Automatic Data Processing, Inc.

One ADP Boulevard
Roseland, New Jersey 07068
U.S.A.
(201) 994-5000
Fax: (201) 994-5495

Public Company
Incorporated: 1949 as Automatic Payrolls, Inc.
Employees: 19,000
Sales: $1.70 billion
Stock Exchanges: New York Midwest Pacific

Automatic Data Processing (ADP), from its very modest beginning has evolved into one of the leading computer services companies in the United States. Since becoming a public company in 1961, ADP has, without fail, increased its earnings every quarter. This enviable record can be largely attributed to the business sense and work ethic of its founders.

In 1949, Henry Taub, a recently graduated accountant, borrowed $2,000 and started a company processing payrolls for small businesses in his New Jersey hometown. He gave the company the modern-sounding name “Automatic Payrolls, Inc.,” although the equipment he used—aged calculators, a mechanical bookkeeping machine, and an addressograph—was old fashioned even for then.

A few years later, a young insurance salesman named Frank Lautenberg met Taub and saw great promise in his company. “I sold Henry some insurance, and he sold me on his company,” said Lautenberg. Like Taub, Lautenberg was the son of a silk mill worker. When he was ten, his father took him to the factory to experience the frightening clatter of the machines and breathe the fiber-filled air. “Get an education so you never have to work like this,” Lautenberg’s father said, and the boy did so.

Lautenberg, who recognized a good idea that needed marketing, persuaded Taub to let him print cards at his own expense, and in his spare time, began selling the services of the young payroll processing company. He succeeded in gaining several accounts for the company, and in 1952, took a pay cut to become the company’s first full time salesman. By 1957, the company’s accounts numbered 100.

Taub, his brother Joe, and Lautenberg devoted themselves to making the business succeed. Taub told Forbes, April 23, 1984, “We were young, none of us was married.... We wanted to prove ourselves, and we had an opportunity to incubate. The concept of farming out payroll was not widely acceptable so we had the chance to develop slowly.” He added, “It was a labor intensive business with low capital requirements. We didn’t have to raise a million dollars in the stock market and then turn somersaults the next morning to please the stockholders.”

In 1957, the company encountered modern technology when they invested in an IBM tab machine. Yet theirs was a company that was market driven, not technology driven. Lautenberg explained to Katherine Davis Fishman in her The Computer Establishment, “Our customers were not concerned with the means we used to provide a solution to their payroll problems. We were never asked whether we were using the newest accounting machine or a dated version, whether delivery would be made by bus, truck, or car—or whether our staff was full-time or part-time, where we saw the future, or how fancy our offices were.... The customers’ only care, as it is today, was about our ability to deliver the promised service. The methods we chose... were selected based on the minimum needed to get the job done properly.”

The company was able to move smoothly into large-scale automation when the time and the technology were right. ADP invested in an IBM data-processing system in 1961. It developed its own elementary software, and the investment paid off in increased capacity and greatly reduced turnaround time. That same year the company changed its name to Automatic Data Processing, and made its first public offering.

In 1962 ADP opened an office on Wall Street to provide brokerage firms with payroll and basic accounting services. Opening this office was a well-calculated move, based on several successful client relationships in that market, and a clear demand for ADP’s dependable recordkeeping services. Its success with this particular industry enabled ADP to build its reputation as a company that could package and deliver industry-based standard services and databases.

Between 1963 and 1968, the company’s sales grew from $1 million to $15 million. The growth was due primarily to ADP’s acquisition of payroll and accounting service-bureaus in large cities. Many service bureaus, although relatively successful, were struggling to custom-tailor their offerings for too few clients in specialty markets. ADP, however, operating from a marketing perspective, not a technology perspective, was determined to keep programing costs down. They ignored the lure of exotic software packages for small, low-margin markets and concentrated primarily on delivering basic payroll and general ledger accounting services to a broad market. “We are suspicious of anything that won’t return 20% before taxes,” Lautenberg told Business Week, May 24, 1969.

In each newly acquired operation, ADP installed its widely useful software packages, and if possible, retained local management, supporting it with sophisticated marketing methods. This strategy proved enormously successful. Josh Weston, then ADP’s president, told the author of The Computer Establishment, “When we bought the Miami service bureau, it had revenues of less than $20,000. The principal stayed on, and now sits on a business three times the size of the whole company at the time we bought him out.”

In 1968 a sharp increase in Wall Street trading volume buried the brokerage firms’ back offices in paperwork, and trading hours at the exchange had to be curtailed. Part of the reason was the inability of many brokers’ new electronic data processing systems to handle the sudden major increase in volume. ADP’s shirtsleeve approach to doing business proved especially valuable to its Wall Street clients, and throughout the crunch, none of its clients was put on restriction by the exchanges because of paperwork problems. Around this time, the company moved its headquarters from its founders’ hometown of Paterson, New Jersey, to Clifton, New Jersey.

Although 1969 was, as The New York Times on November 29, 1970, termed it, “a grim year” for Wall Street, it was ADP’s best year in the brokerage service business, having added 15 new clients. ADP’s characteristic dependability, coupled with careful product development, was paying off. The head of operations at Bear, Stearns estimated that installation of ADP’s new management system to control and route securities had cut the error rate in the security tracking area to one-tenth of the former rate.

Growth continued. In 1970, ADP was the first computer services company to reach the Big Board at the New York Stock Exchange. It was servicing more than 10,000 payroll accounts through 16 data centers around the country and was doing the back office chores for 55 brokerage firms, more than all competitors combined. One of its most significant purchases during this period was of a main competitor in brokerage services, the RCA Systems Center, in 1971. The purchase added 10 clients. In 1973 sales reached $90 million and pretax earnings amounted to $16.7 million.

The days when customers handed their data over to computer service companies to be batch-processed, with the paper load delivered back the next day, were changing. Technology gave customers more choices. One of the choices available was interactive computer services, in which the user rented a terminal and access to a vendor’s computer and software, and did its own processing. Another choice was timesharing, in which the customer took advantage of the economies of scale, and sent data into a shared system for processing.

