Internet Mini Case #4 Sykes Enterprises Maryanne M. Rouse And then there were five.

In late summer 2004, Sykes Enterprises (SYKE) informed city and state officials that it planned to close both its Marianna and Palatka, Florida, call centers by October 2. The two Florida closings brought to nine the number of U.S. call centers the Tampa-based company would close in 2004. By the end of the year, just five of the companys U.S.-based centers would remain: Bismarck, North Dakota; Wise, Virginia; Morganfield, Kentucky; Ponca City, Oklahoma; and Sterling, Colorado. Like many of its competitors, Sykes was shifting its operations to lower-wage countries in an attempt to remain competitive and to meet client demands for reduced costs. Palatka and Marianna would face challenges not unlike those that still plagued Milton-Freewater, Oregon. Like many similar small towns desperate to add jobs and maintain both population and tax bases, Milton-Freewater, Oregon, was willing to take significant risks to survive. In 1998, town officials signed a multimillion-dollar agreement with Sykes Enterprises in which the town promised land, roads, utilities, and tax abatement. Although the company refused to guarantee a minimum number of jobs, minimum length of stay, or salary levels, Milton-Freewater negotiated a $2.2 million loan with the BakerBoyer National Bank of Walla Walla, Washington, to meet the companys cash incentive requirements. In early March 2004, Sykes announced that it would close the MiltonFreewater center and lay off its remaining workers by May 2. In her March 9, 2004, letter to the company, Milton-Freewater city Manager Delphine Palmer asked that Sykes donate its 42,000-square-foot building and land parcel back to the city. She noted: You asked us to dig deep into our pockets to provide Sykes with generous incentives to entice you. I am asking you personally to (help) our small rural American city to cope with this major loss.1 Sykes had previously refused a similar request from Eveleth, Minnesota. In that case, CEO John Sykes said it was not his building to give away and noted that he was obligated to give shareholders the highest possible return on their investment, including assets obtained through legitimate government contracts. Sykes sold the Eveleth center for $2.3 million. _______________________________________________________________________ _
This case was prepared by Professor Maryanne M. Rouse, MBA, CPA, University of South Florida. Copyright 2005 by Professor Maryanne M. Rouse. This case cannot be reproduced in any form without the written permission of the copyright holder, Maryanne M. Rouse. Reprint permission is solely granted to the publisher, Prentice Hall, for the books, Strategic Management and Business Policy10th and 11th Editions (and the International version of this book) and Cases in Strategic Management and Business Policy10th Edition by the copyright holder, Maryanne M. Rouse. This case was edited for SMBP and Cases in SMBP10th Edition. The copyright holder, is solely responsible for case content. Any other publication of the case (translation, any form of electronics or other media) or sold (any form of

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In a surprise announcement in January 2005, the company disclosed that it would lay off staff and close yet another call centerthis time in Bangalore. Rising costs and competition for skilled workers in that southern Indian city, together with what the company termed inadequate rates of return, led Sykes to hand off a number of remaining contracts to other company call centers in the Asia/Pacific regionmost likely China or the Philippineswhere Sykes had had operations since 1997. The India layoffs did not suggest that Sykes was retreating from its aggressive relocation strategy. More likely, the move reflected a growing disillusionment with the economics of operating in large Indian cities. Perceived advantages of the Philippines included lower attrition rates, closer cultural ties to the United States, and less noticeable accents. Filipino workers were also thought to be more service-minded than their Indian counterparts. Company Overview Sykes Enterprises provided outsourced customer management solutions and services to Fortune 1000 companies worldwide via two geographic segments: the Americas (U.S., Canada, Latin America, India, and the Asia/Pacific Rim area) and EMEA (Europe, the Middle East, and Africa). For the six months ended June 30, 2004, the Americas segment contributed between 60% and 61% of consolidated revenues, with the balance coming from EMEA. Operating Segments Customer support outsourcing accounted for 91% of consolidated revenue for the companys 2002 fiscal year. Sykes core business, this segment comprised primarily inbound technical support services (installation support, up and running support, troubleshooting, and usage support), customer support (order status, account maintenance, service dispatch, and customer relations), marketing support (inbound and outbound sales, lead generation, up-sell and cross-sell programs), and speech solutions. The companys customer support contacts included product information requests, description of product features, activation of customer accounts, resolution of complaints, and handling of billing inquiries. Sykes delivered customer support services via a number of communications channels, comprising telephone, e-mail, web, and chat. At the close of 2002, Sykes operated 15 stand-alone customer support centers in the United States; 3 centers in Canada; 15 in Europe, the Middle East, and South Africa; and 7 offshore in the Peoples Republic of China, the Philippines, India, and Costa Rica. The companys strategy in the United States had been to locate centers in smaller and rural communities with lower labor (wage plus turnover) and infrastructure costs. A weak economy, pricing pressures, and the need to reduce costs had led to the companys gradual relocation from rural America to more cost-effective locations overseas. Communities that had met all the companys requirements (cash and land grants, site preparation, and tax abatement)including Ada, Oklahoma; Eveleth, Minnesota; Hazard, Kentucky; Pikeville, Kentucky; Bismarck, North Dakota; Greeley, Colorado; Klamath Falls, Oregon; Milton-Freeman, Oregon; and Scottsbluff, Nebraskawere stunned and angry at the closures, which many regarded as a breach of trust.
