City Picks Three Finalists for Big Outsourcing Job 

Picture clouded by problems at consultant SCB Computer Technology

The city of Memphis has narrowed the field to three finalists for the job of outsourcing its computers and telecommunications. The three companies (chosen from an initial field of 17 firms) are Affiliated Computer Services (ACS), headquartered in Dallas; Electronic Data Systems (EDS), also headquartered in Dallas; and Systems & Computer Technology (SCT), with headquarters in Malvern, Pa. The contract for the rapidly growing computer and telephone operations could be worth as much as $70 million or more, based on the budget for the Division of Information Services, which is being outsourced. It will be for at least five and possibly seven years, according to Roland McElrath, director of the Division of Finance and Administration. “We are still going through our evaluation,” said McElrath. “We have completed a technical review and we are going through a business evaluation of the proposals. We planned to go through oral presentations next week, and the target date to sign an agreement is early December. We are on schedule to hit that.” The outsourcing effects only about 45 employees, but in dollar terms it is by far the largest in city history. McElrath declined to put a number on it because the bids will be negotiated, but the Division of Information Services was budgeted for about $10 million a year. “Our strategy is to downselect to two companies and negotiate prices with them,” said McElrath. Information systems includes computers and telephones for all city departments except the Memphis Police Department, which is on the Shelby County phone system. Adding an unusual twist to the story are embarrassing financial disclosures, a dizzying sequence of management resignations, and allegations of fraud at SCB Computer Technology, the city’s consulting partner. SCB Computer Technology, a Germantown company, has a $468,000 contract to help choose the outsourcing firm but is excluded from bidding on the job itself. Since the contract was signed in 1998, however, SCB has been in turmoil. It has paid the federal government $1.6 million to settle an overbilling complaint by the Tennessee Valley Authority. Its top management, independent auditor, and a board member have resigned. Its stock has been delisted by the Nasdaq Stock Exchange. And its credibility has been battered by company admissions of overstating earnings and hyping press releases in order to inflate revenues. Several lawsuits have been filed alleging that shareholders were defrauded. “We are aware of the financial difficulty they have had but those have not had any adverse impact on the services they provided to us,” said McElrath. “The services we contracted for with them will be completed by the end of the year.” The city has also hired the Washington D.C. law firm Shaw Pittman to advise it on legalities of the outsourcing. SCB Computer Technology, founded by T. Scott Cobb and Ben Bryant Jr., became a publicly traded company in 1996. The stock traded for as high as $13 a share but had fallen to just over $2 a share when the company announced possible accounting problems in April. The Nasdaq delisted the stock, meaning trading was halted. SCB appealed the delisting but it was affirmed in August. In July, SCB admitted overstating its earnings from 1998-2000 by $4.18 million and exaggerating the impact of four contracts on future earnings. The contracts, which did not include Memphis, were either canceled, under review, or worth less than SCB stated they were. Cobb resigned as chairman last November along with board member Joe McLeary. Bryant replaced Cobb as chairman, then Bryant also resigned as chairman and CEO in May of this year and Cobb returned as CEO. Former chief financial officer and president Gary McCarter resigned in July. And Bryant resigned as a director and employee of the company in September, according to the company proxy statement released last week. The new chairman of the board is Jack Blair, formerly an executive with Smith & Nephew in Memphis. The city has put together an evaluation committee that includes McElrath, CAO Rick Masson, City Councilman Tom Marshall, Abe Kani of the former Information Systems division, internal auditor Elizabeth Moore, and Deputy Human Resources Director Charmaine Claxton. The committee will make a recommendation to Mayor Willie Herenton. (You can write John Branston at branston@memphismagazine.com).

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