Many time-sharing companies started up quickly, and died the same way. ADP changed with the times, albeit, slowly and carefully. The company batch-processed the majority of its payroll work, and used its fleet of more than 100 vehicles for delivery. With the acquisition of the time-sharing giant Cyphernetics Corporation in 1975, however, ADP acquired telephone lines covering the United States, and satellite transmission to six European countries. As it had in the past, ADP developed and applied its new capabilities in response to customer need, but it did not rashly abandon its older methods just for the sake of the new.

ADP continued its steady growth and continued to develop its strong market position. By 1978, it had acquired more than 60 companies, it had 50 service bureaus around the United States and 4 overseas, and its yearly return on shareholder’s equity was 30% higher than IBM, Digital Equipment Corporation, or Control Data Corporation.

The recession of the early 1980s caused many of the 80,000 companies using ADP’s payroll processing services to reduce their staffs, resulting in some business loss for ADP. This development, coupled with the growing number of companies buying their own computers and processing payroll in-house, had ADP looking at additional, related lines of business.

The company turned the computer revolution to its advantage by becoming a hardware supplier. It offered customers “value added” services such as systems configuration, communications networks, training for particular software, and constant updating. “Most of the customers we deal with have more important things on their minds than to muck around with what we can do better,” Weston said in The Computer Establishment.

Another new, related line of business for ADP was electronic banking. The market was hardly penetrated when ADP licensed this program from its creator, and began selling automatic teller machines to banks all around the country.

In early 1983, Frank Lautenberg left the company to serve as U.S. Senator for New Jersey, and ADP President Josh Weston assumed the additional title of chief executive officer. Soon after, the company brought on William J. Turner, a group president whose computer expertise and managerial vision quickly began to change the company.

Turner first oversaw a major reorganization, in which the company went from product-based and geographical divisions to industry divisions. Integrating the company’s services effectively combined and segregated all the company’s left hands, and all the right hands, and made it easier to determine what each of the hands was doing.

Payroll and commercial services accounted for 55% of ADP’s total revenues in 1984. The company was becoming more diversified, but ADP did not hesitate to divest itself of unprofitable ventures, such as one sold in 1985 which let customers pay bills by phone. “When you get to be over $1 billion big, it won’t help to come up with $1 million ideas,” Weston told Business Week, December 9, 1985.

Several ventures that offered the numbers Weston liked were collision-repair estimating for the insurance industry, as well as related information services for auto dealers and repair shops. ADP was selling tailor-made service packages not only for a type of client, but for several related industries. The company stepped into a virtually untapped market, with service packages that yielded healthy returns. By 1984, ADP dominated this market and was enjoying an annual growth rate of 30%.

ADP’s Turner-led internal reorganization, along with its strong penetration in information-rich industries laid the foundation for a significant shift in the company’s direction. Long the dependable back-office number cruncher, ADP was moving to provide clients with integrated information services for the front office. The movement to the front-office got its fast start in 1983 when it purchased GTE Telenet Information Services, a stock quote company, and was further aided in 1985 through the purchase of Bunker Ramo Info Systems from Allied Corp.

The company in 1985 began wooing large customers in addition to the moderate-sized companies it had always considered its market. Before long, the company won clients such as Beatrice, Harcourt Brace Jovanovich, and B. F. Goodrich.

As large as ADP itself was growing, however, those in charge remained in touch with the rank and file employees. The company moved its headquarters to Roseland, New Jersey, and in this building, as in the old one, there was no executive dining room and no parking slots reserved for management. All employees are able to buy equity at a discount, and over 50% of the work force own company stock.

Turner, with his technological expertise, effectively led the company out of the past and into the future. Elected president in 1986, he ushered in a huge capital improvement program to bring its brokerage information services up to date, and, at the same time, leave its competition well behind.

The 1980s were a time when information services were becoming more and more sophisticated, a time when clients wanted customized, real-time services that they could control from their own versatile workstations. ADP began developing its FS Partner, a sophisticated market-data quotation and branch-office automation system that also gave brokers the power to study the trading patterns of potential clients and to run elaborate “what-if” scenarios. In 1987, ADP reached agreements with Merrill Lynch and Shearson Lehman Hutton, to further develop and install its FS Partner systems. These two companies had been clients of ADP’s biggest competitior, Quotron. As the FS Partner began taking hold in the market, it was rendering the Quotron system obsolete.

The Wall Street fiasco of 1987, and subsequent layoffs and mergers in the business resulted in a 10% reduction in brokerage services revenues at ADP. Many saw ADP’s capital-intensive investment in the brokerage information services as risky but acknowledged that risk was the nature of the business. The enormous investment was part of a long-term plan, and although ADP suffered from the cyclic nature of the investment industry, it was also counting on it.

As part of its $100 million investment in brokerage information services, the company moved its brokerage computing centers to a new facility in Jersey City. It doubled the capacity of its Mount Laurel, New Jersey, stock-quote computing center.

Turner’s impact on this company goes beyond the nuts and bolts aspect. His technological revival at ADP is supported by a new management strategy he calls “turnaround management.” He takes a stint at the head of each of the business units and shakes up management’s ingrained assumptions about its business, and, ideally, makes it responsive to the present climate and future direction of this new ADP.

In 1988, the company’s smaller ventures such as information services to auto dealers and insurance companies, interactive accounting services, and computer leasing services were flourishing. ADP was processing 10% of the nation’s private sector paychecks, and had the lion’s share—40%—of the U.S. brokerage information business. That year, Turner left ADP.

As part of ADP’s continual pruning of business ventures that fail to yield high returns or that do not fit its long-term strategic objectives, the company sold its automatic teller machine and its banking businesses in 1989. An industry expert commented on ADP’s business acumen in the Wall Street Transcript, November 13, 1989, “We’ve seen a dramatic decrease in the revenue growth rate, coupled with continued gains in profitability. It shows that the business is managed well. It shows that ADP has cost control, and that management understands the leverage points within the organization and can screw down costs. It’s a rare trait in the computer services business. It’s a rare trait in the technology sector in general.”

ADP’s future success will depend on its ability to keep operating costs low, while producing not only dependable, but state-of-the-art information and data processing services. It has come a long way from the time when it toed a cautious technological line and stayed away from specialty software applications.

