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June1999


WHY TELESERVICES COMPANIES FAIL OR SUCCEED

BY NADJI TEHRANI,
EDITOR IN CHIEF, EXECUTIVE GROUP PUBLISHER


Why, in recent years, have some outsourced teleservices companies succeeded beyond imagination while some have failed miserably? I believe I may have discovered the reason.

THE BACKGROUND
About four years ago, teleservices companies were indeed the darlings of Wall Street. Some of the companies that went public at that time rivaled today's Internet companies in terms of stock price appreciation on the NASDAQ - the difference being that teleservices companies, for the most part, actually made money! There seems to be a double standard for Internet companies when it comes to the stock market, whereby the less a company earns, the higher the stock price and appreciation! As ridiculous as this may sound, if you have been following the stock market, you will agree that Wall Street inexplicably rewards companies that lose money better than it rewards companies that make a tremendous amount of money! As I stated in my February 1999 editorial, in terms of the stock market, it is no longer the survival of the fittest, but the survival of the weakest.

But teleservice companies didn't have these problems some three to four years ago. I recall that some of the Rising Stars (the companies that this publication ranks in each August issue as the fastest-growing teleservices companies) were actually growing far in excess of 100 percent a year. In fact, I recall the No. 1 ranked company in the "Developing" category actually grew 1,200 percent in one year and the No. 1 ranked company in the "Intermediate" category grew 500 percent in that year. Of course, for reasons explained in previous "Outlooks," e.g., the lack of experienced and qualified management and employees, the need for higher quality, overcapacity, and the spate of M&A and IPO activity, those heady "boom times" are fading into distant memories.

TWO CLASSES OF COMPANIES
To put all matters in perspective, teleservices companies today should be divided up into two distinctly different categories.

  1. Category A - teleservices companies that are currently being run and managed by the founder or the entrepreneur who made it all happen.
  2. Category B - teleservices companies that were involved in some kind of capital infusion, M&A (merger and acquisition) or other type of equity-based financing.

CATEGORY A IN PERSPECTIVE
Companies that are run by experienced entrepreneurs who founded the company are, for the most part, thriving and doing outstanding business. They are reasonably profitable and business is so good, they are literally turning away business, and justifiably so. These companies are run by people who know what they are doing. They are experienced and they don't make rookie mistakes. The result is a highly successful operation - a profitable, fun-filled organization that is as good for the employees as it is good for the owners. Naturally, I am in daily communication with a number of CEOs of such companies, and I was pleased to learn that virtually all of them seem to agree with the statements made in this editorial.

CATEGORY B
Companies in this category, on the other hand, are managed by inexperienced Wall Streeters (no offense intended) who are trying to run a highly complex business where intricate relationships must exist in the convergence of high-technology and human resource engineering. The credentials of these "industry rookies" normally includes an MBA from a big-name school, zero experience in the call center or related industry, a big ego and a lot of arrogance! They believe the call center business is very simplified and therefore, think they know everything about the call center industry. These folks actually try to run the highly complex teleservices department as they would run a branch of a bank or a 7-11 store. Believe me, I am not trying to be facetious, but if you placed them under a microscope, you will see that this is what has happened.

A few years ago, it was common for a group of investors to buy several highly profitable companies and terminate the employment of the company founders. They would proceed to simply run the companies on the basis of ego and arrogance combined with inexperience (an extremely dangerous combination). The new business operators were a successful in one and only one thing: running these fine companies into the ground! If you think this is too far fetched, please read the sidebar written by Michael J. Budde,president and CEO of Advanced Data-Comm, Inc.Michael and I were recently discussing this subject and he commented to me, "If you observe, Nadji, the companies that are successful are those that are run by the original owners who are experienced insiders with plenty of know-how in running the call centers. And, conversely, the companies that have problems are those that are run by Wall Street's investment bankers who run highly human-intensive call centers not by human understanding, but by numbers!" I think this explains in a nutshell some of the problems that only one category of the teleservices industry is experiencing today. And, frankly, if you apply the same observation and most of the other M&A activities in other industries, I am sure you will find precisely the same results. You would think these group of investors would learn that you cannot run a company by pure ego and arrogance, but you need to have the wisdom of the experienced, battle-toughened managers who have developed precious skills based on years of experience and trial and error.

Naturally, I am not expecting this type of arrogance and blind ambition to stop immediately, but I feel compelled as the publisher of the industry's leading publication since 1982 to discourage such misguided investors that our outstanding but highly complex industry is no place for amateurs and rookies. If you don't know what you are doing, stay out of the call center industry. This is not the way to make a fast buck! In fact, you will lose your shirt for sure if you let your arrogance take over your common sense!

I am sure that this particular editorial may not gain me many friends among the investment community, but truly that doesn't matter because it has always been the editorial tradition of this and other Technology Marketing Corporation publications to call it as we see it. Our obligation is primarily to our valued readers and it is our paramount responsibility to guide them appropriately. This is precisely what I have intended with this editorial.

As always, your comments are welcomed.

Sincerely,

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


One Insider's Viewpoint


I recently asked Michael J. Budde, president and CEO of Advanced Data-Comm, Inc., to comment on the state of teleservices agencies. Advanced Data-Comm is a 1999 C@LL CENTER SolutionsTM "Top 50 Teleservices Agency" and was awarded a 1998 Gold "MVP Quality Award" by C@LL CENTER SolutionsTM magazine. His comments are as follows:

"Thank you for asking me for my observations and insights on possible explanations as to why the service agency industry is experiencing considerable variance in performance, with some companies experiencing high growth and acceptable to good profit margins, while others are struggling, or losing the struggle, to maintain growth and margins. I would suggest there is widespread belief among industry observers that the initial round of public offerings in recent years has been tantamount to a self-inflicted gunshot wound. Underlying rationale for this belief includes the following:
  1. IPOs divulged the margins realized by service agencies. Clients who accounted for significant percentages of these companies' revenue demanded significant price concessions. Companies acquiesced to maintain revenue streams and sustain stock prices.

  2. here has been an exodus of astute industry executives who have elected to "cash their ticket" or step aside to make way for investment banker types with less entrepreneurial spirit.

  3. The proceeds from IPOs provided capital for significant investment in additional capacity to continue high growth rates. The cumulative effect of this individual investment was excess capacity industrywide. A recent conversation with an industry M&A expert related that he had 2,300 open positions he was liquidating.

  4. The excess capacity led to reduced pricing as companies struggled to maintain revenue expectations of shareholders. As prices and subsequent margins were reduced, quality standards eroded, resulting in client churn as clients sought to recapture perceived lost quality."

"As has been noted before in the pages of this publication, recent years have been good times for service agencies…service agencies that devote full attention to quality service at fair prices. While there may be many benefits from an IPO, senior management would be well advised to focus their attention on Main Street rather than Wall Street."

BLURBS
Companies that are successful are those that are run by the original owners who are experienced insiders with plenty of know-how in running the call centers. And, conversely, the companies that have problems are those that are run by Wall Street's investment bankers who run highly human-intensive call centers not by human understanding, but by numbers!

You would think these group of investors would learn that you cannot run a company by pure ego and arrogance, but you need to have the wisdom of the experienced, battle-toughened managers who have developed precious skills based on years of experience and trial and error.







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