Sitel seeking remedy for its growing pains; Acquisition binge brings global role, but also heavy debt; 'Problems that are fixable'; New GM contract expected to add 2,000 workers; Teleservices


When Sitel Corp. was looking for a new president to help guide its burgeoning growth, it knocked on the door of the Alex. Brown investment banker who helped take the teleservices company public the year before.

Phillip A. Clough answered, joining as the No. 2 man in January 1997. Now with the title of chief executive officer, he has overseen the company's largest deal to date -- this month's five-year contract to provide customer service for General Motors' North American Vehicle Sales, Service, and Marketing Group.

"What attracted me to the position [of president] was to have a senior role," said Clough, 36. "I loved Alex. Brown. I wasn't looking to leave, that's for sure. This just ended up being a neat offer and a special opportunity to join a fast-growing, international company."

Fast growing is putting it mildly. After 11 years focused on telemarketing in the United States, Sitel went on a worldwide binge, gobbling up a dozen companies from early 1996 through May 1998 and piling up debt.

Sitel also began to broaden its scope from solely outbound sales calls -- interrupting people at dinner to ask if they'd like to apply for a credit card, for example -- to inbound customer service functions, such as the type provided for in the GM contract.

The company, which last year moved its headquarters from Omaha, Neb., to offices in Baltimore's Inner Harbor, provides outsourced telephone and Internet-based customer service and sales to companies in 18 countries.

It has 20,000 employees at 74 call centers throughout North America, Europe, Latin America and the Asia Pacific region and about a dozen in Baltimore. The GM contract, announced this month, is expected to add about 2,000 full- and part-time workers.

While the spate of acquisitions provided the "global footprint" the company was looking for -- its European call centers work for Hewlett-Packard Co., Texas Instruments Inc. and IBM Corp., for example -- the purchases, financed through loans and stock, put Sitel in debt. Company officials found that transforming the various organizations into a cohesive, successful firm was more difficult than they expected.

"This is a very good company that lost its way," said John P. Larson, an analyst at GS Securities in Milwaukee. "Sitel has problems that are fixable. In terms of perception by investors, fixing the problems is taking a lot longer than people thought."

Although revenue has steadily increased, its bottom line has turned negative. Costs related to the closing of poorly performing call centers, layoffs and restructuring led Sitel to post a net loss of $4.5 million in the second quarter of 1998, and it finished the year $1 million in the red compared with a $2.8 million profit the year before and nearly $11 million in 1996.

The earnings plunge sent its share price, which topped $20 in 1997, to a record low of $1.875 in October of last year. It closed Friday at $2.9375.

When Sitel needed a new chief financial officer last year to help it regain its footing, Clough turned to his old boss at the now-BT Alex. Brown, W. Gar Richlin. Richlin, 53, came on board as CFO and chief operating officer in March.

Richard Franyo, managing director in investment banking at BT Alex. Brown who worked with both Richlin and Clough, said the two make a good team.

"I think Phil's probably more of a marketing and expanding-the-business guy, and Gar would be just terrific at taking control of the situation and making sure everything's buttoned down," he said.

When Clough joined Alex. Brown, the firm wasn't involved with any teleservices companies, but he "went and started that whole area, he carved it out and grew it as a pretty junior guy," Franyo said.

The challenge for Clough and Richlin is to get a firm grip on this newly expanded, global business and make sure all the parts work together. "This is a company that bit off more than it could chew," Richlin said, "and knows it has a case of indigestion."

One of the remedies was to streamline operations. In October, an entire level of middle managers was cut, eliminating about 200 positions, in addition to 150 jobs previously cut.

Fourteen business units now report directly to Baltimore instead of to regional managers. The company expects the cuts to save $10 million annually and improve communications.

The company started in 1985 in Omaha when James F. Lynch, then president of a telemarketing firm called HQ800 Inc., bought its assets for $165,000 and changed the name to Sitel.

"Three and a half years ago, it was a young company with $100 million in business, and 90 percent of the business was in one function -- outgoing sales -- and 10 percent of the calls were incoming," said Lynch, who remains chairman. "In three years we've gone to almost $600 million, the product mix has switched to 60 percent incoming customer service sales and only about 35 percent outgoing sales calls."

Among its main competitors -- including APAC Teleservices Inc., West Teleservices Corp., Convergys Corp., Teletech Holdings Inc., ICT Group Inc. and Telespectrum Worldwide Inc. -- Sitel has the second-highest revenue.

Now that the restructuring and layoffs are over and the global footprint has been established, Sitel executives plan to ease up on acquisitions and focus on improving performance.

Of concern to some analysts is the company's debt that was racked up during the acquisitions -- $112.7 million vs. current assets of $161.3 million as of Dec. 31.

"Fortunately, teleservices is not a capital-intensive business," said a November report on Sitel by Merrill Lynch. "Therefore, despite the low level of earnings, Sitel's cash flow is still reasonable, and its financial position appears secure, despite a high level of debt for the industry."

Analysts on average expect Sitel's earnings per share, 2 cents in the fourth quarter, to increase 27 percent over the next five years.

"[Sitel has] gone through a long and hard process to deliver improved performance," said GS's Larson. "I am reasonably optimistic. It's a show-me situation. It's a good company, a good business, and now they just have to deliver."

Pub Date: 2/28/99

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