MAXIMUS, Inc.

views updated

MAXIMUS, Inc.

11419 Sunset Hills Rd.
Reston, Virginia 20190
U.S.A.
Telephone: (703) 251-8500
Fax: (703) 251-8240
Web site:http://www.maxinc.com

Public Company
Incorporated: 1975
Employees: 4,200
Sales: $399.16 million (2000)
Stock Exchanges: New York
Ticker Symbol: MMS
NAIC: 541611 Administrative Management and General Management Consulting Services

MAXIMUS, Inc. is one of the leading private sector companies that provides program management, information technology, and consulting services to state and local government agencies. Located in Reston, Virginia, MAXIMUS has projects in nearly every state, as well as a number of foreign countries. The company’s operations are divided into three groups. The Government Operations Group has grown out of the work that MAXIMUS has chiefly focused on since its founding in 1975: running welfare-to-work projects, managed care enrollment, and other government health and human services programs. The company’s Government Consulting Group provides support to government agencies in such areas as information technology, program evaluation, and financial management. The Government Systems Group offers proprietary software and advanced computer systems solutions to public agencies. Since welfare reform legislation passed in 1996, MAXIMUS has dramatically increased its revenues, but not without generating a good deal of controversy. The company received unwanted publicity in Los Angeles, Milwaukee, and especially in New York City, providing ready ammunition for critics who not only question how MAXIMUS does business but attack the very principles that the company espouses.

Turning to the Private Sector: Government in the 1960s

The concept of a private company supporting a government agency was pioneered by Ross Perot and his Electronic Data Systems Corporation (EDS), which was originally created to take over the data processing operations of private businesses. When Congress passed Medicare legislation in 1965, resulting in an enormous amount of paperwork that needed to be processed, the concept was applied to the federal government. Medicare and Medicaid processing proved so lucrative for EDS that within three years it accounted for nearly 25 percent of the company’s revenues. By 1977 that amount grew to nearly 40 percent. As a result, Perot would become immensely wealthy and famous enough to twice run for the presidency of the United States.

The founder of MAXIMUS, David V. Mastran, earned an undergraduate degree from West Point in 1965, followed a year later by a master’s degree in industrial engineering from Stanford University. He then spent seven years in the air force, including a one-year tour in Vietnam, before returning to school to earn a doctorate in operations research from George Washington University in 1973. He briefly worked at the Pentagon as an air force researcher, then transferred his skills to the old federal Department of Health, Education, and Welfare. He managed contracts and grants and essentially tried to impose discipline on social welfare programs. According to a. Business Week profile, Mastran was unable to find a private company that understood welfare programs well enough to help the government instill efficiency, and so he decided to quit his position and start a business to fill that need. He told the Washington Post, “I decided I couldn’t fix this from the inside.” In 1975, following a short stint working for the consulting firm of Arthur Young, Mastran founded MAXIMUS with $12,000 and began working alone out of his home. He chose the MAXIMUS name as a reflection of the company’s mission: to maximize government efficiency.

The first work for MAXIMUS was a $3,000 contract to assist in the processing of military health-care claims, followed by a $15,000 job in New Hampshire to create statistical profiles of fraudulent Medicaid recipients, but MAXIMUS soon had difficulty with one of its early contracts. Hired by the federal Office of Child Support Enforcement to increase payments by deadbeat parents, MAXIMUS developed a system that would target people with high incomes. The agency, however, maintained that the law did not allow for such selectivity and opted not to renew the contract.

Generally MAXIMUS maintained a low profile as it began to collect bigger fees and add employees to handle its mounting workload. In 1984 the company received an important contract from New York City, when it was hired to help reduce welfare fraud. Appalled by the condition of the welfare centers he visited, Mastran began a motivational campaign to improve the morale of welfare workers, awarding cake and trophies to those who were successful at reducing fraud. He said that the experience confirmed his view that a private company was better suited to motivate employees than the government. “Government workers are not paid on the basis of performance,” he was quoted as saying. “I can reward performance; government can’t do that.”