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Fulfillment and enterprise support services accounted for approximately 11% of the companys revenue for fiscal 2002. Fully integrated with its customer support services in Europe, fulfillment services provided multilingual sales, order processing via the Internet and telephone, inventory control, kitting and assembly, product delivery, and product returns handling, multi-currency payment processing, and financial services, as well as vendor management and warehousing. In the United States, Sykes provided a range of enterprise support services for client internal support operations, including technical staffing, IT services, IT help desk services, and corporate help desk services. Financial Performance Results for the quarter ended June 30, 2004, were uninspiring. Consolidated revenues were down 4.6% from the same period a year earlier, while net income for the quarter was down significantly. By mid-August 2004, the companys stock was trading near an all-time low of $4.76 in response to disclosures that: _ Sykes expected to lose 7 to 10 cents per share in the third quarter, even after including onetime gains from the sale of closed call centers. Analysts had expected a positive 5 cents per share. _ The company planned to cancel underperforming contracts with a number of leisure industry clients. _ The migration of some clients, including SBC, from U.S. to offshore locations was lagging, which was expected to lead to higher short-term costs. _ A recent FCC decision that was expected to drive AT&T and other providers from the long-distance business was expected to increase the companys costs. Sykes revenue growth in 2003 benefited from diversification into new markets, including financial services and the travel and leisure industries, growth in offshore markets, and the strength of the euro. For the 12 months ended December 31, 2003, the company reported total revenues of $480.4 million, a 6.1% increase over the prior year, together with operating income of $11.6 million and net income of $9.3 million. Operating results reflected a number of special items, including a $2.1 million gain related to the sale of two U.S. customer contact management centers and a reversal of prior-year restructuring accruals. A weakening global economy as well as the companys decision to exit certain business segments had negatively impacted consolidated revenues for the two previous fiscal years. For fiscal 2002, Sykes reported consolidated revenue of $452.7 million, a decrease of $44 million, or 8.9%, from the prior year. The companys reported $18.6 million net loss reflected $20.8 million of restructuring charges related to the closure and consolidation of two U.S. and three European customer support centers, $1.5 million in intangible asset impairments, and $13.8 million in charges associated with the settlement of litigation related to a shareholder suit. For 2001, the company reported consolidated revenues of $496.72 million, a decrease of $106.9 million, or 17.7%, from 2000. Sykes reported $406,000 net income reflected a $14.6 million restructuring charge related to the closure and consolidation of two U.S. customer support centers, two U.S. technical staffing centers, and one European fulfillment center, as well as $1.5 million in intangible asset impairments. Revenues and reported profits for the third quarter were flat; fourth quarter results were expected to be disclosed in late February 2005.

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For 2002, SBC Communications and its affiliates accounted for 15.8% of the companys consolidated revenue, while Microsoft accounted for 12.1%; final results for 2003 were expected to show a similar revenue pattern. (Sykes top 10 customers, including SBC and Microsoft, accounted for approximately 60% of total consolidated revenues.) Complete financial statements, including managements discussion and analysis, as well as SEC filings, can be accessed via the companys web site www.sykes.com. Key Competitors Convergys Corporation Industry leader Convergys (CVG) provided a broad range of outsourced services to clients via its two operating groups. Convergys Customer Management Group provided customer service, technical support, and telemarketing services for clients in the financial services, telecommunications, Internet services, and other industries through more than 45 contact centers worldwide. The companys Information Management Group (IMG) processed over 50 million bills a month from its data centers, provided business process consulting services, and licensed its data processing software. Convergys had grown both internally and through acquisition, expanding its European presence with the acquisition of UK billing services from Geneva Technology. A more recent acquisition of Avaya, Inc.s, global employee service operations was expected to allow the company to expand its human resources support segment. The companys third quarter revenues were $570.7 million compared to $561.2 million for third quarter 2002an increase of approximately 1.7%. (Although the Customer Management Groups revenue increased 13.4% for the quarter, the Information Management Groups revenue declined 16.3% compared to the prior year; operating margins for both operating groups were down.) CVG was engaged in a restructuring effort designed to streamline operations and reduce costs, which was expected to benefit both operating and net margins. Top-line performance was expected to benefit from efforts to expand human resource services, such as the five-year contract Convergys signed with Fifth Third Bancorp in late October. TeleTech Holdings, Inc. TeleTech, the number two U.S. teleservices/business process outsourcing company, provided a variety of customer relationship management (CRM) services in over 50 customer interaction centers worldwide. TeleTech offered customer acquisition, service, and retention programs; customer satisfaction and loyalty programs; customer data and management services; and consulting and marketing services to clients including American Express, Blockbuster, Citigroup, AT&T, and Microsoft. The company had grown principally through acquisitions, moving into Australia and New Zealand in 1996 with its purchase of Acccess24 and into Mexico in 1997 by acquiring Telemercadeo Integral. Acquisitions of Intellisystems (automated support systems) and Digital Creators (Web-based education and training) in 1998 helped diversify the companys customer base and broaden its expertise. In 1999, TeleTech expanded into Argentina and Singapore, acquired Newgen Results (which offered CRM services to automakers and dealerships), and entered a CRM joint venture named Percepta with Ford Motor Company. The company acquired the customer care division
