Sprint Merger Issues
Special Report February 21, 2008, 5:00PM EST text size: TT
Sprint's Wake-Up Call
Reversing a miserable service reputation after the Nextel merger will be key to the company's turnaround
by Spencer E. Ante
When Daniel R. Hesse was named chief executive of Sprint Nextel in December, he figured that customer service was going to be one of his biggest challenges, given how poorly the wireless service provider had performed on that count in recent years. He quickly found out precisely how big. The lanky 54-year-old walked into his first operations meeting at Sprint headquarters in Overland Park, Kan., and found that customer service wasn't on the agenda at all. He changed course right away. Customer service is now the first item discussed at every one of the weekly meetings. "We weren't talking about the customer when I first joined," says Hesse. "Now this is the No. 1 priority of the company."
With good reason. Since Sprint and Nextel merged three years ago, the deal has turned into something of a fiasco, with the company's stock down 66% since the agreement was struck. Poor service is a central reason. After the merger, unhappy customers defected in droves, and profits evaporated. On Jan. 31, Sprint Nextel (S) said it would take merger-related charges of as much as $31 billion, wiping out nearly all of the deal's value. In addition, two lawsuits have been filed against the company for allegedly extending customers' service contracts without their consent.
Employees like Paula Pryor saw the merger's impact firsthand. The 38-year-old, who worked in a call center in Temple, Tex., says the numbers-driven management approach implemented after the combination led to poor morale and deteriorating customer service. Even bathroom trips were monitored. "They would micromanage us like children," says Pryor, who was fired last year after taking time off when her father died.
The toll on Sprint's reputation has been dear. The company has ranked last among the country's five major wireless carriers in customer service every year since the merger in 2005, according to annual surveys by J.D. Power & Associates (MHP).
Now, two months into his job, industry veteran Hesse is disclosing for the first time detailed plans for turning around customer service. He's increasing investments in customer care, adding service technicians in retail stores, and reversing many management practices in customer call centers. Hesse is convinced that restoring Sprint's reputation with customers is the key to its future. "You will see progress," he says. "We have the right people in place. We will get it done."
For the combined Sprint Nextel to be criticized for quality issues is a remarkable reversal. During the 1980s and '90s, when Sprint was the nation's third-largest long-distance company, it distinguished itself by advertising a fiber-optic network so high-quality you could "hear a pin drop." Nextel was known for its "push-to-talk" technology and the best rate of customer retention in the industry.
When the two unveiled plans to merge in December, 2004, there was a certain logic to the deal. Separately, they were much smaller than AT&T (T) and Verizon Wireless, but together they would nearly rival the two wireless leaders in size. The theory was that, combined, they would have the bulk to get the latest phones, best prices on equipment, and most complete network for wireless customers. "The combination of Sprint and Nextel builds strength on strength," Gary D. Forsee, CEO of Sprint and later the combined companies, said then.
But as the two formally combined in August, 2005, it became clear this deal would be even more complex than the typical megamerger. At the same time Forsee and Executive Chairman Timothy M. Donahue were piecing the two companies together, they laid out an aggressive strategy for the combined entity to become a leader in wireless broadband services and content. That led to plans to spin off Sprint's local telephone business, form partnerships with the cable industry, and develop a wireless technology known as WiMAX. "There was so much going on after the merger that there was a lack of focus," says one former senior-level insider.
In September, 2005, the month after the merger closed, Forsee told Wall Street that the deal was going more smoothly than expected. He raised the projection for expected "synergies," or cost savings, to $14.5 billion, up from the original $12 billion estimate at the time of the merger announcement.
That boosted pressures to find cost savings throughout the company, say former employees and executives. An important component of the effort was importing the quantitative management approach of Sprint to Nextel. While some of the new metrics worked well, others had detrimental effects, former employees and executives say. In particular, call centers began to be measured and viewed primarily as cost centers, rather than opportunities for strategic advantage. Customer service ended up a secondary priority, say former executives. Forsee, now the president of the University of Missouri, declined to comment for this story.
In the fall of 2005, as board members gathered for their first meetings as a combined company, the directors from Nextel noticed another key change, according to the former senior-level insider. Before the merger, Nextel directors talked at every board meeting about "churn," the industry term for the percentage of existing customers who leave each month. The directors felt churn was a good shorthand way to understand the quality of customer service, and they prided themselves on Nextel having the lowest in the industry. But after the merger closed, the combined board paid little attention to churn, concentrating instead on the progress with synergies and strategic initiatives. "From the very beginning there was a philosophical difference on churn," says the former insider.
In the trenches, meanwhile, workers were dealing with fallout from the merger. Pryor remembers the conditions in her Texas call center, originally a Nextel facility, shifting dramatically in the first months after the merger closed in late 2005. Managers began tracking what she was doing on her computer. Overtime pay became much harder to get. Most puzzling for her was the pressure to keep customer calls short. At Nextel, she was judged only on the number of customer problems she solved each month, however long they took, and she would occasionally spend 30 minutes to resolve a thorny issue. But after the merger, speed was the priority, she says. "They would say, Your calls need to be shortened,'" she says.
