MS: Unhappy Clients Bite Back : LUSENET : Y2K discussion group : One Thread

Five years ago, when Fairfax County decided to upgrade its computerized records of personal property tax payments, it looked no farther than a mile from the county government center and hired American Management Systems Inc., the giant consulting firm known for improving government information systems. For the next four years, county and AMS programmers pored over computer codes and tried to create a new system. But tests of software prototypes showed glitches, with wrong addresses for some taxpayers, erroneous taxes for others.

By last January, county officials wanted out of the contract, even though it was with one of the shining lights of the Fairfax corporate world.

After long negotiations, AMS this month sent the county a $2 million check, the first installment of $8 million in cash and services it will give the county over the next five years to settle the original $8.8 million contract.

"We didn't reach a point where there was enough functional integrity in the system to continue to go forward," said Kevin C. Greenlief, director of the county's tax administration department. "It was a risk assessment. I'm not saying [AMS] couldn't have done it, but it would have taken more time. It was a smarter decision to back away."

By itself, AMS's settlement with its hometown government may not seem like much more than pesky glitch for a company that expects to book more than $1.2 billion in revenue this year and earn a profit while information technology firms by the hundreds have closed or fallen into financial disarray.

But the Fairfax payment is part of a troubling pattern that has emerged at the company, whose board this fall will name a new chief executive to replace the interim CEO and president, William M. Purdy.

While AMS has completed hundreds of jobs in its 31 years and says its customers renew 85 percent of their contracts, in the past few years it has run afoul of clients who have alleged that the company has been, among other things, deceptive in bidding for work, incompetent and slow in trying to complete its work and ultimately unable to finish some projects.

AMS officials point out that aspersions have been cast by only a small number of its many clients. But the vehemence of some of the accusations, speaking directly to AMS's core business, makes some analysts and former employees worry about the company's quality control.

Last month, the Federal Retirement Thrift Investment Board dumped AMS from a four-year-old, $30 million contract that was more than a year overdue and whose cost had ballooned to $87 million. The company had been hired to develop a record-keeping system to track the retirement investments for 2.5 million federal workers, but Roger W. Mehle, the board's executive director, said AMS "is incapable of fulfilling commitments."

The board, in a federal lawsuit seeking $350 million in damages from AMS, alleged that the company missed numerous deadlines, and over time "made a series of misrepresentations about its progress on the project, concealed defects in its execution of the project and failed to disclose the extent of likely cost overruns."

Purdy said later he was "really angered" at the board's actions and the company says it plans to vigorously fight the suit. The company blamed the delays in finishing the project on board officials who, it said, repeatedly asked for design changes. AMS said it "developed more than 1.2 million lines of software code -- five times the original estimate -- to meet the board's evolving requirements."

Last August, a jury in Jackson, Miss., ordered AMS to pay the state of Mississippi $474.5 million after a protracted dispute over completion of a three-year, $11.9 million contract signed in 1994 that called for AMS to develop software to track collection of the state's 36 taxes.

Mississippi Commissioner of Revenue Ed Buelow said: "After 60 months of the contract, they had only delivered one system, for withholding, and it failed, not once but three times. The first [test] crashed all our systems."

Buelow said he offered to settle the dispute if AMS refunded the $11.9 million the state had paid for the work, but the company refused.

"Finally, out of total frustration," Buelow said, "I terminated them and sued them."

Even then, Buelow said he offered to settle for $35 million six weeks before the case went to trial, but AMS again refused.

Finally, after the jury returned the $474.5 million verdict, Buelow said Mississippi offered a third settlement proposal -- $185 million -- and AMS accepted it.

As a result, AMS was forced to take an after-tax charge of $23.5 million in the third quarter last year, about twice what it could have originally settled the case for. Its insurers covered the rest of the settlement, but now AMS is suing its primary insurer to recover what it had to pay.

Paul A. Brands, then AMS's chairman and chief executive, said at the time that the company did not appeal the verdict because of the length of time it would take and what the long-term effect on the company would be.

"We believe this course will better serve our clients' and shareholders' interests," said Brands, who later sent a letter of apology to Mississippi state workers for the company's performance.

"Our results fell short of the standards of performance that the company has set for itself," Brands wrote.

The Mississippi affair led to the departure of Brands, who was being paid $420,833 a year. He left with $550,000 for this year, part of a $3 million severance package he will receive, a company proxy statement said this past spring.

"He was pushed out by the board because of Mississippi and the poor performance of the company," said a stock analyst who declined to be identified.

In 1999, the firm wrote off $11.8 million to cover a dispute between an AMS subsidiary and Bezeq, the Israeli telephone company. In 1996 it took a $20 million hit when it lost a contract with Cellnet, a British wireless phone company. It also lost a $50 million to $60 million deal to improve billing and customer service systems for Swiss Telecom, Switzerland's national telephone company.

Such body blows to the corporate image, and the prolonged downturn in technology spending, have depressed AMS's stock price. From a high of $43.94 in March 2000, it has dropped now to the teens, closing Friday at $18.42. It fell by more than a third in the days after the thrift board fired the company for the savings plan contract, and the share price has recovered only a bit since then.

Report Card

So what is one to make of AMS's overall performance?

Purdy, who declined to be interviewed for this story, said in announcing second-quarter earnings ($4.6 million, off from $16.1 million a year earlier) that "keeping revenue flat is a sign of real strength" when many technology firms are recording huge losses or going out of business.

