When Hawaiian Telcom switched its customer billing system from one operated by previous owner Verizon Communications Inc. to one it ran itself, it did so knowing that it would save millions of dollars.

After the switch on April 1, Hawaiian Telcom's customer service developed so many problems that its chief executive officer issued a public apology the following month and said in November the problems will not be resolved until sometime next year.

In a recent company filing, Hawaiian Telcom said Verizon was set to increase the monthly cost of its system support to $20 million in April from $10 million in March. The disclosure raises the issue of whether the company made the switch before it was ready, resulting in problems for thousands of customers.

Hawaiian Telcom said its decision to switch to an in-house system was based on tests that indicated the new system would work. The doubling of Verizon's fee after April 1 may have been relevant but was not a deciding factor in the move, said Joel Matsunaga, Hawaiian Telcom's vice president of external affairs.

"We were focused on the conversion," Matsunaga said. "The things that drove the decision on whether to convert the system or not were all centered around where the system development stood and where the testing was at that time."

At the time of the switchover, those systems were behind in development and not yet fully functional, according to Hawaiian Telcom.

However, the company had put in place contingency plans to address known and unexpected problems that could occur following the switchover, Matsu-naga said.

Although Hawaiian Telcom's phone network remains reliable, thousands of customers have received inaccurate bills — some repeatedly — since the switchover. Customers have had to endure long waits for customer service — with some on hold for more than 20 minutes just after the change.

Hawaiian Telcom's decision to convert to its own "back office" systems is among the subjects of an ongoing state Public Utilities Commission investigation into the company's deteriorated level of customer service. That probe could include questions about whether financial considerations factored into the company's decision to proceed with the April 1 conversion.

Hawaiian Telcom acknowledged that running its own back-office systems cost less than the $20 million per month Verizon would charge. However, the company did not say just how much money it saves. Glitches were expected when Hawaiian Telcom took over; however, the scale of problems has exceeded expectations.

Hawaiian Telcom's customer-service problems have hurt its reputation, something it can ill afford in a highly competitive market as it works to build its business by offering new services such as Internet-based television.

Despite devoting considerable resources to resolve its problems, Hawaiian Telcom said last month that it could be several quarters before its information technology systems are functioning as intended.

For some consumers, that's not soon enough.

"I'm thoroughly disappointed," said Kalihi resident Feto Kolio, who complained that Hawaiian Telcom overbilled him for his telephone service.

"What a downfall. The people that took it over — what were they thinking?"

CARLYLE TAKES OVER

The Carlyle Group created Hawaiian Telcom after paying $1.6 billion for Verizon Hawaii's statewide telephone operation. Following the purchase, Carlyle planned to move all human resource, finance, marketing, information technology and other Mainland-based jobs to Hawai'i.

Hawaiian Telcom spent $100 million to bring Verizon's back-office operations to Hawai'i and integrate its systems to speed up customer service. The switch to a locally run telephone company was supposed to improve service, produce new products and bring a net increase of about 150 jobs to the state.

Despite more than a year of planning and preparation, the transition from Verizon to Hawaiian Telcom has been fraught with difficulty.

Hawaiian Telcom was originally scheduled to switch away from Verizon to its own systems on Feb. 1. After a two-month delay, the company said it put in place contingency plans to cover gaps in its new systems and went ahead with the switchover on April 1.

In addition to customer service and billing issues, Hawaiian Telcom has had difficulty collecting and processing information needed to report financial data, resulting in collection delays, billing adjustments and an increase in reserves for doubtful accounts.

As of Sept. 30, Hawaiian Telcom had an allowance of nearly $29 million for doubtful accounts, which was up from about $10 million on Dec. 30.

Hawaiian Telcom also has shelled out $11 million in overtime and other costs because its information technology systems aren't yet up to par.

"In addition to the significant expenses we have incurred, because we do not have fully functional back-office and IT systems, we have been unable to fully implement our business strategy and effectively compete in the marketplace," Hawaiian Telcom said in a filing with the Securities & Exchange Commission. "For example, we are still working on ensuring our back-office systems can support all forms of service bundles."

Service bundles combine several products — such as wireless phones and land line phones — on one bill for a discounted price.

The lack of fully functional systems was one of several factors in the company's decision to delay the launch of a new TV service over phone lines that would compete with cable television.

As of Sept. 30, Hawaiian Telcom had 615,300 lines, down 5.5 percent from the year-earlier period. The decline is partially blamed on the company's customer service problems.

At least one Hawaiian Telcom business customer is not surprised by the phone company's woes. Even before the sale to The Carlyle Group, Honolulu-based communications company Pacific LightNet warned that Hawaiian Telcom's plans to build an entirely new back-office system in Hawai'i had underestimated the time and cost involved.

"All I was trying to do was make people aware," said Pat Bustamante, president for Pacific LightNet. "I was hoping that by raising these issues a better job would have been done."

Despite such concerns, the state PUC approved the sale to The Carlyle Group in March 2005 with certain conditions. Among them was a mandatory investigation by the PUC into customer service six months after the separation from Verizon Communications. The probe started in October and could take a year to conclude. In addition to costing the company customers, the slow response times could result in penalties or fines levied by state regulators.

Reach Sean Hao at shao@honoluluadvertiser.com.