By Louis Lavelle Warning signs showed up when KPMG Consulting went public four years ago. Its bread-and-butter business -- the integration of big-company computer systems -- was showing signs of a slowdown. But for the company now known as BearingPoint (BE), it wasn't the worst of times, either. In the post-9/11 world, CEO Randolph C. Blazer had managed to build a large and growing business providing technology services for government agencies.
Alas, that government business continues to be one of BearingPoint's few bright spots -- and on Nov. 10, Blazer paid the price. Amid signs of growing board dissatisfaction with his performance, he resigned without explanation, handing the reins temporarily to board member Roderick C. McGeary, 53, while the board seeks a permanent successor.
Repeated efforts to reach Blazer to comment for this story were unsuccessful. McGeary, in a statement, credited Blazer with leading the BearingPoint through a period of growth, referring to its $1 billion purchase of European consultancies in fiscal 2003.
FALLING MARGINS. Why such impatience with Blazer? As the consulting industry crawled through a two-year downturn, BearingPoint has been unable to cut costs or raise prices. High taxes and expensive subcontractors have kept costs up, while increased competition from offshore technology services companies such as Infosys Technologies (INFY) and Tata Consultancy Services has diminished its pricing power.
Result: Operating margins are now hovering at 4.5%, down from a previous five-year average of 7.4%. BearingPoint's stock was off about 11% for the year before Blazer called it quits, a drop steeper than the 4% decrease for the Russell 1000 Technology Index as whole.
After the news broke of his departure, BearingPoint stock jumped 9% on Nov. 11, to close at $9.81. Indeed, the announcement came as a bit of a surprise. Last week, the company reported third-quarter profits of $11.9 million on revenues of $840.9 million, below analyst estimates. But revenues were up 13% year-over-year. BearingPoint said fourth-quarter net income would be 9 cents to 11 cents per share on sales of $850 million to $870 million, guidance it reiterated on Nov. 10.
CENTER OF A STORM. That continued earnings strength is due in large part to BearingPoint's growing public-sector business, which now accounts for 40% of revenues and 55% of gross profit. While revenues from federal, state, and local government agencies declined 8% in the third quarter -- due in large part to the temporary suspension of its work promoting economic reform in post-war Iraq -- analysts say the sector represents one of the few consistently bright spots among BearingPoint's eight lines of business.
But the sector is now at the center of a storm in Florida that some analysts worry may eventually scare away new government clients.
In one case, BearingPoint won a contract to install a new computer system for the U.S. Veterans Affairs Dept. The agency's inspector general says the contract, which allowed BearingPoint to rack up $116 million in costs without competitive bidding, was "tantamount to issuing BearingPoint a blank check." Even BearingPoint acknowledged that the system never worked properly -- mainly because of faulty data in existing VA computer systems -- and was later scrapped. Following calls on Capitol Hill for a probe, the Justice Dept. announced publicly that it would conduct an investigation, and BearingPoint says it's cooperating fully.
TAINTED GIFTS? In a second case, BearingPoint hired a state official who had previously awarded it a $126 million contract to run a state data center. That contract also was scrapped, after the state's auditor general said the bidding process was unfair. The Florida Law Enforcement Dept. is looking into communications BearingPoint had with the official before the contract was awarded.
BearingPoint denies any wrongdoing in both cases. It says it never offered the official a job while she was employed by the state, and she has no role in overseeing the Florida contract in her new position at BearingPoint.
There have been additional controversies, although they aren't subject to any criminal probes. Earlier this year, a whistleblower at Florida's Children & Families Dept. accused a BearingPoint lobbyist of providing the department's head with gifts at a time when the company was considering seeking agency business. The Florida official resigned in August amid the controversy. BearingPoint says the lobbyist wasn't retained to pursue the contract and no longer works for it.
WINNING A WHOPPER. And the inspector general for the U.S. Agency for International Development says BearingPoint helped write bid specifications for a $240 million Iraq contract it later won. BearingPoint says it won the Iraq business on its merits.
With such questions swirling, landing new government contracts might seem to be a challenge. But on Sept. 20, BearingPoint reeled in a whopper: a $229 million deal to integrate the back-office operations of the federal agencies that now make up the Homeland Security Dept.
This new contract has ignited controversy anew on Capitol Hill. U.S. Senator Bob Graham (D-Fla.) has asked the watchdog arm of Congress, the Government Accountability Office, to investigate. And fellow Sunshine State Democratic Senator Bill Nelson has written to Homeland Security Secretary Tom Ridge, asking for an explanation how his agency would avoid a repeat of the Veterans Affairs problems.
"VERY STRONG." A Homeland Security spokesman says the agency was aware of the probe into BearingPoint's contract with the VA but is satisfied that its new contract has adequate safeguards. BearingPoint concurs. Says Richard J. Roberts, the BearingPoint exec who runs the public-sector business now under fire: "Our reputation is very strong." But he allows: "In the kind of business we're in, we can not afford for this to happen."
The big question now is whether BearingPoint can make its reputation stronger under new leadership. Lavelle is BusinessWeek's management editor in New York