Principal Subsidiaries

ADP Atlantic, Inc.; ADP Automotive Claims Services, Inc.; ADP Benelux B.V. (Netherlands); ADP Central, Inc.; ADP Credit Corp.; ADP Dealer Services Ltd. (Canada); ADP Financial Information Services, Inc.; ADP Information Services, Ltd. (U.K.); ADP Network Services International, Inc.; ADP Network Services, Ltd. (U.K.); ADP of New Jersey, Inc.; ADP of North America, Inc.; ADP-WHT Corporation; American Computer Trust Leasing (79%); Automatic Data Processing Limited (U.K.); Automatic Data Processing (H.K.) Ltd. (Hong Kong); Automatic Data Processing Community Urban Redevelopment Corporation; Canadian-Automatic Data Processing Services Ltd. (Canada, 50%).

Further Reading

Fishman, Katherine Davis, The Computer Establishment, New York, Harper & Row, 1981; Mayer, Martin, “How to manage a revolution,” Forbes, April 23, 1984; McClellan, Stephen T., The Coming Computer Industry Shakeout, New York, John Wiley & Sons, 1984; Bernstein, Amy L., “Mr. Service,” Information Week, April 10, 1989.

—Carole Healy

Automatic Data Processing, Inc.

One ADP Boulevard
Roseland, New Jersey 07068-1728
U.S.A.
(201) 994-5000
Fax: (201) 994-5495

Public Company
Incorporated: 1949
Employees: 21,000
Sales: $2.2 billion
Stock Exchanges: New York Chicago Pacific Philadelphia Boston
SICs: 7374 Data Processing & Preparation; 7372 Prepackaged Software; 8721 Accounting, Auditing & Bookkeeping

The undisputed number one paymaster to the nation, Automatic Data Processing, Inc. prepares the paychecks for one out of seven American workers. The company, widely known as ADP, is also a leading supplier of stock quotation systems, handles the back-office processing for many securities brokers, and provides a variety of computerized services to auto dealers as well as claims service support for auto insurers and repairers.

The multibillion dollar operation owes its start to the fact that when the bright and innovative Henry Taub graduated from New York University in 1947, he was still shy of his 20th birthday, and thus more than a year away from eligibility for the CPA exam. Consequently, Taub, who had worked part-time for a small Manhattan public accounting firm while a commuter student at NYU, became a full-time employee. The work entailed keeping the books for dozens of small businesses, coupled with lots of handholding.

Taub soon became aware that preparing payrolls and maintaining the necessary supporting data were a major headache for smaller employers. Social security was as yet less than a dozen years old, and income tax withholding had only started during World War II. All in all, payroll accounting was becoming steadily more demanding.

So, in 1949, with the support of two business acquaintances, Taub opened a company to provide that specialized service. He called his new business Automatic Payrolls, Inc. As he readily recalled later, the “Automatic” defined the service only from the point of view of the client, who was spared many burdensome tasks; on the company’s side, automation started with little more than an adding machine. Taub also noted the deeper significance of the carefully chosen name. In his hometown of Paterson, New Jersey, an old-line textile center where the automation of looms had long been a major issue, “automatic” carried the connotation of “an advanced form of work.”

From a small office in Paterson, Taub solicited accounts in the surrounding area, often utilizing public transportation to pick up time sheets and return the finished payroll. During this time, Taub’s company didn’t handle the clients’ money; signing the checks or placing cash in the pay envelopes was left for the employer to do on site. In 1951, Taub’s younger brother Joe joined the organization, specializing in administrative functions for the next 25 years.

In 1953 the third member of Automatic Payroll’s long-time guiding trio came aboard. He was Frank R. Lautenberg, the son of a Paterson textile worker. Three years older than Henry, Lautenberg served in Europe during World War II then earned an economics degree at Columbia University and became a sales trainee for Prudential Insurance. The local Prudential office was in the same Paterson building as Automatic, and he and the Taubs met occasionally at a nearby coffee counter. Since most of Lautenberg’s life insurance sales calls took place in the evening, he found time to solicit business for Automatic during the day, and after a while joined the company full-time.

Henry Taub recollected: “We formed an effective trio, with complementary strengths—me in accounting, Joe in organization, and Frank in marketing—and very compatible in personality and business style.” Eventually, Lautenberg succeeded Henry Taub as chief executive in 1975 and held that job until his election as U.S. senator from New Jersey in 1982. Henry Taub then became the company’s honorary chairperson while remaining an active director and chairing the executive committee.

The young company kept adding customers in northern New Jersey and the New York City area, but progress was moderate. By the June 1957 fiscal year, operating revenues had grown to $150,000; profits for the entire year, however, were a mere $964. One factor was the switch that year from manual bookkeeping machines to an early IBM computer. Lautenberg later told Investor’s Reader magazine that the punch card computer system “damned near killed us. It wasn’t a very good improvement. Then we started developing techniques that enabled us to start working with computers.”

With the new equipment, Automatic Payrolls also branched into some general data processing services such as analytical reports covering sales, costs and inventories, questionnaire tabulation, and even the maintenance of bowling league statistics. In 1959 the Taubs set up a separate company, Automatic Tabulating Services, to handle the general data processing business. Then, in June 1961, in preparation for going public, the payroll and tabulating companies were merged into the newly named Automatic Data Processing. At the time, ADP had about 200 payroll clients, including the cast and crew of the Broadway hit My Fair Lady and 30 general processing customers.

With only a modest $419,000 in revenues and $25,000 in net profits for the June 1961 year, ADP was very much of a “penny stock” when the first 100,000 shares were offered to the public in September 1961 at $3 a share. Henry Taub reflected: “Those first dozen years were our incubation period. We learned how to operate what was essentially a brand-new business.” When it emerged from the incubator, ADP was set to mature. Starting with its first quarter as a public company, ADP managed an unbroken string of double-digit earnings per share growth—a string that encompassed 128 quarters as of the end of the 1993 fiscal year. Meantime, each share bought for $3 in 1961 had multiplied into 144 shares worth more than $7,000 by 1993.

Just prior to offering its stock on Wall Street, ADP went to Wall Street to drum up business. Encouraged by a couple of brokerage houses that were already payroll clients, ADP opened an office in downtown Manhattan in July 1961 to process “back office” data such as customer trade confirmations and related reports—the start of what was to become ADP’s second most important line.