In 1988 MAXIMUS signed a major five-year, $49 million contract with Los Angeles County to run its portion of a state welfare-to-work program called GAIN (Greater Avenues for Independence), the first attempt to privatize a welfare system. Rather than just serving in a support capacity, MAXIMUS was essentially replacing government. The company determined whether someone was eligible for welfare, prompting a lawsuit by the Service Employees International Union that contended that only civil service employees had the legal right to make such decisions. Social critics also questioned the inherent conflict of a for-profit company engaged in public work: Would MAXIMUS focus its efforts on the clients that could be more easily placed in jobs, thus padding its success rate at the expense of the people who needed their help the most?

Supporters of MAXIMUS could, at the very least, point to the improved conditions of the welfare environment. Welfare clients, called “participants” by MAXIMUS, found softly lit, carpeted, and nicely decorated waiting rooms where they were offered cookies and coffee. Rather than waiting for hours and being subjected to the indifference of receptionists and case workers, they were quickly escorted to private rooms where they could talk to interviewers and watch videos. Moreover, the case managers, handling much less of a workload than their county counterparts, were given an incentive to help clients find work. They received $100 of a $150 bonus paid to MAXIMUS for every client that remained in a job for six months or worked enough to reduce an Aid to Families with Dependent Children (AFDC) grant by at least 50 percent. It was this conflicting view of MAXIMUS, as either innovative savior or calculating opportunist, that would repeatedly surface in the coming years.

By 1990 MAXIMUS was generating $19 million in annual revenues. With state and local governments cutting budgets and increasingly turning to the private sector for help, the company, working in just four states, appeared poised to experience substantial growth. It touted how much money it saved the government, and boasted of its superior computer systems and flexible staff that operated without the hindrance of bureaucratic red tape. Although critics challenged the accuracy of the savings, citing the lack of independent verification, no one could question that MAXIMUS and other private sector companies were now becoming established players.

MAXIMUS experienced a number of problems, however. In 1993 data entry errors in Arizona resulted in the state refunding $250,000 in child support payments. In 1994 Mississippi froze a contract with MAXIMUS when costs actually doubled after the company took over child support collection. Also in 1994 MAXIMUS had problems in West Virginia after it hired a consultant who was a supervisor of a project on which it was bidding. The company claimed that it had been misled by the employee. Although MAXIMUS was never charged with wrongdoing, it decided to withdraw its bid. These problems notwithstanding, MAXIMUS continued to grow. It exceeded $50 million in revenues in 1995, then almost doubled that amount in one year, generating $103.1 million in 1996.

1996 Welfare Reform Legislation Spurs Growth

A watershed moment for MAXIMUS and other private sector program management companies came in August 1996 when President Clinton signed into law the Personal Responsibility and Work Opportunity Act. This welfare reform legislation essentially rewrote the rules. AFDC money was now allocated to states in block grants, and requirements that state or local government agencies be involved in running the program were eliminated. Privatization of welfare-to-work programs funded by federal money was now given a free reign. Wisconsin wasted little time in awarding its business to private contractors. For a number of years its governor, Tommy Thompson, had been granted federal waivers to institute experimental welfare reform programs. Since 1987 when he took office, Thompson claimed that Wisconsin had reduced the number of people on welfare more than the other 49 states combined. In April 1996 he signed a law that would require all able-bodied parents to work in exchange for AFDC money. The program, called Wisconsin Works, or W-2, was put on hold pending federal welfare reform legislation, but as soon as President Clinton signed the bill, the state was quick to act. In September 1996, W-2 went into effect, limiting aid to welfare recipients to two consecutive years or a lifetime total of five years, with the goal of completely eliminating welfare within several years. A year later, MAXIMUS and four nonprofit companies would divide Milwaukee’s 24,000 welfare clients.

Company Perspectives:

This company and our success are measured by how we make individual lives better. Time and again, MAXIMUS has continued to deliver on the promise of our mission. Looking ahead, our commitment is just as strong.

