Administaff, Inc.

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Administaff, Inc.

19001 Crescent Springs Drive
Kingwood, Texas 77339
U.S.A.
Telephone: (281) 358-8986
Toll Free: (800) 237-3170
Fax: (281) 358-3354
Web site: http://www.administaff.com

Public Company
Incorporated: 1986
Employees: 1,200
Sales: $4.4 billion (2001)
Stock Exchanges: New York
Ticker Symbol: ASF
NAIC: 561330 Employee Leasing Services

Administaff, Inc. is one of the top three companies in the professional employer organization (PEO) industry. A PEO contracts with a business to manage its human resources department. Administaff’s clients are primarily small and medium-sized businesses with less than 20 employees. Administaff works as co-employer with the client, managing payroll and benefits for the employees, and handling many regulatory issues such as compliance with workplace safety standards. The idea behind Administaff is that small business owners can concentrate on what they do best, while Administaff handles the sometimes burdensome complexity of employee paperwork. Employees can also benefit from the relationship with Administaff because the company takes advantage of economies of scale, offering a range of benefits often not feasible for a small company on its own. Administaff was a pioneer in the professional employer organization industry, starting in Texas in the mid-1980s and expanding to major urban centers across the United States. As of 2002 Administaff had 38 offices serving more than 20 markets, including New York City, San Francisco, Los Angeles, Chicago, Denver, Cleveland, and Atlanta. The company also runs four regional service centers. These are in Houston, Dallas, Atlanta, and Los Angeles. Administaff serves more than 4,400 client companies, and oversees some 70,000 of its clients’ employees. Administaff’s clients work in a range of industries, including banking, legal services, medical services, insurance, engineering, and light manufacturing.

Birth of an Industry

Administaff, Inc. was founded in 1986 by Paul Sarvadi and Gerald Mcintosh. Sarvadi, who remains chief executive of the company, was a charismatic salesman who made the best of his employer’s bankruptcy by starting his own business. Sarvadi had a wife and child to support by the time he was 19 and an undergraduate at Houston’s Rice University. Consequently, he went to work as an Amway salesman. He worked as a salesman for various multilevel marketing companies for ten years and then was hired at Omnistaff, a company on the cusp of a new industry.

Omnistaff, based in Dallas, was one of the first staff leasing companies. Staff leasing gradually evolved into what is known today as a professional employer organization. Staff leasing varied somewhat from what Administaff does today. Under a company such as Omnistaff, a business owner would fire all of his or her employees; they would be hired by the staff leasing company and then leased back to the original employer. The original employer now had a personnel count of zero. All paychecks and paperwork were taken care of by the staff leasing company. The staff leasing company took a fee based on a percentage of the small business’s payroll, usually from 5 to 10 percent. The key savings was in time for the small business owner, who no longer had to worry about keeping track of employee paperwork. Staff leasing also took advantage of a new law, the Tax Equity and Fiscal Responsibility Act of 1982, which allowed business owners a new way to shelter income in a tax-free pension plan. If the staff leasing company put 7.5 percent of employees’ wages into a pension plan, then the small business owner was allowed to set up a pension plan for himself or herself, and this could hold up to 25 percent of the business owner’s income.

Before the Tax Equity and Fiscal Responsibility Act took effect, there were only a handful of staff leasing firms. By 1985, there were some 275 staff leasing companies in the United States. The leading firm in this burgeoning industry was Omnistaff, which had revenues of about $60 million in 1984, employing some 10,000 workers on behalf of about 1,300 client companies. Fortune magazine called Omnistaff the “kingpin” of staff leasing, in an overview of the industry published April 1, 1985. Omnistaff was led by James Borgelt, who both bolstered the industry and later tarnished its reputation. Omnistaff declared bankruptcy in late 1985, only months after Fortune had lauded the company. Borgelt was later involved with another staff leasing company, American Workforce, Inc., which went bankrupt in 1991. Borgelt eventually was sentenced to three years in prison for stealing from clients.

