The business media terms it a corporate restructuring, but that word fails to capture the finesse with which the nation’s fourth largest internet service provider (ISP) has transformed its customer-service operations in the past two years. The numbers and accolades don’t lie, however. Earthlink management shaved tens of millions of dollars in operating expenses to boost its competitiveness and investor appeal, while maintaining or improving the quality of its customer service.

By the end of 2002, it was obvious that Earthlink, which had built a strong revenue stream among dial-up or narrowband customers, had arrived late to the broadband party. The first round of layoffs in January 2003 impacted 1,300 customer-service workers in Washington, California, and Texas. The cutbacks might have been forgotten by offshoring opponents if not for the board’s next two steps—beginning with its decision to reward its chief executive with a 76% increase in his annual bonus that year, from $196,000 in 2002 up to $346,790 in 2003. Then in January 2004, when the acrimonious U.S. Presidential race was heating up, the offshoring opponents received new fodder: Earthlink announced its second round of layoffs, eliminating another 1,300 jobs, primarily call-center workers in California and Pennsylvania. The company, which had at one point employed 5,100 workers, was scaled back to around 2,000.

But Earthlink’s ambitious outsourcing plans worked well. Company officials say the firm has saved $100 million in the two years since it outsourced customer-service and support operations. Did the savings come at the expense of quality customer service? On the contrary, Earthlink became the recipient of the 2004 J.D. Power and Associates highest ranking for customer satisfaction among ISPs.

Scott H. Kessler, Internet Equity Analyst at Standard & Poor’s, says that to management’s credit the company’s subscriber churn rate has been unaffected by the outsourcing. “Netzero [a United Online company] is trying to undercut them, so Earthlink’s trying to differentiate [itself] by providing award-winning service and some add-ons that people like, such as Spamblocker [software].” Kessler respects management’s cost-cutting acumen, but expresses concerns about revenue growth.

Yet on February 8, an ebullient Garry Betty, Earthlink’s CEO, greeted the Wall Street investment community with news of the ISP’s strong fourth-quarter growth. Betty reported that the company grew its broadband subscriber base by 300,000 last year—taking its overall base to 1.4 million customers, up 29% on a year-over-year basis. The company still has 3.9 million narrowband (dial-up) subscribers, though that’s a shrinking line of business.

After a few bumpy years, the $1.4 billion company is turning a profit. But Earthlink executives know it can slip away easily. The sheer ease with which customers can switch ISPs drives nearly every business decision made by Earthlink. And this is what makes customer service so strategic for the firm: It is far more cost-effective to retain a customer—or upsell him or her to broadband—than it is to find a new one.

The Secret Sauce

The secret of Earthlink’s success is deceptively simple: fostering competition among its service providers to achieve continuous improvement. “We believe that friendly competition certainly yields better results and raises the bar for all parties involved,” says Scott Wise, VP of partner performance and resource planning. “When developing a relationship with our [potential] partners, we tell them our philosophy and select ones that are OK with that.”

What began in 2003 with a small customer-service engagement with ClientLogic expanded by the end of 2004 to a total of six providers, including Knoah, Sitel, Mphasis, People Support, and West. The work is delivered both onshore and offshore. Earthlink has an interactive-voice response (IVR) system that it uses to “triage” customer calls and then it routes traffic overseas via VoIP to different call centers.

As you might imagine, the providers that perform the best over time pick up the most minutes and, in this case, it’s not a hollow cliche: Time is money.

“What makes Earthlink unique, and what makes their approach effective, is they’re very open about how a vendor does relative to the others,” says Ralph Barletta, Founder and VP of Operations at Knoah. “Your rank is out there on a weekly basis. There is a constant jockeying for position and an effort to stay on top, and that ultimately leads to the best result.”

Each provider receives a Call Center of the Month plaque that has 12 spots for brass plates. When a provider scores highest in a particular month, it receives a plate with, say, March 2005 inscribed, and it holds a party to celebrate the victory. “So, for that month they get to celebrate the performance,” says Wise. “They don’t like to let it go.” Having won and lost these monthly competitions, Barletta likens the award to playing “king of the hill. Everybody’s on the hill, but only one person is on top of the hill at any point in time.”