Donna Morea, one of the AMS's six executive vice presidents, said: "Everybody in the information technology industry is struggling with challenging market conditions. In the midst of that, AMS is actually doing very, very well."

Of the problems with contracts, she said: "Those are aberrations. There is not a trend. In Fairfax, we jointly and mutually and amicably decided to discontinue the program. In the thrift case, we're very disappointed and angered by the board's action. We intend to fight this lawsuit.

"Our success rate speaks for itself. Ninety-nine percent of our cases result in happy clients," Morea said. "In the context of everyone else, many of our competitors have declining revenue. Like everyone else, we're waiting for the market to pick up."

AMS was founded by five former members of a Defense Department "whiz kids" team that was created in the 1960s by Defense Secretary Robert McNamara. One of them, Charles O. Rossotti, was the firm's longtime chairman until 1997, when President Bill Clinton appointed him internal revenue commissioner, a post he still holds. Not surprisingly, given the founders' background, the firm's early work concentrated on defense contracts.

Now, the company says it has contracts with 47 of the 50 top U.S. banks, five of the top 10 insurance companies, 20 of the top 50 investor-owned utilities, 11 of the top 15 telecommunications firms, key defense agencies, 90 percent of federal civilian agencies and 43 states. Its client list reads like a Who's Who of corporate America: Aetna Life, Prudential, Wachovia, BellSouth, Verizon Wireless, AT&T, American Express and Capital One.

Consumers may not know it, but each month AMS software produces millions of bank statements, phone bills and tax assessments.

In March, the Virginia state government launched a Web-based procurement system built by AMS that gives state agencies the ability to shop for products and services online. And in June, even as the thrift board dispute was coming to a head, AMS won a new contract with the Naval Sea Systems Command that could be worth $160 million over five years to provide fleet maintenance engineering services. AMS has been doing that for 25 years.

Such conflicting evidence -- some contracts that end in lawsuits and some in renewals -- has left AMS's stock analysts with equally mixed views.

"We continue to believe that AMS has many core competencies," said Robert St. Jean of J.P. Morgan in New York, "but there is a risk from the suit from the thrift board and the general weak environment in the information technology commercial sector. That has caused us to take a more cautious stand on the stock than we have in the past."

Moreover, St. Jean suggested that the lack of a permanent chief executive now for nine months has hindered AMS's performance. "Good things don't tend to happen to companies in transition," he said.

With those factors in mind, Morgan recently downgraded its AMS rating from "long-term buy" to "market performer."

"Is there a pattern here, a failure on AMS's part?" St. Jean said. "I don't think so. Based on the research I've done, they broadly have a very good reputation with clients, a strong track record of execution for a broad range of clients. But losing the Mississippi suit has invited a high level of aggression from those clients who have an issue with AMS.

"The success of an IT project is equally the responsibility of the client and the vendor," he said. "When that doesn't happen, you don't get a good outcome. Just look at the large volume of revenue this company has done this year and over a long period of time. There have been a lot of successful contracts."

Another analyst, William Loomis of Legg Mason Wood Walker in Baltimore, said: "Right now there are pretty tough times for AMS and the [information technology services] industry. They've actually outperformed many of their peers."

Still, Loomis said, the disputed contracts and lawsuits are disappointing. "When you start to have these, others occur. If you have a project that's over-budget and over-time, tensions build and things get emotional. Bridges get burned. AMS really needs to control these contracts and tell the client you can't change [things] halfway through."

Loomis said in such contentious circumstances both AMS and its clients have been at fault, but "AMS should, more than anyone, control the scope. If the client terminates the project, then the client terminates the project."

Some former AMS employees share Loomis's view that at least in some cases the company has not sufficiently overseen the quality of its work, although their views may be colored somewhat by the way in which Purdy announced the first of 700 layoffs last February.

Company revenue was flattening at the time, which might have been reason enough for the layoffs, but Purdy said those being laid off were "not capable of fitting in or being retrained," which angered many of the newly dismissed, many of whom said they had received excellent job ratings over the years.

Purdy, in a letter to laid-off employees, later said "some of the media did not convey the message you and others should have received," but at the same time again said many of the workers "were not performing at the exacting levels expected in our very competitive workplace."

Kim Bassarab, a former AMS office manager who was laid off, said: "It was completely spiteful, hurtful. He hurt us by saying we were unable to fit in. I think the layoffs were strongly economically based."

Another former worker, who declined to be identified, said the firm's problems on some contracts stem from the growth of the company, which now has 8,500 workers around the world.

A former manager, who was dismissed after 17 years at AMS, said, "It seemed like every time we added another 1,000 employees, [quality control] spiraled out of control." In the earlier days, she said, the culture of the company encompassed that of "collegial academicians," where "you might be a project manager on one project and the next time you might be working with someone who had worked for you."

But, the former manager said, by the late 1980s and into the 1990s as the size of the company increased, "somehow it changed. The relationship between employees and managers used to be that you could talk through work problems. More and more it became: 'We're going to tell you how to do it.' In the '90s, every year or 18 months there seemed to be a major problem."

Loomis, the stock analyst, concluded: "This is a high-quality company. They need to find out the problem on executing the programs and preventing them from falling apart. It's important to remember that it's really very few that have had problems, but they happen to have been high-profile."

Washington Post

-- Anonymous, August 28, 2001

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