Teletech

Teletech

In the demanding world of information technology movement and management, Teletech Corporation is a major player. Headquartered in Dallas, Texas, Teletech is comprised of two main business segments: Telecommunications Services and Products and Systems. Products and Systems main focus is the manufacture of computing and telecommunications equipment. Within the company, the telecommunications services sector accounted for 75% of the market value of Teletech while Products and Systems provided the remaining 25% of Teletech's market value. The prospective return on capital for the company as a whole would be 10.35%. It was decided by top management to apply a hurdle rate of 10.41% to all capital projects, as well as in evaluating the performance of the business unit. Within Teletech's mission statement there is a phrase that is of utmost importance to the success of Teletech. The phrase reads, "We will create value by pursuing business activities that earn premium rates of return." Translating that statement into practice has been a challenge for management. Despite some growth, Teletech's stock has not grown at a rate equal to that of overall stock market indices or with industry indexes for telephone, equipment, or computer stocks. The disappointing growth has been attributed to poor earnings growth, increased telecommunication competition, and the disappointing performance of the Products and Systems segment.

A closer look at each segment of Teletech allows for a greater understanding of the overall situation at Teletech. The telecommunications services segment is a major provider of long-distance, local, and cellular service throughout the Southwest and Midwest United States. Telecommunications provides service lines to more than 7 million customers. Figures from the telecommunications financial statements look promising. From 1989-1995, revenues grew at an average rate of 3%. In 1995, segment revenues, net operating profit after tax (NOPAT), and net assets equaled $11 billion, $1.18 billion, and $11.4 billion, respectively. In 1995, the telecommunications segment earned a return on capital (ROC) of 9.8%. Teletech has been forced to cope with gradual deregulation as a result of the Bell Systems breakup in 1983. Teletech has dealt with this through aggressive expansion into new services and geographic regions. The most recent expansion opportunities pursued by Teletech involve cellular telephone operations, acquisition of new telephone operating companies in Latin America, and investment in new technology such as digital switches and optical fiber cables. While all of these are necessary to be competitive, they are not without cost. The capital budget of the telecommunications segment has varied from $1.5 - $2 billion in each of the last ten years. Ending on a positive note, Teletech is regarded by customers as the leader in product quality and customer satisfaction. As a result, management expects to be able to command premium prices for its services.

The products and systems segment of Teletech did not officially exist until 1990. Before that Teletech merely had an equipment manufacturing division that produced only telecommunications equipment. In 1990, the company acquired a leading computer workstation manufacturer. The goal of this acquisition was to apply state-of-the-art computing technology to the design of telecommunications equipment. An explosion in the growth of the microcomputer market and the increased use of phone lines to connect computers to mainframes persuaded Teletech management to connect telecommunications equipment and computing technology. Aided by Teletech's capital base, borrowing ability, and distribution network, growth of the product and systems segment increased its sales by almost 40% in 1995. The segments NOPAT and net assets in 1995 were $480 million and $4.6 billion, respectively. The return on capital for products and systems was discovered to be 12%. These numbers are offset somewhat by current trends. Maintenance of their position as a technology leader in the industry required sizable investments