Analysts warn: Beware of BearingPoint's problems

BearingPoint Inc. clients should monitor closely their engagements with the struggling IT services provider, to make sure its financial problems don't affect the quality of its work, analysts cautioned Monday.

Chief information officers (CIOs) and IT managers should review the terms and conditions of their contracts with BearingPoint and keep a close eye on how the company performs. They should immediately bring to BearingPoint's attention any problems and demand prompt corrections, analysts said.

"Whenever they're engaged with a provider that is in financial difficulties, CIOs and IT managers need to take an extra measure of caution and risk management to make sure they don't get the short end of the provider's problems," said Lorrie Scardino, a Gartner Inc. analyst.

This goes even for a company like BearingPoint, a provider whose clients tend to be loyal and which has a very good reputation for the quality of its work and its project management methodologies, Scardino said.

"Don't take a wait-and-see attitude. Stay on top of things," she said. "If there's something that seems unusual or a couple of things that together seem unusual that may affect the services you get, don't let it fester" and address it right away.

For companies considering hiring BearingPoint, the word is caution. "You need to be very careful about making the decision to go with them," said Andrew Efstathiou, a Yankee Group analyst.

BearingPoint on Thursday announced layoffs and a significant earnings restatement when it issued its fourth quarter financial report, in which it also missed expectations. The earnings report shocked Wall Street, and the stock at one point on Thursday lost over 30 percent of its value. It had closed at $10.31 on Wednesday before the earnings announcement Thursday morning. After falling as low as $6.75 on Thursday, it has regained ground, closing Monday at $8.15.

The McLean, Virginia-based consultancy and systems integrator on Thursday adjusted its accounting and erased from the books almost 25 percent of the net income it had reported in the fiscal year's first three quarters, from $44 million to $33.2 million. The restatement shaved $0.05 per share from the company's first three quarters, to $0.19. The company also announced layoffs of between 250 and 275 staffers, from a total of about 16,000.

On top of that, the company badly missed fourth-quarter expectations, reporting earnings per share of $0.04 and gross revenue of $774.8 million, both way below consensus expectations from analysts polled by Thomson First Call of $0.15 and $829.6 million, respectively. BearingPoint blamed the shortfall on lower-than-expected sales in Europe, the Middle East and Africa.

The BearingPoint situation deems special attention from CIOs and IT managers because it involves layoffs, always a serious matter, but especially so among IT service providers, which essentially sell the skills of their staffers, Scardino said. This is the third layoff announcement the company has made in the past nine months. BearingPoint, formerly known as KPMG Consulting Inc., had about 17,000 employees at the beginning of December, but in the next two months it issued two layoff announcements, for a total of between 1,150 and 1,250 job cuts, or up to 7 percent of its workforce then.

Another cause for concern for BearingPoint clients is the execution of its top executives, Efstathiou said. There are three main areas in which their decisions and leadership are in question and which led to the disastrous fourth quarter, he said.

First, the BearingPoint chief executives have kept the company's focus on the difficult consulting and systems integration segment of the services market, instead of diverisfying into better-performing areas such as outsourcing, Efstathiou said. For example, Accenture Ltd., whose core business is also consulting and business integration, has successfully diversified into outsourcing, thus gaining additional revenue streams, Efstathiou said.

Second, top level executives have been slow in building BearingPoint's offshore outsourcing business, and its offerings in this space are too limited, he said. Meanwhile, competitors are busy expanding in this area to meet the increasing demand from clients for offshore services, he said. Offshore outsourcing services are those provided from outside a client's country often at lower prices.

Third, BearingPoint hasn't successfully completed its transformation to a corporation from the partnership structure it had when it was part of accounting giant KPMG International, Efstathiou said. BearingPoint also hasn't properly integrated the non-KPMG practices it has bought over the past two years, such as those it bought from Andersen Worldwide, he said.

At least one client isn't too worried about BearingPoint's troubles. The U.S. Agency for International Development (USAID) is sticking with BearingPoint after awarding it in July a $9 million contract to do relief and reconstruction work in Iraq. "The company can execute its contract and that's all we're concerned about," a USAID spokesman said.

One satisfied client who recently finished working with BearingPoint on a large project said he would consider hiring the services provider again. "We were very happy with them," said Carl Whitman, American University's executive director of e-operations.

BearingPoint didn't return calls seeking comment for this story.