SPECIAL COVERAGE: UNDERSTANDING OUTSOURCING

MARCH 9, 2004

Kentucky Answered
Call of the Future --
But Got Bad News

Outsourcer Set Up in Hazard,
Then Headed Overseas;
'We Were Blindsided'

By DAN MORSE
Staff Reporter of THE WALL STREET JOURNAL

HAZARD, Ky. -- The news was so big that people first heard it from the president.

"I came here to show America who you are," Bill Clinton told several thousand listeners squeezed along a sweltering downtown street in the heart of Appalachia 4½ years ago. "I want people to know a lot of good things are going on here."

The president introduced John Sykes to the crowd and talked about his company: "Sykes Enterprises is making a major commitment -- listen to this -- to construct two information technology centers in eastern Kentucky that will bring hundreds of new jobs in Pike and Perry counties. Thank you, Mr. Sykes."

Mr. Sykes didn't come cheap. Kentucky had ponied up $7.6 million in cash and incentives to land his company. Officials were betting that computer help-desk call centers would instantly link Appalachia to the New Economy. And for a while, the plan worked. Sykes eventually trained more than 3,000 workers to help frustrated personal-computer callers from coast to coast.

No longer. As Hazard and other small U.S. towns have learned, the phone links on which they had banked their hopes have quickly zipped to even more remote places such as India, China and Central America.

The same technology that brought jobs to towns such as Hazard can, in a flash, whisk them away to Bangalore. The towns' travails show the perils of economic development in days of dizzying global change.

As Sykes has shifted overseas in the past two years, it has closed or announced closures of 10 of its 19 domestic call centers, including its two facilities in eastern Kentucky. "We were blindsided," says Hazard native Johnny Napier, 48 years old, a former truck driver who lost his Sykes job in January.

Mr. Sykes, 66, says his former host towns -- which gave his company incentive deals generally valued by the towns at between $2 million and $4 million -- were repaid many times over in the form of paychecks and employee training to prepare workers for other jobs.

But the laid-off workers are having trouble finding technical call-center jobs. While such positions are still being created in the U.S., they tend to be for small groups of 10 to 30 workers -- as companies introduce products or services for which they need quick help close to home, says Brad Cleveland, head of the Incoming Calls Management Institute, a consulting and training company in Annapolis, Md. Rural centers, often set up as 400-seat facilities, don't necessarily get the work.

When Sykes Enterprises Inc. went public in 1996, fast-growing tech firms desperately needed help. Sykes was able to provide outsourcing services at lower rates by opening call centers in places such as Klamath Falls, Ore.; Ada, Okla.; Scottsbluff, Neb.; and Bismarck, N.D. "We wouldn't have done this for someone making Hula Hoops," says Russell Staiger, president of the Bismarck-Mandan Development Association, which put together $4.5 million in cash and incentives for two centers. Mr. Sykes flew to North Dakota to welcome the first class of workers. The wind-chill was 86 below zero, Mr. Staiger says. There were no absentees. "I've got to commend you," Mr. Staiger remembers Mr. Sykes telling them.

Economic developers received good reports when they called other Sykes centers. Few paid much attention to small operations that Sykes started in the Philippines in 1997 and Costa Rica two years later. In 1999, Sykes had $21.9 million in net income on revenue of $572.7 million. Its share price soared to $49.94.

It all looked good to Paul Patton, Kentucky's governor at the time. Having grown up in eastern Kentucky, he knew first-hand the region's poverty and dependence on the coal-mining industry. He had campaigned, in part, on the promise to do something about it.

When a Sykes representative, Dave Reule, showed up to scout locations for a single call center, Mr. Patton escorted him to Pike Central High School in Pike County. They walked into a modern computer lab and a nearby room that students had turned into a mini call center, answering computer questions from county school-system workers. Visiting Hazard, 70 miles away, they met officials promising an equally willing work force.

At the end of the tour, Mr. Reule asked the governor whether he could handle two of these facilities. "You're darn right we could," Mr. Patton shot back.

Mr. Patton realized the hefty incentive packages -- with no promises from Sykes about how long it would stay -- were a stretch. But given the history and stereotypes associated with the region, "sometimes you have to be very aggressive," he says.

With President Clinton's announcement, the agreements got off to a big start. "We all thought our time had come," remembers Charles Colwell, chairman of an industrial authority that runs the Coalfields Industrial Park, where Sykes built a sprawling red brick call center along a new road that officials agreed to name "Sykes Boulevard." It was to anchor a tech section of their industrial park, which was next to a large manufacturer of engineered lumber.