Buoyed by strong internal growth after going public, ADP was ready to speed its development through aggressive use of acquisitions by the mid-1960s. Since then, it acquired more than 100 companies or corporate units. However, management stressed that these acquisitions should serve as “catalysts” and not as “our main engine of growth.” As Josh S. Weston, who joined the company in 1970 and became CEO in 1982, explained to security analysts, acquisitions were intended “to telescope time and risk in helping us pursue a strategic direction that we wanted to pursue anyway.”

The acquisition drive got under way in 1965 when ADP broadened its brokerage business with the addition of Brokerage Processing Center and shortly thereafter expanded its payroll service with Payrolls for Industry of Long Island. Then, in 1967, Miami Beach-based Computer Services of Florida was purchased. This represented a significant geographic breakout, since ADP had effectively been limited to customers that could be served by its local pickup and delivery facilities, except for a handful of payroll clients whose requirements permitted mail communication (computer transmission of payroll data and checks was not yet possible). The Florida beachhead was followed by a flurry of other east coast acquisitions. Thereafter, the company acquired or established its way into other parts of the nation. By 1972 it operated centers in 20 cities from which it paid over one million people.

That year ADP acquired CSI Computer Systems of Cincinnati, which helped about 500 car dealers with their paper work. This led ADP into its third major line, which it called Dealer Services. Since then ADP vastly expanded both the concept and scope of these services. By 1993 it served more than 7,000 North American car and truck dealers, while 1,000 European dealers were added with the 1992 acquisition of Germany’s Autonom Computer. While Autonom served primarily German GM/Opel dealers, ADP planned to add more European cars and countries.

In North America, ADP clients represented roughly one-third of all dealerships while accounting for over half of vehicle sales. Many used ADP-supplied computers and programs that eliminated preprinted forms—after blank sheets were inserted into the printer and pertinent data was entered, completed invoices emerged. Other programs handled scheduling for the repair shop or kept track of all data on showroom visitors (including their preferences and dislikes) to give sales staff a better shot at closing a deal. Some of the software used to show potential financing and insurance costs came under FTC attack in 1991 for allegedly making financing the car through the dealer seem cheaper than paying cash; ADP, while insisting that the pro-financing claims were “standard industry practice,” agreed to remove the challenged segment. All in all, even though, as chairperson Weston quipped to stockholders in 1992, the U.S. auto industry nowadays “seldom has one good year in a row,” ADP steadily increased its dealer business, which accounted for roughly 12 percent of total ADP revenues.

With the acquisition of Itel Corp.’s Autadex division in 1980, ADP began developing another auto-related business line, now known as Automotive Claims Services. Through a huge data base maintained in Ann Arbor, Michigan, that cataloged the components of virtually every model produced since 1970, adjusters and repair shop operators could instantly obtain detailed repair estimates, including parts and labor. In 1985 ADP added a Vehicle Valuation Service for cars that were stolen or “totaled.” It also started a parts service showing price and availability of private brand and salvage yard parts. Moreover, in 1993, ADP undertook a minority investment in National BioSystems, which evaluated medical costs of accident victims.

Claims Service, whose clients included most of the major insurance companies, brought in about five percent of ADP revenues in the early 1990s. Since that time, it received less emphasis. In 1993, the “Other” group, which, along with Claims, counts such minor activities as network, general accounting, and wholesale distribution, as well as overseas payroll services (mostly Britain and the Benelux countries), registered six percent of revenues as opposed to nine percent in fiscal 1992. However, the “Other” contribution may have been somewhat understated because this category was also the place for certain corporate accounting adjustments.

Strongest growth in the early 1990s was in Brokerage Services, which produced 23 percent of fiscal 1993 revenues. ADP processed over one-fifth of the trades executed on Wall Street each day. Nevertheless, these back-office functions were eclipsed by ADP’s presence in the front office. In 1983 ADP bought GTE’s Telenet Information Services, which put it into stock quote machines, and three years later it acquired the Bunker Ramo quote machine operations. ADP was therefore in the forefront of the industry revolution that replaced “dumb terminals” with intelligent work stations that provided each individual broker not only with current stock quotations and market news but instant access to client account records, background data, and analysts’ opinions on securities, as well as offering the capability to enter orders electronically. By 1991 ADP was the top provider of such information services. Some infringement disputes with previous industry leader Quotron (which became a Citicorp subsidiary in 1986) were settled in 1993 when, as part of a deal in which ADP bought Quotron’s overseas stock quotation business, ADP obtained a permanent license to certain Quotron stock information software.

ADP entered the proxy distribution business in 1989. This segment sent out stockholder reports and proxy statements to investors whose stock was held in “street name” by brokerage houses, and then processed the returned proxy votes. In 1992 ADP acquired another major proxy distribution company, Independent Election Corp. of America. However, while the ADP service was directed at individual customers of brokerage houses, Independent dealt with large institutional holders. The difference in client groups and operating systems slowed the integration of the two proxy units, and, while net results were beneficial, this generated some embarrassing problems during the 1993 proxy season. ADP remained confident, however, that the glitches would be overcome, and the company was set for a smooth 1994 season.

By far the largest ADP business, with 59 percent of total revenues in 1993, remained what is now called Employer Services. The broadened title reflected the fact that, beyond payroll-related work, this sector offered such services as job costing, labor distribution analysis, management reporting, unemployment compensation management, human resources information, and personnel benefit services. In 1993, the core of this operation paid more than 16 million employees of some 275,000 employers and prepared all the related W-2 forms and other required reports, as well as all sorts of internal personnel reports for the employer. More than 75 percent of the payroll clients also used ADP’s tax filing service (started in 1982) in which ADP handled the actual submission of tax payments to all levels of government. During this time, over 95,000 clients submitted their payroll by computer. ADP was also able to arrange the laser printing of paychecks on site, while an increasing number of payments were electronically deposited directly to the employee’s designated bank account.

While traditional banking institutions were a major competitor for payroll services, ADP gradually acquired such payroll businesses, often arranging for the bank to remain the up-front marketing agent while ADP operated the service. The largest such acquisition (indeed, ADP’s largest single acquisition ever) was the takeover of Bank of America’s 17,000-client, $110 million revenue payroll business in May 1992. Interestingly, this deal was concluded just one month after Bank of America completed the merger of Security Pacific, another California banking giant whose payroll business had been acquired by ADP eight years earlier.

