Gevity HR, Inc

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Gevity HR, Inc.

600 301 Boulevard West
Bradenton, Florida 34205
U.S.A.
Telephone: (941) 741-4300
Toll Free: (800) 243-8489
Fax: (941) 741-4333
Web site: http://www.gevityhr.com

Public Company
Incorporated: 1997
Employees: 934
Sales: $425.8 million (2003)
Stock Exchanges: NASDAQ
Ticker Symbol: GVHR
NAIC: 561330 Professional Employer Organizations

Gevity HR, Inc. is a complete human resources management solutions provider, offering outsourced services for employee recruitment, management, and retention, for payroll processing, benefits administration, and related paperwork, as well as for compliance with government regulations. One of the largest professional employer organizations in the United States, the company serves more than 8,000 clients and 100,000 client employees and operates more than 40 sales and consulting services offices located in Alabama, Arizona, California, Colorado, Minnesota, New Jersey, New York, North Carolina, Tennessee, Texas, and Florida. Gevity HR offers its clients and coemployees the most efficient technological infrastructure for payroll processing, including an online data entry at Gevity HR Central. The Internet portal provides direct access to payroll and benefits information as well as management guidance and ideas.

Founders' Success

In the familiar American tale of the entrepreneur starting a business in the garage, the image is of someone tinkering with a formula or building a better mousetrap. Tom Cooley, William Mullis, Jim Roberts, and Doug Mark diverged from that image when they started a service company in Cooley's garage in 1984. A freshly painted workbench became a shared desk around which the four men tinkered with ideas about how to assist small businesses in handling certain aspects of human resources management. Concerns included payroll processing, state unemployment and other tax issues, workers compensation, health insurance, benefits administration, and a complex array of changing government regulations.

Through the then new concept of employee leasing the company, called Staff Leasing, would become the official employer of client employees, then lease them back to the client for a fee. By pooling employees of many small companies under the umbrella of a professional employer organization (PEO), Staff Leasing would provide insurance benefits to small client companies at costs only available to large businesses. Under this plan the client retained responsibility for hiring, firing, and worksite safety. Service fees covered certain taxes, workers compensation insurance, plus fees for administration. Staff Leasing invoiced clients for paid salaries and wages, and for their portion of costs related to health and retirement benefits plans.

The four founders purchased a photocopier on a payment plan and incurred $20,000 in credit card debt to finance general business expenses while the company established a client base. They began by calling on companies in Bradenton, Florida, street by street. The men approached businesses on one side of the street in the morning, stopped for lunch, and then called on the businesses on the other side. Within six months they attracted enough business and interest to feel assured of success.

Staff Leasing found clients primarily among construction and manufacturing companies who benefited most from low rates for workers compensation insurance. Other client businesses included barber and beauty shops, automotive repair shops, health services, retail stores, restaurants, hotel and lodging services, landscaping companies, and plant nurseries. Clients employed from five to 100 people. In 1988 Staff Leasing posted $26 million in gross sales. The company opened its first branch office in Ocala in 1989, followed by sales offices in St. Petersburg, Orlando, Fort Myers, New Port Richey, Lakeland, Brandon, and throughout the state of Florida. A subsidiary, Total Employee Leasing Services, handled insurance provisions and claims administration.

After eight years of successfully building the business, Roberts and Cooley wanted to retire, so in April 1992 the founders hired an appraiser to evaluate the worth of Staff Leasing. Shortly afterward, Mark became ill, pushing the process forward. As word of the appraisal circulated, Staff Leasing received several unsolicited offers. In November Craig Capital Corporation, an investment group led by Charles Craig, bought the company. Roberts retained his 25 percent interest in the company, while his partners sold for $15 million. Roberts and Mullis stayed with the company for a short time, with Mullis as president and chief executive.

By the time of the acquisition, Staff Leasing had become the largest PEO in the state of Florida, with 25 offices, plus one office in Georgia. Invoices for $450 million generated gross sales of $232 million in 1992; the company employed 30,000 offsite workers and 420 staff members.