In 1997 Mastran decided to take MAXIMUS public, prompted, he said, by an offer of more than $100 million from “a major blue-chip company.” The $84 million offering, with an initial price of $16 per share, netted Mastran almost $25 million and other executives of the company an additional $20 million. MAXIMUS used the remaining money to fund expansion, making a number of acquisitions in 1998. The company purchased San Antonio-based Spectrum Consulting Group for approximately $19.3 million. Spectrum provided information technology services. MAXIMUS then acquired David M. Griffith & Associates (DMG) of Northbrook, Illinois, for approximately $31.5 million. DMG also did consulting work for government agencies, focusing on executive recruiting and human resources planning. The next MAXIMUS acquisition was a $32 million stock swap for Carrera Consulting Group of Sacramento, California, a software provider for government agencies.

Also in 1998, MAXIMUS purchased Phoenix Planning and Evaluation Ltd. out of Rockville, Maryland, for stock worth around $7 million. Phoenix specialized in smart cards and electronic benefits transfer systems that were becoming a popular way for government agencies to distribute payments to clients. Overall, MAXIMUS was filling out its business so that it could offer a full range of services to its government customers. To solidify its cash position and fuel further acquisitions, MAXIMUS made a secondary offering of stock in 1998, selling 4.2 million shares and raising more than $136 million.

Although MAXIMUS was well received by investors, the company came under fire from other circles. In 1997 the company received a $12.4 million contract to manage Connecticut’s child-care services for women enrolled in a welfare-to-work program, but quickly experienced problems. After only three months the company was a month late in processing most of the clients’ checks to pay for child care, and many welfare recipients had trouble receiving approval for benefits. MAXIMUS upgraded its computer and phone systems and added staff to fix the problems, but when it determined that it would lose $500,000 a month on the contract, the company threatened to terminate the program unless it received more money. The state agreed to increase the contract by an additional $6 million. MAXIMUS maintained that the state had not fully explained the magnitude of the project, but critics contended otherwise. A spokesperson for the Connecticut State Employees Association put it bluntly: “In terms of service here, they’ve been abysmal. They underbid, over-promised and they didn’t deliver.” The company’s fiercest opponents, state employee unions and welfare advocates, would soon have even more of an opportunity to criticize MAXIMUS.

In Milwaukee, MAXIMUS was hit with a number of Equal Employment Opportunity Commission (EEOC) complaints from former employees who claimed they were passed over for promotions because of race and gender during a restructuring of the company in early 1999. MAXIMUS vigorously denied the charges, which at the very least were a public relations headache, especially since the company was expanding its welfare reform model to Arizona, California, Delaware, and Maryland, as well as being eager to tap into the biggest prize of all, New York City and its pool of 600,000 welfare recipients.

Perhaps even more troubling for the company’s reputation to come out of the EEOC complaints was the revelation that its subsidiary MaxStaff Employment Services received the first chance to hire the most qualified job seekers in the W-2 program. Aside from its usual critics, MAXIMUS now had Milwaukee staffing firms denouncing its practices. Former MAXIMUS employees in their EEOC complaints said that the company tested and screened W-2 participants, and those deemed employable—with skills, education, and no criminal record—were set aside for MaxStaff, who would then put them in temp-to-hire positions. Furthermore, the former employees maintained that in some cases MAXIMUS paid MaxStaff to place people. MAXIMUS denied that any money changed hands between MAXIMUS and MaxStaff and characterized the former employees as “angry with us because they were unable to meet our performance goals.”

Under Fire in New York in 2000

The company’s Milwaukee operation led to even more bad press in New York City in 2000 when the city comptroller, Alan Hevesi, questioned a $104 million welfare-to-work contract, renewable for an additional $104 million, that MAXIMUS had been awarded without going through the formal bidding process. Because New York City Mayor Rudolph Giuliani championed the contracts and was running for the U.S. Senate, a situation further complicated by Hevesi’s own apparent ambition to seek the mayoralty, MAXIMUS suddenly found itself in the middle of a political imbroglio and under the microscope of the national media. What the press revealed about MAXIMUS, on almost a daily basis, was nothing less than a public relations nightmare.