While ADP started out “helping those who couldn’t help themselves” when it came to payroll automation, and it continued to derive about half its payroll revenues from firms with under 100 employees, large “national accounts” with over 1,000 employees were increasingly shifting to ADP from in-house installations. Here ADP benefitted from the almost universal belt-tightening mode at most major corporations, which became willing to outsource nonstrategic functions. Furthermore, the constant growth and change in regulations on both the federal and local level required unending adjustment in payroll software programs, and many companies found it easier to leave the adjusting to a specialist like ADP. The same logic applied in adjusting a program to fit all the many jurisdictions in which a national company retained employees. Furthermore, ADP offered great flexibility. For instance, it could take in ready stride the requirements of clients like H&R Block, whose payroll, depending on the time of the tax year, fluctuated from 2,000 to 65,000 employees.

For all its business lines ADP set certain criteria. In order to realize economies of scale, the company preferred computing services that could be mass marketed and mass produced. ADP stipulated that its services should induce long-term client relationships with repetitive revenues, and should require enough specialization and know-how to raise barriers to entry by competitors and exit by clients.

Josh Weston also looked for what he called “a silent third force”—a set of conditions that provided a relatively uniform framework within which ADP could design its products. Thus, the IRS and the wage and hour laws set an overall pattern for wage payments, the SEC and the stock exchanges regulated the handling of securities transactions, and the auto manufacturers informed franchised dealers how to keep their records.

ADP also maintained, “it is a prime criterion for us in either starting up or later staying in a business that we think we have an excellent chance to be number one in that particular business.” In September 1993 Weston told security analysts that ADP was assessing potential opportunities in four new data service markets, any one of which, if entry through a suitable acquisition could be arranged, might develop into a fourth major ADP line. The company’s presumed target would be volume in the $200 million-plus range, or more than double the Claims Service peak.

Since the mid-1980s, ADP also actively engaged in “pruning,” which it defined as having “sold, shrunken, or milked” various product lines or businesses that no longer, according to Weston, “fit our long-term strategic objectives.” Among others, ADP sold a computerized tax processing business, its electronic funds transfer operation that serviced automatic teller machines, and its interest in a Brazilian payroll company. It also planned to simply shrink some businesses “where a smaller ongoing operation gives ADP a better return” than selling it, especially when a unit might continue to generate cash that could build up other operations. And while counting on outsourcing by other companies to feed its growth, ADP also used outsourcing when appropriate. Thus, in 1990 it arranged for IBM to take over the maintenance of its stock quote terminals.

Throughout its existence, ADP has used highly conservative accounting, with a strong cash position, low debt, and quick depreciation, allowing it to move into technologically advanced replacements without incurring big write-offs of the displaced equipment. This operating scheme permitted the longest string of consecutive earnings advances on the New York Stock Exchange, where the company arrived in 1970. ADP crossed the billion dollar mark in revenues in 1985 and topped $2 billion in fiscal 1993 when earnings reached a record $294 million. Dividends, while fairly conservative, were raised each year since payments started in 1974. Furthermore, the company was also convinced that room existed for further progress. In 1993, ADP noted that it still had only about a 15 percent penetration of the payroll market nationally and even in its New York-New Jersey home area only about 25 percent.

Insisting that ADP push toward continually higher goals, Weston cited the example of the pole vaulter who, even after all competitors have been eliminated, is made to try for ever higher jumps until he fails to clear the bar three times. Only after the inevitable final failure is the vaulter brought to the winner’s stand. As Weston sought to inspire his company to ever greater efforts with the pole vault analogy, he concluded: “Since they’re going to be recognized as winners anyway, asking them to jump an inch higher isn’t dirty pool.”

Principal Subsidiaries

ADP Credit Corp.; Brokerage Processing Center; Computer Services of Florida; CSI Computer Systems; Telenet Information Services; Independent Election Corp. of America.

Further Reading

“Automatic Data Processing Hews to Winning Formula,” Wall Street Journal, December 24, 1992.

“Payroll Specialist” Investor’s Reader, July 26, 1972.

“Presentation on Automatic Data Processing by Josh Weston, Chairman and CEO, to The New York Society of Security Analysts,” Roseland, New Jersey: Automatic Data Processing, Inc. September 13, 1990.

“They Make Money Paying Us,” Forbes, January 4, 1993.

Weston, Josh, “Soft Stuff Matters,” Financial Executive, July/August 1992.

—Henry R. Hecht

Automatic Data Processing, Inc.

One ADP Boulevard
Roseland, New Jersey 07068-1728
U.S.A.
Telephone: (973) 974-5000
Fax: (973) 974-5495
Web site: http://www.adp.com

Public Company
Incorporated: 1949
Employees: 41,000
Sales: $7.02 billion (2001)
Stock Exchanges: New York Chicago Pacific Philadelphia Boston
NAIC: 514210 Data Processing Services; 511210 Software Publishers; 334611 Software Reproducing; 541211 Offices of Certified Public Accountants; 541214 Payroll Services (pt); 541219 Other Accounting Services

The undisputed number one paymaster to the nation, Automatic Data Processing, Inc. prepares the paychecks for one out of seven American workers. The company, widely known as ADP, is also a leading supplier of stock quotation systems, handles the back-office processing for many securities brokers, and provides a variety of computerized services to auto dealers as well as claims service support for auto insurers and repairers.

Inventing a Better Way to Manage Payrolls: 1940s–50s

The multibillion-dollar operation owes its start to the fact that when the bright and innovative Henry Taub graduated from New York University in 1947, he was still shy of his 20th birthday, and thus more than a year away from eligibility for the CPA exam. Consequently, Taub, who had worked part-time for a small Manhattan public accounting firm while a commuter student at NYU, became a full-time employee. The work entailed keeping the books for dozens of small businesses, coupled with lots of handholding.

Taub soon became aware that preparing payrolls and maintaining the necessary supporting data were a major headache for smaller employers. Social security was as yet less than a dozen years old, and income tax withholding had only started during World War II. All in all, payroll accounting was becoming steadily more demanding.