Sarvadi had apparently just gone to work for Omnistaff when it started to go under. His very first client call was on Gerald Mcintosh. Mcintosh was impressed with Sarvadi’s sales pitch and had no idea that this was the young salesman’s first attempt. Mcintosh was unable to sign up for Omnistaff’s services, however, since he had just sold his company. Instead, he decided to go to work for Omnistaff also. Sarvadi and Mcintosh worked together for only a short while before they found themselves unemployed again. They started speculating on what they would do differently if they were to run their own staff leasing firm. Before long they had a detailed business plan, with Sarvadi in charge of sales, and Mcintosh in charge of other operations. Although the plan was supposed to be just a “what if,” in March 1986 the pair incorporated Administaff and went to work out of a 600-square-foot office. They had no staff and only one phone between the two of them. But they were able to pick up several Omnistaff clients. Once these clients had gotten used to staff leasing, they did not want to go back to their old way of doing business. So Administaff took them on. In the company’s first year, it had only three clients, and barely more than 30 leased employees. But the firm brought in $750,000 and quickly went up from there.

Struggle for Legitimacy in the Early 1990s

In 1987, Administaff more than quadrupled its revenue, bringing in $4.2 million. The surge the next year was even more impressive, up to $21 million. The curve continued upward as the company more than tripled its revenue the next year, and more than doubled it in 1990. One reason often cited for the sudden boom in staff leasing in the late 1980s and early 1990s was that costs for employee health plans were skyrocketing at the time. Administaff was able to offer savings to small business owners while costs were going up and up. Administaff executives also noted that the amount of paperwork for which employers were accountable rose at that time, as regulations for insurance and pensions became more detailed. These conditions helped Administaff build its business and also accounted for the rise of hundreds of other staff leasing firms. The proliferation of companies in the industry helped spread the idea of staff leasing, laying the groundwork for more and more businesses to convert to outsourcing their human resources functions. Yet Administaff’s competitors were not always upright, and problems at some staff leasing companies threatened to smear the entire industry. One boon to Administaff was the passage of the Texas Reform Act of 1986, which spelled out more precisely what a staff leasing firm was liable for. Administaff worked closely with a national trade organization, the National Staff Leasing Association, to set standards for the industry. But many staff leasing companies in Texas flouted or evaded the law. By 1991 there were more than 200 staff leasing firms operating in Texas. The Texas Employment Commission and the State Board of Insurance considered only 40 of these companies to be legitimate. Some companies did not offer their employees workers’ compensation; others were apparently taking money that was to be set aside for taxes and disappearing. The law was unclear about who was liable if a staff leasing company went bankrupt or closed its doors and an employee had an unpaid insurance or compensation claim. In 1991 a Texas grand jury began looking into fraud charges at eight staff leasing firms, and the Federal Bureau of Investigation and the Department of Labor began investigating the bankruptcy of one of Dallas’s biggest staff leasing firms, American Workforce. The many bad apples made conditions difficult for the legitimate companies in the industry. Administaff took out two-page ads in the Wall Street Journal, defending the industry and its own reputation. Administaff also vocally supported legislation calling for a hefty annual licensing fee for staff leasing firms and a surety bond from a state-licensed insurance company.

Despite the difficulties of the infant industry, Administaff continued to grow and prosper. By 1992 the company was ranked as the second fastest-growing firm in Houston; it ranked 16th nationwide in a survey done by Inc. magazine. The company began to look at markets beyond Texas, too. It opened a Dallas office in 1993, and then set off on a nationwide expansion project. In 1993 Kelly Services, the large temporary help agency, acquired a California staff leasing firm (and by that time the operative phrase had evolved to professional employer organization, or PEO). This seemed to put the spotlight on the industry for financiers, and in 1994 Administaff received substantial capital from two Texas groups, the Texas Growth Fund and Bankers Trust. With some $7 million of new investment, Administaff opened four new offices in 1994, diversifying into the prime urban markets of Atlanta, Phoenix, Chicago, and Washington, D.C. The company also began expanding its headquarters building. Sales for 1995 were more than $716 million. Net income fell from $3.8 million in 1994 to $1.1 million in 1995 because of the many costs associated with the expansion. About half of Administaff’s clients were in the Houston area, and only 20 percent were from outside Texas. But the company considered that it had only scratched the surface of the PEO industry.

