to outsource employee services the way Fortune 500 companies do.

Convergys outnegotiated 11 other companies - including IBM and Oracle - to win the contract. Already providing employee services for GE, Pfizer and Bristol-Myers Squibb, Convergys proudly announced its first government client Sept. 10, 2001.

Bush and his staff sold the deal to lawmakers during the 2002 legislative session, boasting about the Internet-based services they were buying. It would move Florida's 1970-era, paper-intensive personnel and payroll processes to digital speed.

Bush said the state's 120,000 employees and 32 state agencies would be getting better service from Convergys' 550-employee operations in Tallahassee and Jacksonville. "The technology platform being used is 21st century rather than ... mid 20th century technology," Bush said. He predicted the state could save up to $93-million in operating costs.

But this was a first-of-its kind union between a new government contractor and an enormously complicated public entity. The path would be rocky. An example: Soon after work began, Convergys officials and state managers realized that the multitude of state agencies involved did not all have the same version of Windows software, something the state had promised in the contract.

Another example: Before signing the contract, the state Deparment of Management Services had never taken a full survey of state agency payroll plans. Some agencies started their work weeks on Monday, some on Thursday. Some paid monthly, some bimonthly. Some had to wait for federal money to move from Washington.

"We underestimated the diversity of the various agencies and their public policy issues," then-DMS Secretary Bill Simon said in November. "And every time we tried to change something, we got "Well, the children will starve or the prisoners will escape."'

Chris Emerick, the Convergys vice president who oversees government contracts, said none of the problems during development were that different from those found in commercial businesses. But the environment was.

"It's much more of a juggling act," said Emerick, who is based in Jacksonville. "Typically with a commercial sector client, something has been mandated, the CFO says this is going to happen and when you run into stumbling blocks you can always point to that person who says, "This has got to get done.'

"In the public sector, you have a lot more clients," Emerick said. "You have publicly elected officials, retirees, employees, agencies, the State University System, the Legislature, and you can't force anything on them, you have to make them feel like they're part of the process."

As implementation in Florida dragged on, the Convergys business strategy expanded.

It landed contracts to run call centers for the U.S. Postal Service and to provide telephone access to job listings for the federal Office of Personnel Management. Then last October, Convergys' twin objectives to expand its employee services division and its government clients came together again: The Texas Health and Human Services Commission hired Convergys to provide comprehensive personnel and payroll services for its 46,000 employees.

The Texas news came just as Convergys' financial investment in Florida began to pay off. Florida paid its first payment to Convergys in September - though the state has withheld payment of $22.5-million, citing the services discrepancies that have infuriated state employees and retirees.

Last week, Convergys and DMS officials apologized in tandem for the errors before a state House committee. But they said most problems with the state's payroll system were fixed. And they said the time spent on hold for employees asking questions about benefits was down to an average 7 minutes, 37 seconds during the week of Feb. 14. Just four weeks earlier, the average wait was 20 minutes, 15 seconds.

"The system is working as designed," Emerick told the panel. "Now, having said that, we're not going to be satisfied until the end-users are satisfied."

As far as Wall Street is concerned, you can forget Bush's comments Jan. 18 that his administration needs "to get better at procuring and monitoring the procurements."

Or the frustrations of lawmakers who were inundated with calls in January from state employees or retirees who have had a problem with People First.

"I feel like there's nobody who's safeguarding the state's interests," said Sen. Nancy Argenziano, R-Dunnellon, whose led the charge to consider reining in the governor's contracting powers.

Or that legislative changes are expected to reduce the state's savings for the contract - once pegged at $93-million - to about $25-million.

Wall Street hasn't heard any of it. What has Wall Street heard about Convergys and its Florida contract? Bill Simon, the former DMS secretary who managed the contract before leaving for a private sector job last month.

At Convergys' annual analysts meeting in November at Orlando's posh Arnold Palmer Bay Hill Club & Lodge, Simon spoke less than a week after newspapers reported that the People First startup had spawned thousands of paycheck errors in its first month.

To the group, Simon acknowledged transition pangs. But he also heaped praise on Convergys, its product and its employees. "I was most impressed with the fact that they never for a moment took their foot off the gas pedal," Simon said, according to a meeting transcript.

"I also think ... we have blazed a trail by creating a model that can be replicated in other state government or municipal government entities," Simon said.

That's all Wall Street cared to hear.

"He basically told us the state was satisfied with Convergys and the system," said Paul Jacobson of Kaufman Bros. "We think if Convergys performs well in these two contracts they're going to have an advantage in terms of bidding on other contracts as the (government services) market opens up."

Months later, as problems with the system continues to make news, analysts say nothing has changed. Larry Berlin, who once struggled with payroll errors at his own 35-employee company, said he'd expect nothing less when the state is redesigning a system for 120,000 employees across 32 agencies. Berlin is an analyst for First Analysis Securities, which specializes in research for institutional investors.

"My first suspicion is that the mistakes are a result of input from the state employees," Berlin said. "Whenever I made a mistake in payroll, it was almost always that I'd sent the wrong information rather than a problem with the system."

Only failure by Convergys in Tallahassee would make a difference to Wall Street. It would suggest the company's long-term strategy to make government a major market is flawed, Berlin said.

But it wouldn't be a huge blow for privatizating government services, analysts agree.

"Governments are going to see how much money it saves taxpayers and they're going to want it," Berlin said. "There's just a belief you can get far better economies outsourcing than you can in house."

-- Researcher Kitty Bennett contributed to this report. Joni James can be reached at 850-224-7263 or jjames@sptimes.com

[Last modified March 1, 2005, 01:10:14]