So, in 1949, with the support of two business acquaintances, Taub opened a company to provide that specialized service. He called his new business Automatic Payrolls, Inc. As he readily recalled later, the “Automatic” defined the service only from the point of view of the client, who was spared many burdensome tasks; on the company’s side, automation started with little more than an adding machine. Taub also noted the deeper significance of the carefully chosen name. In his hometown of Paterson, New Jersey, an old-line textile center where the automation of looms had long been a major issue, “automatic” carried the connotation of “an advanced form of work.”

From a small office in Paterson, Taub solicited accounts in the surrounding area, often utilizing public transportation to pick up time sheets and return the finished payroll. During this time, Taub’s company did not handle the clients’ money; signing the checks or placing cash in the pay envelopes was left for the employer to do on site. In 1951, Taub’s younger brother Joe joined the organization, specializing in administrative functions for the next 25 years.

In 1953 the third member of Automatic Payrolls’ longtime guiding trio came aboard. He was Frank R. Lautenberg, the son of a Paterson textile worker. Three years older than Henry, Lautenberg served in Europe during World War II and then earned an economics degree at Columbia University and became a sales trainee for Prudential Insurance. The local Prudential office was in the same Paterson building as Automatic, and he and the Taubs met occasionally at a nearby coffee counter. Since most of Lautenberg’s life insurance sales calls took place in the evening, he found time to solicit business for Automatic during the day, and after a while joined the company full-time.

Henry Taub recollected: “We formed an effective trio, with complementary strengths—me in accounting, Joe in organization, and Frank in marketing—and very compatible in personality and business style.” Eventually, Lautenberg succeeded Henry Taub as chief executive in 1975 and held that job until his election as U.S. senator from New Jersey in 1982. Henry Taub then became the company’s honorary chairperson while remaining an active director and chairing the executive committee.

The young company kept adding customers in northern New Jersey and the New York City area, but progress was moderate. By the June 1957 fiscal year, operating revenues had grown to $150,000; profits for the entire year, however, were a mere $964. One factor was the switch that year from manual bookkeeping machines to an early IBM computer. Lautenberg later told Investor’s Reader magazine that the punch card computer system “damned near killed us. It wasn’t a very good improvement. Then we started developing techniques that enabled us to start working with computers.”

With the new equipment, Automatic Payrolls also branched into some general data processing services such as analytical reports covering sales, costs and inventories, questionnaire tabulation, and even the maintenance of bowling league statistics. In 1959 the Taubs set up a separate company, Automatic Tabulating Services, to handle the general data processing business. Then, in June 1961, in preparation for going public, the payroll and tabulating companies were merged into the newly named Automatic Data Processing. At the time, ADP had about 200 payroll clients, including the cast and crew of the Broadway hit My Fair Lady and 30 general processing customers.

Rapid Growth in the 1960s and 1970s

With only a modest $419,000 in revenues and $25,000 in net profits for the June 1961 year, ADP was very much of a “penny stock” when the first 100,000 shares were offered to the public in September 1961 at $3 a share. Henry Taub reflected: “Those first dozen years were our incubation period. We learned how to operate what was essentially a brand-new business.” When it emerged from the incubator, ADP was set to mature. Starting with its first quarter as a public company, ADP managed an unbroken string of double-digit earnings per share growth—a string that encompassed 128 quarters as of the end of the 1993 fiscal year. Meantime, each share bought for $3 in 1961 had multiplied into 144 shares worth more than $7,000 by 1993.

Just prior to offering its stock publicly, ADP went to Wall Street to drum up business. Encouraged by a couple of brokerage houses that were already payroll clients, ADP opened an office in downtown Manhattan in July 1961 to process “back office” data such as customer trade confirmations and related reports—the start of what was to become ADP’s second most important line.

Buoyed by strong internal growth after going public, ADP was ready to speed its development through aggressive use of acquisitions by the mid-1960s. Since then, it acquired more than 100 companies or corporate units. Management stressed, however, that these acquisitions should serve as “catalysts” and not as “our main engine of growth.” As Josh S. Weston, who joined the company in 1970 and became CEO in 1982, explained to security analysts, acquisitions were intended “to telescope time and risk in helping us pursue a strategic direction that we wanted to pursue anyway.”

The acquisition drive got underway in 1965 when ADP broadened its brokerage business with the addition of Brokerage Processing Center and shortly thereafter expanded its payroll service with Payrolls for Industry of Long Island. Then, in 1967, Miami Beach-based Computer Services of Florida was purchased. This represented a significant geographic breakout, since ADP had effectively been limited to customers that could be served by its local pickup and delivery facilities, except for a handful of payroll clients whose requirements permitted mail communication (computer transmission of payroll data and checks was not yet possible). The Florida beachhead was followed by a flurry of other East Coast acquisitions. Thereafter, the company acquired or established its way into other parts of the nation. By 1972 it operated centers in 20 cities from which it paid more than one million people.

That year ADP acquired CSI Computer Systems of Cincinnati, which helped about 500 car dealers with their paper work. This led ADP into its third major line, which it called Dealer Services. Since then ADP vastly expanded both the concept and scope of these services. By 1993 it served more than 7,000 North American car and truck dealers, while 1,000 European dealers were added with the 1992 acquisition of Germany’s Autonom Computer. While Autonom served primarily German GM/Opel dealers, ADP planned to add more European cars and countries.

Company Perspectives:

ADP’s objectives are sustained growth in shareholder value through ever-improving financial results, World Class Service, and being an employer of choice. We will achieve these objectives by having a total commitment to the highest ethical standards, by treating everyone with honesty, fairness and respect, and by conducting our business with the highest level of integrity. We believe in open, informal communications, hard work, and prudent financial management. These are ADP’s core values, the foundation on which our business culture is based.

But a statement of values is not enough. Unless our values are consistently practiced, they become just platitudes. Consistent implementation occurs only when each of us respects the rights of others, when our actions are free from discrimination, and when each associate is accorded full equal opportunity.

As we continue to grow and as our businesses become increasingly complex, a shared, well-communicated Corporate Philosophy is more important than ever. We are not perfect. Our actions will occasionally fall short of our aspirations. Such shortcomings should be viewed as an opportunity to learn and to refocus our efforts to live up to our values and Corporate Philosophy.

