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Convergys Rising

February 3, 2006
It’s 2:30 a.m. on October 31, and handful of tired Convergys executives watch as a fax machine spits out a contract in the works for 14 months. They call their client counterparts and make a champagne toast. Forty-eight hours later, the news is out: Convergys, which had been considered a second-tier outsourcing industry player, has won a 13-year deal with DuPont worth an estimated $1.1 billion. It’s called the biggest HRO contract ever.

    The deal, brokered by a team led by senior vice president Morris Applewhite at the company’s Jacksonville, Florida, office, signaled the expanding stature within Convergys of the company’s HR operations. Though the newest of the $2.6 billion corporate outsourcing specialist’s three main businesses, it is on a fast track toward becoming a big driver of profits and revenue.

    The DuPont contract capped a year in which Convergys’ HR outsourcing operation, called the Employee Care Group, signed three other significant deals--with Whirlpool and two companies that haven’t publicized the pacts but are known to be Boston Scientific and Solectron. The new business brings the number of Convergys HR outsourcing contracts to 13, covering a total of 3 million employees. According to estimates from Convergys executives and analysts, that makes the Cincinnati company the No. 2 HR outsourcer in the country, second only to Hewitt Associates.

    DuPont’s decision to outsource is the latest testament to corporations’ expanding interest in turning over noncore HR operations to professionals in order to focus on more critical business enterprises. Though outsourcing hasn’t picked up as quickly as prognosticators originally estimated, early indications suggest that 2006 could be a breakthrough year. Today, less than 5 percent of Fortune 2,000 companies and less than 1 percent of midmarket companies have such arrangements, according to a December report from NelsonHall, an HR industry consulting and research firm. However, NelsonHall predicts in its report that worldwide HR outsourcing expenditures will increase 20 percent this year to $4.3 billion.

    As for Convergys, critics have chided the company for hiding the HR outsourcing division’s financial results within a larger division, making it difficult to determine how big or successful the business is--an issue the company is addressing. Critics agree the company’s 2005 performance proves it has perfected its sales pitch, but they wonder whether the company has the management depth to implement its new deals while continuing to service contracts with existing clients such as Avaya, Fifth Third Bank, Bristol-Myers Squibb and the state of Florida.

    "Their success with DuPont in particular, and to some extent other contracts they’ve won recently, will make or break their HR outsourcing offering," says Derek Smith, research director at Kennedy Information, an HR industry research firm. "They’re either going to execute successfully or struggle." If the latter happens, it will hurt the company’s ability to get other contracts, Smith says.

    Convergys Employee Care Group president Karen Bow­man brushes off such concerns. "I’m confident in our ability to execute on what’s in front of us," she says.

Unlikely beginnings
    There’s a lot riding on Bowman’s shoulders. When Cincinnati Bell spun off its billing and customer care departments in 1998 to form Convergys, those two businesses became the publicly traded outsourcing specialist’s bread and butter. Convergys still earns the bulk of its money running call centers and providing customer billing for cable TV, telephone and cell phone businesses, with Cingular, DirecTV and Sprint Nextel its top three customers in 2005.

    But telecommunications industry shake-ups have affected some long-standing contracts. Spring Nextel said this month that it will wind down its billing contract with Convergys over the next two years.

    In recent years, Convergys has trimmed its U.S. workforce and other overhead costs several times to reduce operating expenses, and has turned to its HRO operation to drive future revenue and profits. It’s a far cry from the genesis of Convergys’ HR business, which began as an afterthought.

    Before Cincinnati Bell spun off Convergys, the company’s call center division acquired a business called American TransTech from AT&T that included a small HR outsourcing operation in Jacksonville. After the spinoff, Convergys executives asked Bowman, then a company general counsel, to investigate which TransTech corporate assets to keep or sell.

    That was 1998, the dawn of the HR outsourcing industry. According to Bowman, the more she delved into the business, the more opportunity she saw. Instead of recommending selling the business, she urged Convergys chairman and CEO James Orr to keep it--and let her run it. He agreed.

    It was slow going at first. Most of the contracts Convergys inherited, such as with General Electric, were for single HR functions, not the type of multiprocess deals corporate HR executives now favor. Clients were skeptical. "They weren’t very excited about being acquired by a call center business," Bowman recalls.

    Predicting that corporate buyers would someday want more bundled services, Convergys picked an enterprise resource planning system as a technology platform. "It wasn’t a market that used an ERP; it was a market that used proprietary systems," Bowman says. "People thought we were a little nuts because we picked one that wasn’t well-known in HR: SAP. But they had the stronger global platform."


"Our experience is when suppliers have growth spurts, more often than not they suffer from delivery problems down the road."
--Michael Janssen, Everest Group

    Due at least in part to that groundwork, in 2002 Convergys won a nine-year, $350 million contract with the state of Florida’s Department of Management Services. The deal, covering 200,000 state employees, was among several privatization efforts championed by Gov. Jeb Bush, and ultimately the only one to survive. It remains one of the largest personnel outsourcing contracts ever signed by a public agency.

    Like other early outsourcing vendors, though, Convergys ran into trouble. At least two early clients, Pfizer and Toys "R" Us, are no longer under contract. Convergys representatives don’t comment on former customers.

    The Florida contract quickly got messy. It called for moving HR functions for 33 different agencies onto a state-of-the art technology platform and creating Web-based self-service tools. But the process was more difficult than anticipated, leading to well-publicized glitches and delays. When the Management Services Department eliminated 800 jobs because of outsourcing, Convergys was lambasted by local politicians for moving state jobs offshore, though company officials insist that didn’t happen.