Expanding Outside of Florida During the Mid-1990s

Under new ownership Staff Leasing continued to expand, opening offices in Florida and Georgia. In 1993 alone revenues increased 90 percent to $438 million. The company established Staff Leasing in Texas, the second largest employee leasing market, with the September 1994 opening of an office in Irving, near Dallas-Fort Worth. Another four sales offices opened throughout Texas in 1995. By the end of 1995 Staff Leasing operated 35 offices in Florida, Georgia, and Texas.

Other expansion involved partnerships with banks that promoted Staff Leasing services to business customers. Bank of America began to offer the services in 1995. In October 1996 Barnett Bank of Jacksonville experimented by offering Staff Leasing services to small businesses at banks in six counties. Within the first two weeks, six businesses in Manatee County enrolled in the program. Barnett Bank expanded the program statewide and new business generated by Barnett Bank contributed to Staff Leasing's growth by 10 percent that year. A similar promotional arrangement with Dwyer Group, of Waco, Texas, involved Dwyer's franchises, E.K. Williams and General Business Services, which already offered accounting, tax, and counseling services to small businesses. Through Staff Leasing, the franchises began to offer PEO services in Florida, Georgia, and Texas, while Staff Leasing reciprocated with referrals.

Although gross revenues exceeded $1 billion in 1995 and 1996, the company operated at a loss, leading Staff Leasing to the elimination of health insurance subsidies to client companies. To reduce costs over the long term, Staff Leasing invested in the most advanced computer technology available to process payroll and to facilitate benefits administration for 78,000 leased employees.

To fund further expansion, Staff Leasing became a public company in May 1997, with an initial public offering of 4.6 million shares of stock at $17 per share. The offering grossed $68 million, including approximately $8 million for existing shareholders. Staff Leasing expanded to new states, with two offices in Arizona, one in Mesa, near Phoenix, and the other in Tucson, and one office in Minnesota, in Edina, near Minneapolis. The company chose these markets for their large numbers of small businesses and low unemployment. In addition, the company opened new offices in Savannah, Georgia, and in Corpus Christi and Beaumont, Texas. During 1998 Staff Leasing opened offices in Nashville and Memphis, Tennessee, and Greensboro and Raleigh, North Carolina. By the end of 1998 Staff Leasing operated 44 offices in seven states, serving more than 10,200 clients and 128,000 workers and generating revenues of $2.4 billion.

1999 Insurance Contract Prompting Shift to White-Collar Clientele

Providing blue-collar clients with low-risk workers compensation insurance, Staff Leasing encountered difficulties that prompted a change in its basic business strategy. The change began in 1999 when Liberty Mutual Insurance Company canceled its contract to provide Staff Leasing with workers compensation insurance after losing money on the contract. Staff Leasing negotiated a contract with CNA Financial Corporation, a loss-sensitive agreement that involved a higher level of financial risk than the fixed-rate contract with Liberty Mutual. Under the terms of the contract, the company held $30 million in reserve as collateral, equal to one-third total cash and investments. If premium income invested did not earn 7.5 percent interest during the year, CNA required Staff Leasing to supplement the difference.

To offset the risks of insuring blue-collar employees, who are more likely to be injured at work, Staff Leasing decided to diversify by marketing its services to white-collar businesses. In addition, companies employing higher-paid professionals experienced less employee turnover, reducing unemployment claims as well. Risk management involved an adjustment of fees to account for these differences and termination of contracts with clients that generated minimal profit. During the first three months of 1999, Staff Leasing terminated contracts with 500 clients involving 3,700 employees, maintaining relationships with 10,357 clients and 126,466 employees. The higher cost prompted several clients to end their association with Staff Leasing.

Company Perspectives:

Vision: Businesses are universally recognizing people as the single most important resource in their endeavors to create value. Sharing in Gevity's expertise, know-how, and technology, specifically designed to leverage human capital, uniquely supports this effort and enhances the ability of business leaders to focus on their core competencies.

Mission: Our mission is to strengthen our clients' human capital by sharing our leading-edge expertise, know-how, and technology to find, develop and retain people, manage all related paperwork, and protect their business.