In North America, ADP clients represented roughly one-third of all dealerships while accounting for more than half of vehicle sales. Many used ADP-supplied computers and programs that eliminated preprinted forms. After blank sheets were inserted into the printer and pertinent data entered, completed invoices emerged. Other programs handled scheduling for the repair shop or kept track of all data on showroom visitors (including their preferences and dislikes) to give sales staff a better shot at closing a deal. Some of the software used to show potential financing and insurance costs came under FTC attack in 1991 for allegedly making financing the car through the dealer seem cheaper than paying cash; ADP, while insisting that the pro-financing claims were “standard industry practice,” agreed to remove the challenged segment. Even though, as Chairperson Weston quipped to stockholders in 1992, the U.S. auto industry nowadays “seldom has one good year in a row,” ADP steadily increased its dealer business, which accounted for roughly 12 percent of total ADP revenues.

Entering the Information Age: The 1980s and 1990s

With the acquisition of Itel Corp.’s Autadex division in 1980, ADP began developing another auto-related business line, now known as Automotive Claims Services. Through a huge database maintained in Ann Arbor, Michigan, that cataloged the components of virtually every model produced since 1970, adjusters and repair shop operators could instantly obtain detailed repair estimates, including parts and labor. In 1985 ADP added a Vehicle Valuation Service for cars that were stolen or “totaled.” It also started a parts service showing price and availability of private brand and salvage yard parts. Moreover, in 1993, ADP undertook a minority investment in National BioSystems, which evaluated medical costs of accident victims.

Claims Service, whose clients included most of the major insurance companies, brought in about 5 percent of ADP revenues in the early 1990s. Since that time, it received less emphasis. In 1993, the “Other” group, which, along with Claims, covered such minor activities as network, general accounting, and wholesale distribution, as well as overseas payroll services (mostly Britain and the Benelux countries), registered 6 percent of revenues as opposed to 9 percent in fiscal 1992. The “Other” contribution may have been somewhat understated, however, because this category was also the domain for certain corporate accounting adjustments.

Strongest growth in the early 1990s was in Brokerage Services, which produced 23 percent of fiscal 1993 revenues. ADP processed more than one-fifth of the trades executed on Wall Street each day. Nevertheless, these back-office functions were eclipsed by ADP’s presence in the front office. In 1983 ADP bought GTE’s Telenet Information Services, which put it into stock quote machines, and three years later it acquired the Bunker Ramo quote machine operations. ADP was thus in the forefront of the industry revolution that replaced “dumb terminals” with intelligent work stations that provided each individual broker not only with current stock quotations and market news but instant access to client account records, background data, and analysts’ opinions on securities, as well as offering the capability to enter orders electronically. By 1991 ADP was the top provider of such information services. Some infringement disputes with previous industry leader Quotron (which became a Citicorp subsidiary in 1986) were settled in 1993 when, as part of a deal in which ADP bought Quotron’s overseas stock quotation business, ADP obtained a permanent license to certain Quotron stock information software.

ADP entered the proxy distribution business in 1989. This segment sent out stockholder reports and proxy statements to investors whose stock was held in “street name” by brokerage houses, and then processed the returned proxy votes. In 1992 ADP acquired another major proxy distribution company, Independent Election Corp. of America. Whereas the ADP service was directed at individual customers of brokerage houses, Independent dealt with large institutional holders. The difference in client groups and operating systems slowed the integration of the two proxy units and, while net results were beneficial, this generated some embarrassing problems during the 1993 proxy season. ADP remained confident, however, that the glitches would be overcome, and the company was set for a smooth 1994 season.

By far the largest ADP business, with 59 percent of total revenues in 1993, remained what is now called Employer Services. The broadened title reflected the fact that, beyond payroll-related work, this sector offered such services as job costing, labor distribution analysis, management reporting, unemployment compensation management, human resources information, and personnel benefit services. In 1993, the core of this operation paid more than 16 million employees of some 275,000 employers and prepared all of the related W-2 forms and other required reports, as well as all sorts of internal personnel reports for the employer. More than 75 percent of the payroll clients also used ADP’s tax filing service (started in 1982) in which ADP handled the actual submission of tax payments to all levels of government. During this time, more than 95,000 clients submitted their payroll by computer. ADP also was able to arrange the laser printing of paychecks on site, while an increasing number of payments were electronically deposited directly to the employee’s designated bank account.

Although traditional banking institutions were a major competitor for payroll services, ADP gradually acquired such payroll businesses, often arranging for the bank to remain the upfront marketing agent while ADP operated the service. The largest such acquisition (indeed, ADP’s largest single acquisition ever) was the takeover of Bank of America’s 17,000-client, $110 million revenue payroll business in May 1992. Interestingly, this deal was concluded just one month after Bank of America completed the merger of Security Pacific, another California banking giant whose payroll business had been acquired by ADP eight years earlier.

Key Dates:

1949:

Henry Taub forms Automatic Payrolls, Inc.

1953:

Frank R. Lautenberg joins Automatic Payrolls.

1957:

Automatic Payrolls switches from manual bookkeeping machines to an IBM computer.

1961:

Automatic Data Processing is formed.

1972:

ADP acquires CSI Computer Systems.

1983:

ADP acquires GTE’s Telenet Information Services.

1992:

ADP takes over Bank of America’s payroll services.

1997:

ADP forms Electronic Banking Unit.

Although ADP started out “helping those who couldn’t help themselves” when it came to payroll automation, and it continued to derive about half its payroll revenues from firms with less than 100 employees, large “national accounts” with more than 1,000 employees were increasingly shifting to ADP from in-house installations. Here ADP benefited from the almost universal belt-tightening mode at most major corporations, which became willing to outsource nonstrategic functions. Furthermore, the constant growth and change in regulations on both the federal and local level required unending adjustment in payroll software programs, and many companies found it easier to leave the adjusting to a specialist like ADP. The same logic applied in adjusting a program to fit all the many jurisdictions in which a national company retained employees. Furthermore, ADP offered great flexibility. For instance, it could take in ready stride the requirements of clients like H&R Block, whose payroll, depending on the time of the tax year, fluctuated from 2,000 to 65,000 employees.