From the outset it was clear that MAXIMUS, unlike companies that would be invited to bid on the welfare-to-work project, had several months’ advance notice. The city’s welfare commissioner, Jason A. Turner, had been the architect of Wisconsin’s welfare reform and had personal ties to MAXIMUS. A friend of Turner, Tony Kearney, was paid by MAXIMUS but served as a consultant to the city, and was assigned an office on the same floor as Turner. In this role Kearney was able to sit in on meetings with MAXIMUS competitors who were also bidding on welfare-to-work contracts.

To add to the Wisconsin–New York connections, it was revealed that Turner’s wife met with the head of the MAXIMUS Wisconsin office, leading to a consulting job for her father. It also became apparent that one of the subcontractors for MAXIMUS named in its proposed contract with New York, who was to receive between 20 and 30 percent of revenues, was run by Richard Schwartz, a former top aide and campaign manager for Giuliani, who had pledged not to accept any consulting contracts with the city. Furthermore, according to Hevesi, MAXIMUS asked to be paid $4,620 for each person placed in a job, but the city bumped the amount to $5,000 per person.

Key Dates:

1975:: Company is founded.
1984:: Contract is signed to help reduce welfare fraud in New York City.
1988:: Contract is signed to run state welfare-to-work program in Los Angeles County.
1996:: Personal Responsibility and Work Opportunity Act is signed by President Bill Clinton.
1997:: Company completes initial public offering of stock.

MAXIMUS faced additional problems in Wisconsin, which ordered an independent audit of the company after management admitted that four of its employees, including Kearney, had billed the state for work done elsewhere. The accounting firm hired by the Department of Workforce Development, however, had worked for MAXIMUS from 1997 through 1999, prompting more criticism. Revelations from the state Legislative Audit Bureau were damaging enough to result in Wisconsin withholding or recovering $7.6 million in payments to MAXIMUS. The audit revealed that the company mistakenly billed Wisconsin $51,000 in wages for employees seeking new contracts in other states; spent $196,000 on advertising that instead of explaining the W-2 program to welfare recipients appeared to simply promote MAXIMUS; billed the state $15,741 for a staff party at an expensive resort; paid singer-actress Melba Moore $23,000 to entertain clients and staff; and charged the state for $23,637 for promotional items such as fanny packs and golf balls.

MAXIMUS admitted to some mistakes in judgment but denied any intentional wrongdoing. Eventually the company received its New York contract, albeit drastically cut in size. Nevertheless, it remained a target for critics and politicians, who portrayed MAXIMUS as a company willing to hire local power brokers in order to gain business. As it sought a new contract in Los Angeles, for instance, MAXIMUS hired the former manager in the Los Angeles County welfare office to be its local contract manager. Criticism of its business practices was then used to bolster the arguments of social critics who maintained that the entire privatization of welfare was misguided. No doubt, large numbers of people were removed from the welfare rolls, but was poverty itself being addressed? Or would welfare-to-work simply create a new class of indentured servants? Would children forced into substandard day care facilities, while their mothers now worked at the lowest paying jobs, remain an expense to society for years to come? And finally, were we simply exchanging poor people and corporations as the recipients of the government dole?

Of course MAXIMUS was involved in more areas than just welfare-to-work programs. It continued to expand its services with more than a dozen acquisitions in 1999 and 2000. The company maintained that its goal could be simply expressed in its trademarked slogan: “Helping Government Serve the People.” While serving that mission the company was also rewarding its shareholders. In 1998 revenues grew to $233.5 million, then in 1999 to $319.5 million, and in 2000 to $399.2 million with a net profit of $30.5 million. There appeared no reason to believe that those numbers would not continue to grow in the years to come.

Principal Subsidiaries

CCI-MAXIMUS, Inc.; CSI-MAXIMUS, Inc.; DMG-MAXIMUS, Inc.; Strategic Partners International, LLC; UNISON MAXIMUS, Inc.; Valuation Resource Management, Inc.; GovPrograms.com, Inc.