Staff Leasing continued to expand with new office locations in Alabama, Colorado, Georgia, and Tennessee, and a new bank partnership, with Bank One Corporation, but approached sales in a new way. To attract white-collar businesses, as well as to maximize its human and technological administrative infrastructure, Staff Leasing offered existing services individually and added new services. The company offered payroll administration and certain kinds of corporate insurance, such as general liability and commercial automobile insurance, separate from its co-employment package. Through the introduction of human resources management outsourcing and consulting services, Staff Leasing provided assistance with employee recruitment and retention and related tasks, such as skills matching, job description, and development of reward and incentive programs.

The new strategy shifted the company's focus of growth, from small businesses in small cities to small and mid-sized companies in major metropolitan areas. Staff Leasing closed some offices and relocated other offices to urban locations, Metropolitan offices opened in Houston, Denver, and Atlanta. Staff Leasing explored opportunities in Philadelphia and Manhattan by sending a sales team to those areas before committing to a permanent office in New York City. In addition, the company intended to attract gray-collar clients, defined as highly skilled workers, though not as highly paid as white-collar workers.

To reflect the change in strategy, Staff Leasing adopted the name Gevity HR in the summer of 2001. The new name suggested the company's mission to help clients develop positive and lasting relationships with their employees.

2001 Setback

Just as Gevity began to see some success through the diffi-cult transition from blue-collar to white-collar clientele, the company experienced a sudden increase in costs due to an unusually high level of workers compensation claims. Fee increases did not adequately cover the costs of CNA's high-risk insurance and Gevity had to draw $22 million from reserve funds to cover the costs. Gevity reported a loss of $15.6 million on revenues of $3.1 billion in 2001.

While many other PEOs closed under similar circumstances, Gevity initiated several cost-cutting measures that would immediately reduce operating expenses. The company eliminated executive bonuses for the year and laid off 120 employees, involving 80 at corporate headquarters and 40 at branch offices. A change in office infrastructure, such as communications equipment, software, and hardware, also reduced operating expenses. In addition, Gevity raised prices to be more compatible with potential claims, expecting that new business would offset lost clients.

In its attempt to become profitable again, the company faced a difficult economy, which meant lower fees due to high unemployment. The PEO industry experienced slower growth overall and the Florida market for PEO was saturated. From a competitive standpoint, Staff Leasing/Gevity had not advertised much, so the company did not have widespread recognition. Operating the most advanced and efficient technological infrastructure among PEOs, Gevity had a financial and service advantage over the competition, however. Gevity HR Central, the company's new Internet portal, was designed for client convenience, providing customers with online data entry for payroll as well as enhanced information access. The quality of Gevity's technology infrastructure earned the company recognition from Information Week as a top innovator.

Factors that served to return Gevity to profitability included an increase in the average employee pay as the company's client base changed. Since fees are based on payroll, the company earned more in fees despite a 10 percent decline in the number of worksite employees. Workers compensation costs declined as a percent of wages as well. The client mix encompassed 24 percent blue-collar, 43 percent gray-collar, and 33 percent white-collar employees.

New Executive Leadership Propelling Gevity to Profitability in 2002–03

In March 2002 Gevity hired Erik Vonk as chief executive officer. Vonk brought a background in international banking and experience as CEO of Randstad North America, a Dutch temporary staffing firm based in Atlanta. Vonk's success at Randstad included the provision of 16,000 temporary workers for the 2000 Summer Olympics in Atlanta. After a rapid succession of four CEOs since 1994, Vonk brought a new level of sophistication and stability to the executive office at Gevity.

Vonk made an immediate impact on the company, as he restructured the branch network in order to improve communication with clients. The function-based structure proved ineffi-cient, requiring a client to speak with different people about different concerns. The new structure provided individual customer relations managers, who could speak with clients about all of their concerns.