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of Boston Communications (which served wireless operators, carriers, and resellers) in 2000. The company reported third quarter 2003 revenue of $244.9 million, a decline of $7 million, or 2.8%, from the comparable quarter in 2002. TeleTechs operating margin for the quarter declined from 4.3% in 2002 to 3.7% for 2003, while net income declined from $6.3 million in third quarter 2002 to $2.1 million in third quarter 2003. West Corporation Formerly West TeleServices, West Corporation (WSTC) was the number three U.S. provider of outsourced teleservices, with over 30 call centers and 7 automated voice and data centers. The company provided inbound (customer service, product support, order processing) and outbound (product sales, customer acquisition and retention) call handling for such clients as AT&T, Dell, and Microsoft. West generated almost half its revenue from the inbound call segment, nearly a third of revenue from outbound calls, and the remainder from computerized call processing services such as processing of automated product information requests, prepaid calling services, and credit card activation. West, which had pursued both internal and external growth strategies, had recently announced it had agreed to acquire ConferenceCall.com, a provider of Internetbased conferencing. The acquisition would be integrated into Wests InterCall unit but maintain its own brand name and presence. For the quarter ended September 30, 2003, West reported consolidated operating revenues of $263.2 million, a 32% increase over the same quarter in 2002. The companys operating income for the period was $40.4 million, a 93.2% increase over the comparable quarter in 2002, while net income increased 79.1%, to $24.4 million. SITEL Corporation SITEL (SWW) provided inbound call handling for customer service requests, technical support, and order taking. The company also offered outbound telemarketing, database and list building services, and direct response marketing. The company served over 300 corporate clients from 84 contact centers in 20 countries; four units of General Motors accounted for nearly 25% of SITELs sales. With consumers becoming more and more web savvy, SITEL had begun building a new business around offering e-services, such as inbound e-mail handling, real-time customer service chat support, and automated customer service support. The company also was trying to leverage its international expansion efforts to capture global clients. (The United States accounted for almost 60% of sales.) SITELs third quarter 2003 revenue was $208.8 million, a 16% increase over the comparable quarter in 2002; however, the company reported an operating loss of $396,000 and a net loss of $3.9 million, a significant decline from the prior years quarter three operating income of $2.6 million and breakeven net income. The Industry The customer management services industry was extremely competitive and highly fragmented with firms providing different combinations of outsourced business process services, from outbound telemarketing to customer relationship management and human resources consulting, to clients on a global basis. Industrywide pricing pressures,
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reflecting a lingering economic weakness and continuing pressures on MNCs to control costs, had compelled competitors to walk a fine line between aggressive cost cutting and revenue growth. One way firms had sought to provide attractive value propositions to their clients was by moving customer service centers offshore to India, the Philippines, Costa Rica, and other lowcost locations. In addition to lower wage costs, competitors cited educated employees and significantly lower turnover as key reasons to relocate service centers. Although the cost of routing calls to offshore locations had been considered a barrier several years earlier, the decline in telecommunications costs over the past three years made overseas operations not only viable but competitive. Strengthening economies in these locations could, however, make service center jobs less attractive and drive up wage and turnover costs. And public perception in the United States continued to be a problem for firms shifting manufacturing or service jobs out of the country. International outsourcing was a subject that made U.S. business leaders and elected officials clearly uncomfortable, especially in the jobless economic recovery of the early 2000s. On a positive note, the same weak economy, rapid changes in technology, global competition, and pricing pressures that afflicted competitors in the customer management services industry made outsourcing customer management as well as other business processes an attractive option for clients. Although clients had traditionally turned to service companies to reduce costs, more and more companies had begun to view outsourcing as a means of enhancing service while allowing a sharpened focus on core competencies rather than on non-revenue-producing activities. The expectation of 24hour-a-day, seven-days-a-week customer service, especially in the United Statesa level that many in-house contact centers would have trouble reachingwas a key trend driving growth in the industry. Note 1. D. Palmer, Letter to the Company, St. Petersburg (FL) Times (March 27, 2004).

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