`LIKE NOAH'S ARK'
Other employees say they felt similar pressure. Gayle R. Romero, who worked in Sprint Nextel call centers for six years, says that at one team meeting after the merger, a manager said, "if you don't think you can handle this, I hear McDonald's is hiring." Says Romero: "Everyone was scared."
Customer service issues began to surface later that year. In January, 2006, Sprint unveiled plans to merge the two billing and customer care systems from the combined companies. But employees say there was little evidence of any progress in the following months. Service reps had to toggle back and forth between systems, and at times couldn't get access to billing or technical information for customers. "It was like Noah's Ark," says one former insider. "We had two of everything."
Churn rose quickly, hitting 2.4% in the third quarter of 2006. That was the highest among the country's major carriers and far above the 1.4% rate Nextel reported before the merger. At the same time, Sprint reported softer-than-expected earnings, punishing its stock.
As Sprint came under financial pressure in 2006, it began to ask call-center workers to engage more in sales. Whereas Nextel service reps had no sales quotas, workers at the combined companies were required to hit targets for renewing contracts or retaining customers who wanted to cancel accounts. One call-center employee says she was supposed to renew 600 to 900 contracts per month, and sometimes the target exceeded 1,000. In the customer retention unit, workers were given cash bonuses of $2,000 to $3,000 per month if they met monthly quotas. "They wanted those big bonuses," says Romero.
Allegations in the two lawsuits against Sprint raise questions about how far Sprint workers went in meeting those sales quotas. Selena L. Hayslett, a realtor from Apple Valley, Minn., says she called Sprint Nextel four times in late 2006 to dispute charges on her bill. Then she realized that each time she called, Sprint was extending her contract, without her consent, according to an affidavit filed in one of the suits. "I felt tricked," said Hayslett.
Her complaint is included in a lawsuit filed by the Minnesota attorney general, alleging that Sprint extended contracts when customers made small changes to their service. "It's kind of like the Hotel California," says Lori Swanson, the attorney general, "where you can check in and never leave." Sprint declined to comment in detail on the lawsuit. However, a spokesman says there are "discrepancies between our rec-ords and the lawsuit's portrayal of customer interactions."
Paula Appleby, a plaintiff in the other lawsuit, claims she tried to cancel her Sprint contract a number of times. But "each time she has attempted to cancel her service she has been told that her contract had been previously extended," according to the complaint, a federal lawsuit filed earlier this month seeking class action status. Sprint said it is still reviewing the Appleby lawsuit and declined to comment on specific claims.
In early 2007, as its financials deteriorated, Sprint cracked down on the freebies that call-center workers could give to keep customers happy, say current and former employees. One current manager in customer retention says that in the first half of 2007, Sprint cut back on virtually all the free minutes, service credits, and free phones that his workers used to be able to dole out. "One hundred minutes is it," says the manager, who asked for anonymity because he does not have authorization to speak to the press.
The new policies hurt Sprint's ability to build its customer base. In the third quarter of 2007, churn stayed high, and Sprint saw its subscriber numbers remain flat, at 54 million, while rivals AT&T and Verizon added millions. In October, Forsee stepped down as CEO under board pressure. Today, Hesse is reversing course on several fronts, hoping to salvage what he can from the troubled merger. He and his lieutenants aren't eliminating the quantitative approach entirely, but they're changing many of the old metrics to now emphasize service over efficiency.
Bob Johnson, Sprint's new chief service officer, has eliminated limits on the amount of time service reps spend on the phone with customers. Instead, he'll track how frequently reps resolve customers' problems on the first call. Employees who don't solve a minimum percentage on the first call won't be eligible for sales bonuses. He'll also track how quickly customer calls are answered, to ensure they're getting prompt attention. "My incentives and policies are all driven around improving the experience," says Johnson. He says the long-delayed combined billing system will be done by May.
Hesse is also returning to the Nextel philosophy in a number of areas. Churn, for example, is once again a top priority, discussed at every operations meeting. The figure remained stubbornly high, at 2.3% in the fourth quarter of 2007.
As for the allegations in the two lawsuits, Johnson says Sprint has implemented a zero tolerance policy for shoddy customer service, which includes a new focus on extending contracts only with detailed approvals from customers. Among other things, Sprint sends a letter to customers outlining any changes to their account, and customers have 30 days to cancel the changes.
Hesse knows he has a long, hard road ahead of him. Still, he's convinced Sprint is at last moving in the right direction. "We're beginning to improve customer service already," he says. "There will be a lag between when it improves and when the world knows that Sprint's customer service has improved. There's always a perception lag."