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
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,”
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
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
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
“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
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
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
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.”