Company Perspectives:

Administaff’s mission is to be the recognized leader in the development, sale and delivery of quality Professional Employer Organization services to our strategically selected market of small to medium-sized businesses. This mission will be accomplished by a highly motivated team of innovative people dedicated to finding, attracting and satisfying clients in a manner that will produce consistent and superior productivity among clients, employees and the Company.

Public Company in the Late 1990s

Administaff first began making plans to go public in 1995, hoping to raise $40 million to carry out its nationwide expansion. The company delayed its initial public offering (IPO), waiting for better market conditions and for some tax issues to be ironed out. By 1996, Administaff had a stable of 1,400 client companies, with a total of 23,000 worksite employees. Administaff itself had about 500 corporate employees. In 1997 the IPO went forward, and the company debuted on the New York Stock Exchange. CEO Sarvadi claimed that the move to go public was as much about public relations as about funding expansion. Sarvadi wanted to raise the profile of Administaff and of the whole PEO industry, and to distinguish his company from the fly-by-night operators that still darkened the industry’s reputation. “We wanted to emphasize that we’re here to stay,” Sarvadi told the Houston Business Journal (May 22, 1998). Administaff was at the front of a wave, as four other PEO companies went public that year. But regardless of the public relations aspect, the stock offering raised money for the company, which had plans to open one new sales office every quarter. The firm had 21 offices in 13 different markets by 1998, and it planned to have 90 offices in 40 markets over the next several years.

Administaff made an arrangement with the credit card firm American Express in 1997. American Express bought up 5 percent of Administaff, spending some $17.7 million, and the two companies agreed on a joint marketing plan where American Express would offer Administaff s services to its small business clients. American Express worked with approximately 1.6 million small businesses. The credit company would take on the expense of making the contacts, and Administaff would pay it a commission. Administaff’s stock rose quickly when the joint marketing agreement was announced. The firm seemed to have a promising future ahead of it. It was one of the largest companies in the industry, yet it had only 1 percent of the market. The concept of the PEO was catching on, and 16 states now had or were working on licensing laws.

The company pushed into more new markets, moving into Los Angeles in 1998 and later that year opening an office in the San Francisco area. The Bay Area was home to some 40,000 small businesses, many on the cutting edge of the technology industry. This seemed to be ripe ground for Administaff’s services. The next year, the company opened two offices in New York City. New York had a huge concentration of businesses that fit Administaff’s target client profile. There were more than 97,000 businesses in the small-to-medium range, and this was also an area where Administaff’s partner American Express had a large penetration.

By this time Administaff was spread coast to coast, with many stops in between. It had sales offices in Charlotte, North Carolina, in St. Louis and Orlando, as well as four Texas offices, among others. Revenue continued to boom, and after a record-breaking quarter in 2000, the company’s stock price shot up. Revenue for 2000 was $3.7 billion, and Administaff found itself on the Fortune 500 list of the country’s biggest companies. By that year the firm had 35 sales offices, including eight in California. As the technology sector cooled off and the economy nationwide slowed down, Administaff reined in its expansion for 2001. Opening fewer new offices allowed the company to hold down its operating expenses. The company finished 2001 with revenue of $4.4 billion. This represented an increase of almost 18 percent over the year previous, even as client companies laid off or terminated workers. Net income fell sharply, however. Although business conditions across the country were more difficult in 2001 than they had been in the high-flying late 1990s, Administaff was able to continue its growth streak. It moved more solidly into the Midwest in 2002 with a new office in Cleveland. The company was more than halfway to its stated goal of opening offices in 40 markets across the country, as Cleveland was its 21st. Administaff seemed to be focusing on the Midwest, with plans to build a new service center in Chicago by 2004, and hopes for multiple sales offices in some of the region’s cities.

Principal Competitors

Paychex, Inc.; Automatic Data Processing, Inc.; Gevity HR Inc.

Key Dates:

1986:: The company is founded.
1994:: The company opens offices outside Texas.
1997:: Administaff goes public.
1998:: The company enters a joint marketing agreement with American Express.