The Mess at ACS: What It Means for Outsourcing Customers

Affiliated Computer Systems has had a rough couple of years, to put it kindly.

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After a second failed attempt to take the company private, boardroom upheaval that ended with the exodus of five of its directors and an SEC investigation into backdating of stock options that led to the dismissal of its CEO and CFO, the public image for IT services provider Affiliated Computer Systems (ACS) has taken a hit.

What has occurred over the last two years at the Dallas-based outsourcing provider is rare, not only in the IT services field. “It’s rare in any industry,” says Eugene Kublanov, CEO of San Ramon, Calif.-based outsourcing advisory neoIT. “You hardly ever see boardroom issues spill out this publicly into the market. With ACS, it’s been particularly ugly because of the merry-go-round of rumors and actions that have surrounded the company for some time.”

While ACS is issuing statements of reassurance to its clients, and experts say the turmoil has not noticeably affected the quality of the services the company provides, the recent events leave open questions about the company’s future and what it means for ACS customers. “An actual change in control is much easier to deal with than chaos surrounding a potential change in control,” explains Randall Parks, cochair of the global technology and outsourcing practice at law firm Hunton and Williams. “I’m not sure anyone could anticipate what has happened at ACS.”

ACS Seeks to Reassure Customers

ACS says it prides itself on delivering exemplary service to clients. “It is no accident that ACS leads the industry with a contract renewal rate of nearly 95 percent,” says spokesman Kevin Lightfoot, noting recent contract wins with the State of Alaska and the District of Columbia’s Medicaid program. “ACS’s fundamentals remain strong. The review of the company’s strategic alternatives did not affect our strong focus on our clients or our business operations,” Lightfoot adds.

Indeed, Lynn Blodgett, who took over as CEO last November, has said he didn’t want any of the behind-the-scenes boardroom and buyout issues to be a distraction within the outsourcing marketplace.

But it has been a bit of a sideshow, largely because of persistent uncertainty. “Every resolution that they have come to has taken so long and there’s still not a lot of clarity,” says Gartner research director Dane Anderson. “That would make me wonder, as a client, whether I’d want to sign a long term deal with ACS.”

As for current ACS customers, there’s the danger that the situation, like any potential change in ownership at a technology vendor, can divert management attention away from day-to-day business, says Chris Pattacini, vice president for outsourcing consultancy Nautilus Advisors. (For more on dealing with industry consolidation, see Five Steps to Take If Your Outsourcing Service Provider Is Sold.) As a result, service quality can deteriorate. “This is generally caused by reorganization and cost-cutting measures that typically follow a merger or acquisition,” explains Pattacini. “But in the case of ACS, it may occur before the transaction as it sits on the sale block.”

To mitigate the risks, ACS customers should seek out all the information they can from the provider. “The biggest thing they can do for themselves is to make sure they have the greatest level of transparency from ACS they can get,” says Gartner’s Anderson.

That’s easier said that done with closed door offers and SEC rules surrounding transfer of ownership, Anderson acknowledges. And account managers may not be used to fielding such questions.

“As an account manager, the last thing you want to deal with is explaining what is happening in your corporate board room,” says neoIT’s Kublanov. “You want to make sure the service levels are right, you want to be upselling. Any distraction from that is not good.”

Smart customers will press the issue, to seek understanding about the company’s future plans, Anderson says. “It behooves those clients to stay as close as they can to their account managers to find out what the path forward looks like not only from a contractual standpoint but from an ACS strategy standpoint,” says Anderson.

When in Doubt About the Future, Review the Terms of an Outsourcing Contract

Speaking of contracts, now would also be a good time to review the terms of the outsourcing contract to find out what might happen in the event of a change of ownership at ACS.

Most outsourcing contracts contain some language about ownership changes at the customer, but few such agreements have clauses dealing with mergers and acquisitions at the outsourcing provider. “The good ones have a change of control clause that gives clients a lot of options from terminating to renegotiation,” says Eugene Kublanov of neoIT, who says he sees such language in about half of the contracts he encounters.

More likely that not, says Kublanov, most ACS customers will not see any major effects at the account level right away. “Where it may have an impact, when you throw in these ethics issues, is on the employee level,” Kublanov says. “In the worst case, the employees may feel demoralized or want to leave. In the best case, they may be shaking their heads about all the crazy stuff happening at the board level.”

Another area of concern may be problem escalation. Most issues a client encounters in an outsourcing deal can be solved at the account team level. But the point of escalation is always senior management. An outsourcing customer wants to know that if all else fails, he can call someone at the top. “If there’s complete turmoil,” says Kublanov, “then the client doesn’t have that solid escalation point anymore.”

So far, the boardroom battles and ongoing uncertainty about future ownership have not sullied ACS’s reputation as a provider of IT services per se. “It’s not affecting their reputation so much as its affecting the outlook customers have about signing a deal with ACS right now from a risk perspective,” says Gartner. “It’s the soap opera of IT services.”

How things will ultimately play out at ACS is unclear. Kublanov thinks ACS will go private one way or another. And going private could be good for outsourcing customers. “As a public company, there are certain demands and stresses coming from Wall Street that at times are not aligned with customer needs,” says Kublanov. “A private company may have more leeway.”

Then again, Anderson says, there may be more acquisition attempts for ACS in the future.

ACS customers are no doubt hoping ACS will continue in its efforts to insulate its clients from goings-on behind the scenes. “Crises happen all the time at all sorts of companies. The important thing is to make sure there are no disruptions to the client,” says Kublanov. “Any negativity can cause disruption, not only to the clients but to the outsourcing industry in general.”