    Portions of that deal have now been up and running for more than two years, and Convergys and Florida state representatives say they’re satisfied with how things are working. "The good news is we made it through and demonstrated there was good value in the value proposition the lawmakers originally envisioned," Bowman says.

    Employee Care Group executives say they’ve learned from those early mistakes. For one, they won’t do "lift and shift" contracts, where a provider simply takes over a company’s HR functions whatever their condition. Instead, they help clients simplify and standardize processes to be outsourced before technology transfer begins, a strategy company officials say ultimately means bigger cost savings for clients and greater profit margins for them. Convergys also distinguished itself by creating a network of shared service centers around the world, in some cases piggybacking on centers and labor pools the company operated for its other divisions.

    Today, 30,000 of Convergys’ 62,000 employees work outside North America, including workers in India and the Philippines, though not all of them support the Employee Care Group.

    The strategies appeared to pay off in July, when Whirl­pool signed a 10-year deal with Convergys, passing over ACS, IBM, Accenture and Arinso. "We were confident Convergys was more of a global player. They could offer a whole platform of services," says Abbe Luersman, Whirlpool’s vice president of total rewards and HR solutions, speaking at a Convergys-sponsored conference for Wall Street analysts in late November.

    Then Convergys snagged DuPont--reportedly beating out IBM and Hewitt--in a deal that analysts say could set a new standard for future contracts. In addition to being one of the longest and most expensive ever, the DuPont contract is also one of the broadest, covering 60,000 employees and 102,000 retirees, operations in 70 countries and 30 languages, and everything from payroll and benefits administration to compensation management, recruiting and online learning.

    At the time DuPont signed the deal, officials at the $23.7 billion chemical conglomerate said they expected the partnership to reduce HR operating costs by 20 percent initially and up to 30 percent after five years. DuPont also picked Convergys because the company had service centers in regions and languages that matched its operations, says Ernie Lareau, DuPont’s director of HR portfolio and program management, who is overseeing the outsourcing transition.

Closely guarded business
    Convergys executives say that revenue from new HR outsourcing contracts takes up to two years to show up on the company’s balance sheet, so results from DuPont and other contracts signed last year could begin appearing late this year or in 2007. They expect the new deals to double HR outsourcing revenue from 2005 to 2007, with profit margins eventually growing into the midteens.

    But the size of Convergys’ HR business remains something of a mystery. Despite Employee Care’s newfound prominence within the company, Convergys has reported the group’s results within its larger Customer Management Group, which also includes its call center operation. In 2005, "other" revenue for the Customer Management Group, including revenue from Employee Care, was $482 million, about 27 percent of the group’s total sales. Earnings weren’t broken out. By comparison, Hewitt Associates, the country’s top HR outsourcer, reported revenue of $2 billion for its HR outsourcing business in its fiscal 2005 ended September 30, 2005, with segment income of $253 million.

    As recently as November, Convergys officials publicly admitted that the company had kept its HRO results under wraps for competitive reasons despite calls for more transparency from Wall Street analysts and other company watchers. But in connection with releasing fourth-quarter results in late January, Convergys CFO Earl Shanks said financial results for Employee Care will be broken out beginning in March, when the company issues its 10-K report for 2005.

    Convergys’ financial results aren’t the only thing some industry observers wonder about. They also question whether Convergys has the management depth to run all the new business it won last year. "Anyone who signed four or five deals, you have to ask how many ‘A’ teams they have to (run) those deals," says Michel Janssen, president of supplier solutions for the Everest Group, a Dallas HR industry consultant. "You need a very good person to run a DuPont-sized deal, and usually those people aren’t just lying around. Our experience is when suppliers have growth spurts, more often than not they suffer from delivery problems down the road."

    One key manager, Steve Rolls, a Convergys executive vice president and Bowman’s boss, is leaving at the end of January to pursue other interests. But Bowman and her supporters in the industry express confidence in other managers.

    "Karen Bowman is one of the most competent service delivery managers of all," says Phil Fersht, a NelsonHall HR analyst and author of the firm’s recent industry report. Fersht and others also give kudos to Applewhite, senior vice president of global business and head of Employee Care’s sales organization, who acted as the point man on the DuPont deal for most of 2005; Debbie Ashley, operations lead during negotiations, who will administer the contract; Peter Hirano, Employee Care senior vice president of product management; and Bonnie Tichman, Convergys’ vice president of marketing.

    Bowman expects to spend 2006 getting DuPont, Whirlpool and other new clients up to speed and closing in on some "targeted pursuits" she won’t talk about.

    Some of that new business could fall into the category of multitower outsourcing, where one provider assumes responsibility for multiple business operations, such as HR, IT, supply-chain management, and finance and accounting. Convergys took a step in that direction in August when it paid $5 million for Deloitte Consulting Outsourcing’s finance and accounting outsourcing unit. Bowman says she is "absolutely looking into the strategic benefits of offering multitower outsourcing," though she won’t reveal whether the company is in contract talks with anyone.

    Rumors of a buyout have swirled around Convergys for at least a year, brought on by its close working relationships in its other divisions with companies that are also competitors, such as IBM, as well as a stock price that some observers and shareholders believe is undervalued. In late January, Convergys was trading at $16.81 a share, off a 52-week high of $17.90 in mid-December.

    But officials are confident Convergys will continue as a stand-alone company. "We think there’s lots of opportunity for our existing shareholders to get good returns over time," CFO Shanks said at the Wall Street analysts conference in November.

    It’s a sure bet the industry will be watching Convergys during the next year or two to see whether HR outsourcing contracts with DuPont, Whirlpool and other new clients turn into those good returns.

 

Workforce Management, January 30, 2006, p. 1, 22-28 -- Subscribe Now!