The work wasn't easy and didn't pay all that well at first. Phone technicians started at $6.50 an hour, with raises of 25 cents after three months, 25 cents after six months, and 50 cents at 12 months, according to workers. Callers were often irate and rude, upset that their computers weren't working as expected. Occasionally, they insulted the phone technicians' thick mountain accents. Workers had to solve problems within tight time limits -- in just nine minutes for certain accounts.

Still, many workers took to it right away. Melina Brock was an out-of-work medical receptionist when she came to Sykes in 2000. Then 29, she and her husband, Junior, a coal miner, needed extra money for the mortgage and their 6-year-old son, Cody. Ms. Brock says she started out answering questions about Microsoft Corp.'s Internet service. She worked her way up to quality control and hoped to retire from the place. "We never had jobs like this," she recalls.

Back at Sykes headquarters in Tampa, Fla., things weren't going so well. In early 2000, Sykes issued a profit warning, sending its stock plummeting. A few months later, the Nasdaq stock market started its decline, as tech spending hit the skids.

Clients demanded lower costs, and Mr. Sykes began moving some operations offshore. He set up shop in China. A year later, in 2001, he expanded existing operations in the Philippines and Costa Rica, where more than 90% of those hired had college degrees. In 2002, he started a call center in India and later announced plans for one in El Salvador. In all, his company could generally offer services for about half of what he could in the U.S., at better margins for the company.

Mr. Sykes moved to shutter U.S. facilities. Among the first was in Eveleth, Minn., opened two years earlier after a $4.01 million incentive package, according to Minnesota officials, who begged Mr. Sykes to stay. One of them, William Siegel, wrote a letter that began by reminding Mr. Sykes how they had eaten lunch together when he had come to town.

"We have been making every effort to diversify. We need companies like Sykes," he said in the letter. "We put our faith in Sykes to grow and prosper here."

In his response, Mr. Sykes said his company had been well worth their investment. "William…I trust we have made you proud," he wrote. He also pointed out how much had changed in three years: "Very few would have projected that so many service jobs would be leaving our country and sent offshore."

The recruiters say they tried unsuccessfully to persuade Sykes to give them the building or sell it at a reduced rate. "Sykes came in. They tried to make a go at this. They put the money in their back pocket, and they ran," says Matt Sjoberg, who puts together incentive packages for Iron Range Resources, an economic development agency in Eveleth.

Also in 2002, Sykes closed operations in Scottsbluff, Neb. The Twin Cities Development Association says it is now on the hook for $300,000 of a $1.5 million incentive package. This is due to guarantees the association made with local and state officials, such as Sykes staying for five years, says Rawnda Pierce, the group's executive director, who arrived at her post after the deal was inked.

Some development officials still feel good about their investment. In 2002, Sykes closed one of its two Bismarck facilities. Mr. Staiger, the local recruiter, says both deals -- dating back to 1995 and 1997 -- paid off, by bringing money from paychecks into the local economy and by providing employee training. "Unequivocally, it was worth it," he says.

Over the next six months, Sykes says it will significantly boost offshore operations. By fall it could have nearly twice as much capacity in developing countries as it does in the U.S.

In eastern Kentucky, recruiters are wondering what will become of the two Sykes buildings. Fred Brashear, president and CEO of the Hyden Citizens Bank just outside Hazard, hopes a new company will eventually move in there but worries the empty building might turn off prospects he drives into the Coalfields Industrial Park: "They're going to sit there and say, 'What's the deal with that?' "

Mr. Napier, the former Sykes worker and onetime truck driver, says his unemployment checks cover about half of the monthly expenses for him and his 16-year-old son Justin, including payments on a Toyota Tercel with 94,000 miles on it. He could try to return to long-haul trucking, but that would mean Justin would have to move into his mother's two-bedroom house, 15 hilly miles from his school, he says. Mr. Napier has looked for local delivery jobs, with no luck so far.

In his closing months at Sykes, Mr. Napier and colleagues searched the Internet for information on federal trade-assistance programs. Those programs, dating back to 1974, offer benefits to workers hurt by imports who enter retraining programs. Mr. Napier and his colleagues discovered that the laws were designed more for manufacturing jobs and that the Labor Department had denied requests for Sykes workers in Eveleth.

"We didn't make widgets," Mr. Napier says. "That law was fine, before the Internet, before you could talk to someone in India for free."