March 2000

Here We Go Again...Wall Street Is Focused On CRM And Call Centers

BY NADJI TEHRANI

Five Years Ago Teleservices Companies Were The Darlings Of Wall Street!
Perhaps this publication should be given credit for, or blamed for, piquing Wall Streets interest in our industry in the first place. By providing the industrys only verifiable market statistics and growth rates for teleservices agencies, we might have inadvertently encouraged Wall Streeters to take a closer look at our industry.
As most of you know, C@LL CENTER CRM Solutions is the industrys first and only credible source of information on the industry (as distinguished to such a high honor by Mr. Alex Fraser, marketing manager of Hewlett Packard). Since 1985, this publication has ranked the teleservices sector of the industry in three different ways: The Top 50 Teleservices Agencies, both outbound and inbound; The Rising Stars, which is a ranking of the fastest-growing teleservices companies; and The MVP Quality Awards, which distinguish the recipients based on the quality of their service. The combination of these awards and communication of the phenomenally rapid growth rate of some of the teleservices companies naturally attracted a series of investors toward such award-winning companies.

I recall, for example, that a company that for many years was in the number-one position in one of our rankings was sold to a group of investors for more than 100 million dollars. A number of other very profitable companies were also acquired by investors, while still others joined Wall Street by going public. If you read my June 1999 editorial, Why Teleservices Companies Fail Or Succeed, you will discover that shortly after they became involved with Wall Street, many experienced a mountain of problems. As I stated in that editorial, the call center/CRM industry is extremely complex and sophisticated. Since they did not understand that, Wall Streeters thought they could simply come into our industry, acquire a company, terminate the employment of all key executives and management who built the company, replace them with a group of recent MBA grads and the company would prosper. How wrong they were! Every single one of the acquired companies that followed this highly ill-advised, downright stupid management philosophy ended up being destroyed or near bankruptcy. A case in point is the acquired company that was number one in our rankings for over a decade: It no longer exists! Can you believe it? The company in question was not only the perennial number one in the industry, but its original management was, by far, the most highly respected and competent management in the entire industry.

A Warning To New Acquirers
If you are serious about investing in our industry, I urge you to adhere to the following guidelines, then, and only then, decide whether or not this industry is for you:

1. Without fail, you must read my June 1999 editorial and understand what it is really saying and why so many companies were forced to near bankruptcy.
2. Plan to keep key personnel (and in a well-managed company that means everyone) and the corporate culture that has made the company to be acquired a success. Dont think you can save money by coming in with a chainsaw and cutting everything everywhere. Remember that this industry is a people industry and is technologically complex. There is positively no room for amateurs in this industry.

The Right Way And The Wrong Way
One of the greatest mistakes most acquiring companies make is paying 100 percent cash up front, then laying off all key personnel. That is practically a kiss of death.

There is, however, a successful acquisition model that is practiced by the management of a company called SR. Teleperformance. This particular company, which has an extremely good track record of acquiring successful companies and keeping them successful, has a new approach. Mr. Daniel Julien, the chairman and CEO of the company, never pays 100 percent cash for any acquisition. Rather, he pays a maximum of 50 or 60 percent down and then keeps the entire management team and staff while giving them a tremendous incentive to stay with the company and do a terrific job. Here is how it works. If a company is valued at 100 million dollars, Teleperformance will purchase the company for 60 million dollars down and then provide incentives for the owners and management to work together to double the value of the remaining 40 million dollars in the next five years. As such, instead of receiving only 40 million additional dollars, the owners and management will now receive an additional 80 million dollars if they meet the objectives. In this manner, the owners receive $40 million and everyone is happy. With this kind of highly innovative and sensible acquisition policy, Teleperformance management has been able to develop a network of worldwide teleservices companies and has maintained a growth rate of 50 percent per year in both sales and profits. If you contrast this highly intelligent method of acquisition with the disastrous one explained above, you will see that there is no shortcut to success. The ruthless termination of key people simply does not lead to a successful operation.

What Turned Off And Then Turned On Wall Street?
Obviously, five years ago, Wall Street was very happy with the extremely rapid growth of our industry, which in some cases, exceeded several hundred percent per year (for the Rising Stars). The stocks of companies going public doubled and quadrupled in a relatively short time until problems of over- capacity, price erosion and the subsequent loss of quality led to disaster. As soon as just one of the teleservices companies missed just one quarter of Wall Streeters expectations, Wall Street turned a cold shoulder to our industry. The value of stocks that were previously $80 per share dropped to as low as $1.50 per share! Our Cinderella status turned into out of favor status and Wall Street has practically lost interest in our industry for the last four and a half years.

What Changed Wall Streets Mind?
Wall Street has renewed its interest in teleservices companies over the last two years as the teleservices industry has become involved in e-commerce and Web-enabled teleservicing. I must give Wall Street credit for recognizing the tremendous opportunity that exists for call/CRM centers as the backbone of the Internet revolution. Today, nothing is hotter than business-to-business, consumer-to-business and business-to-consumer e-commerce, and Wall Street knows that call/CRM centers are playing a key role in this market.

Recently, Precision Response, a respected teleservices company, was acquired by USA Network for $680 million and as we understand it, this represents 16.6 times EBITA (earnings before interest taxes and amortization). Reportedly, this unheard-of multiple was paid for this outstanding company because of its strong and powerful position as an effective CRM (customer relationship management) company, as well as an e-commerce support company in which the e-commerce revenue was growing at a phenomenal rate. So, Wall Street, as I predicted, woke up to the fact that no e-sales or e-service company can exist successfully without providing world-class customer service, customer care and customer relationship management, which is where the teleservices companies come in. Lets face it, customer relationship management today is a highly complex field. It includes customer loyalty, customer retention and day-to-day interaction with customers, just to mention a few areas where there is absolutely no room for mistakes and no place for amateurs. Obviously, CRM is best handled by the companies that specialize in it. It is the specialty of many teleservices companies and indeed the core-competency of such companies to do a first-class job of CRM. (To avoid pitfalls and drastic mistakes, please read my January 2000 editorial). Corporate Americas core-competency is not CRM. Wall Street has recognized this fact and now has a renewed interest in our industry.

Let Us Not Blow It Again
Those of you who have attended TMC-sponsored conventions during the last five years know that in all of my pre-keynote speeches, I warned everyone that we must not lose sight of quality or Wall Street will come down on the whole industry. I mentioned frequently that the good times could come to an end someday. Some heeded my advice and others did not. As a result, the entire industry took a tailspin and disaster struck. Our industry went from the darling of Wall Street to the cellar in just a few months! Let us learn from our past mistakes and get involved with the investment community with our eyes wide open.

A Word To The Wise
Think of what other companies in our industry experienced after they were acquired before you jump into an agreement with another group of investors whose unrevealed plans are to cut costs and employment of key people, which leads to running the company into the ground. Logic dictates that no one benefits from this type of activity. Therefore, I urge you to study hard, assess the situation and be extremely careful if you are going to get involved with Wall Street once again. Dont destroy the fine reputation of our industry by being short-sighted and blow our chances once again.
As always, I welcome your valued comments.

Sincerely

Nadji Tehrani
Executive Group Publisher
Editor-in-Chief
ntehrani@tmcnet.com 

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