Gevity settled issues that improved its financial standing. A new workers compensation insurance contract with American International Group (AIG), effective January 1, 2003, required no investment risk related to premiums. Although Gevity paid a higher premium for coverage through AIG, the increase aligned with marketwide increases. A private placement of $30 million in convertible preferred stock, funded by Frontenac Company LLC, provided funds for expansion and allowed Gevity to repurchase stock from Charles Craig.

Key Dates:

1984:: Staff Leasing begins operations in the garage of one of its four founders.
1989:: The first branch office opens in Ocala, Florida.
1992:: Gross sales reach $232 million as the company leases 30,000 employees.
1993:: Craig Capital acquires Staff Leasing.
1995:: Staff Leasing operates 35 offices in Florida, Georgia, and Texas.
1997:: Staff Leasing opens offices in Arizona and Minnesota and initiates a public stock offering.
1999:: The company begins a shift from a blue-collar to a white-collar client base.
2001:: The company's name change to Gevity HR reflects an emphasis on human resources outsourcing.
2003:: Gevity HR opens six offices in California.

In April Gevity announced a change in its accounting procedures. The company began to speak in terms of "net" revenue rather than "gross" revenue. The latter combined salaries, wages, certain payroll taxes, and administration service fees. Gevity began to separate the fees into net revenues for public disclosure. Thus in 2002 gross sales of $3.4 billion differentiated greatly from net sales of $374.7 million from fees. The corporate accounting scandals of 2002 prompted the accounting change. Gevity led the PEO industry in this move toward transparency and recounted the previous five years of net sales in its 2002 annual report. Gevity reported net income of $4.7 million in 2002.

Vonk addressed the persistent problems in Gevity's sales organization by hiring Robert Minkhorst as senior vice-president of marketing and sales. Throughout the transition to human resources outsourcing, Staff Leasing/Gevity experienced a high turnover in sales representatives as the situation demanded different sales skills, from an appeal based on low-cost insurance to one based on the intangible benefits of human resources outsourcing and consulting services. Initially, Minkhorst's adjustments furthered the turnover, as he sought to reduce competition among Gevity's sales associates by reorganizing the sales structure into five regions, 15 markets, and 330 sales territories. The sales representatives had been accustomed to selling and developing referrals on a national level and the change narrowed the field to smaller, prescribed areas. Minkhorst increased salaries, cut perks, and tied some bonus pay to teamwork. Through psychological testing and intensive, month-long training, Minkhorst ensured that new sales representatives possessed the skills and attitudes that his approach required. Gevity hired more than 100 sales representatives, titled Business Development Managers, seeking candidates with an awareness of the human resource needs of small- to medium-sized companies. Gevity enhanced its consulting services by hiring the same number of human resources consultants.

As the company revived expansion into new markets in 2003, Gevity's offices integrated sales and consulting staff. Growth focused on the New York City area and major metropolitan areas of California. Gevity opened sales and consulting offices in Melville and White Plains, New York, and acquired TeamStaff, Inc., of Somerset, New Jersey, in November. The $9.7 million acquisition involved 1,500 clients and 16,000 client employees and significantly increased Gevity's profits in the fourth quarter. In northern California Gevity opened offices in Concord, San Francisco, and Santa Clara in Silicon Valley, and in southern California in Irvine, Los Angeles, and San Diego. By February 2004 one-third of the 230 sales representatives on Gevity's staff were located in California.

Through alliances with AIG and Transamerica Retirement Services, Gevity enhanced its employee 401K plan benefitto meet the interests of its white-collar and gray-collar clientele. Transamerica provided new investment options, investment consultations, and support materials and services. AIG Advisor Group network offered a variety of finance consultation services.

Gevity succeeded in its strategy to address the human resources requirements of a professional clientele. In addition to attaining more business from legal, computer, and social services, and finance, real estate, and insurance companies, Gevity increasingly contracted with mid-sized companies. New contracts included ComUnity Lending, a California mortgage company, with 1,400 employees, and Financial Service Solutions, a mortgage provider in Charlotte, North Carolina, with 1,000 employees. Contracts with a professional client base provided a higher operating margin, improving profitability. In 2003 revenues increased 13.7 percent to $425.8 million, while net income more than tripled to $15.7 million.