For all of its business lines ADP set certain criteria. To realize economies of scale, the company preferred computing services that could be mass marketed and mass produced. ADP stipulated that its services should induce long-term client relationships with repetitive revenues and should require enough specialization and know how to raise barriers to entry by competitors and exit by clients.

Josh Weston also looked for what he called “a silent third force”—a set of conditions that provided a relatively uniform framework within which ADP could design its products. Therefore, the 1RS and the wage and hour laws set an overall pattern for wage payments, the SEC and the stock exchanges regulated the handling of securities transactions, and the auto manufacturers informed franchised dealers how to keep their records.

ADP also maintained, “it is a prime criterion for us in either starting up or later staying in a business that we think we have an excellent chance to be number one in that particular business.” In September 1993 Weston told security analysts that ADP was assessing potential opportunities in four new data service markets, any one of which, if entry through a suitable acquisition could be arranged, might develop into a fourth major ADP line. The company’s presumed target would be volume in the $200 million-plus range, or more than double the Claims Service peak.

Since the mid-1980s, ADP also actively engaged in “pruning,” which it defined as having “sold, shrunken, or milked” various product lines or businesses that no longer, according to Weston, “fit our long-term strategic objectives.” Among others, ADP sold a computerized tax processing business, its electronic funds transfer operation that serviced automatic teller machines, and its interest in a Brazilian payroll company. It also planned to simply shrink some businesses “where a smaller ongoing operation gives ADP a better return” than selling it, especially when a unit might continue to generate cash that could build up other operations. While counting on outsourcing by other companies to feed its growth, ADP also used outsourcing when appropriate. Thus in 1990 it arranged for IBM to take over the maintenance of its stock quote terminals.

Throughout its existence, ADP relied upon highly conservative accounting, with a strong cash position, low debt, and quick depreciation, allowing it to move into technologically advanced replacements without incurring big write-offs of the displaced equipment. This operating scheme permitted the longest string of consecutive earnings advances on the New York Stock Exchange, where the company arrived in 1970. ADP crossed the billion-dollar mark in revenues in 1985 and topped $2 billion in fiscal 1993 when earnings reached a record $294 million. Dividends, while fairly conservative, were raised each year since payments started in 1974. Furthermore, the company was convinced that room existed for additional progress. In 1993, ADP noted that it still had only about a 15 percent penetration of the payroll market nationally and even in its New York-New Jersey home area only about 25 percent.

Insisting that ADP push toward continually higher goals, Weston cited the example of the pole vaulter who, even after all competitors have been eliminated, is made to try for ever higher jumps until he fails to clear the bar three times. Only after the inevitable final failure is the vaulter brought to the winner’s stand. As Weston sought to inspire his company to ever greater efforts with the pole vault analogy, he concluded: “Since they’re going to be recognized as winners anyway, asking them to jump an inch higher isn’t dirty pool.”

New Services for the Information Age: Entering the 21st Century

The rapid evolution of computer technology in the 1990s provided ADP with a golden opportunity to expand many of its core products and services. By mid-decade, the Internet had made it possible for a company to manage all aspects of its finances, from payroll to banking, on a personal computer. The intricacies involved with mastering this new technology, however, combined with the increasing complexity of benefits packages and tax laws, was turning accounting into a major headache for small and mid-sized business owners. Rather than trying to handle the problem on their own, many of these companies began turning to outside firms to handle their bookkeeping needs.

It was in this atmosphere that ADP began developing a host of services designed to help employers integrate these new technologies into their day-to-day operations. The company set the stage for this transition when it acquired a bank charter in 1995. The Interstate Banking and Branching Efficiency Act of 1994 had already removed limitations on interstate banking, and so the charter provided ADP with the opportunity to augment its payroll business with loan processing, bill payment, and investment services. From the point of view of cost, the transition was a relatively easy one: The expense of maintaining a banking web site was negligible and did not require a complete overhaul of the company’s infrastructure. The challenge for ADP was to create services unique enough to draw customers away from the traditional bank branches.

One of ADP’s first new offerings arose out of its merger with Checkfree Corp. in July 1995. Through this venture, the company introduced its electronic banking service, providing small businesses with a convenient, affordable way to pay bills and balance accounts online. The company built upon this innovation when it formed its Electronic Banking Unit in 1997, which established partnerships with banks and software designers to create a centralized, web-based banking resource center. By making financial products and services readily available online, the resource center could offer valuable support to business owners looking for a way to cut administrative costs. ADP Pay Expert, the industry’s first complete payroll processing service, was introduced in 1998, and in 1999 the company created Solution Profiler, a program designed to allow small businesses to customize their payroll service.

This heightened focus on small businesses did not mean ADP was neglecting its larger clients. In 2000 it launched ADP Enterprise Payroll Services, which offered a comprehensive web-based payroll and accounting platform for corporations with more than one location. That same year it launched Accountant Advantage, a referral network that allowed accounting firms to market ADP’s payroll products. The company also remained dedicated to global expansion, solidifying its foothold in the burgeoning Asian payroll processing business with the acquisition of the Australian firm Pay Connect Solutions, the largest payroll processor in the Asia/Pacific market, in July 2000. Heading into the new century, however, it was clear that the small business sector was the area with the largest potential for growth. With research data indicating that payroll services for small businesses would blossom into a $4 billion industry by 2000, ADP was determined to put itself in position to become the undisputed leader in this promising new market.

Principal Divisions

ADP Employer Services; ADP Brokerage Services; ADP Dealer Services; ADP Claims Services.

Principal Competitors

Administaff, Inc.; Ceridian Corporation; Paychex, Inc.

Further Reading

“Automatic Data Processing Hews to Winning Formula,” Wall Street Journal, December 24, 1992.

Crone, Richard K., “Notes on the Infobahn: ADP Positioned to Control Funds at Point of Payroll,” American Banker, January 9, 1995, p. 6A.

Marjanovic, Steven, “Check free, ADP to Start PC Payment System Aimed at Small Business,” American Banker, July 20, 1995, p. 8.

“Payroll Specialist,” Investor’s Reader, July 26, 1972.

“They Make Money Paying Us,” Forbes, January 4, 1993. Weston, Josh, “Soft Stuff Matters,” Financial Executive, July/August 1992.

—Henry R. Hecht
—update: Steve Meyer