Houston Business Journal - May 22-28, 1998

The Big Business of Small Business
Paul Sarvadi wants Administaff to be the entrepreneur’s best friend

By Chris Carroll

When Administaff Inc. went public last year, it wasn’t because the company needed to raise money, says CEO Paul Sarvadi. It was really a public relations move.
As the first publicly traded professional employer organization, Sarvadi says the company wanted to build awareness of the fledgling PEO industry. And by listing on the New York Stock Exchange, Administaff meant to establish its own credibility.

"We wanted to emphasize that we’re here to stay," Sarvadi says.

Sarvadi, who always seems to have a supporting statistic on the tip of his tongue, notes that 87 percent of small business owners own stock and a good portion of those understand the differences in qualifications between stock exchanges.

Sarvadi and co-founder Gerald McIntosh opened Administaff in 1986 – just two guys in a 600-square-foot office with one telephone, three customers and a total of 32 worksite employees. The company had revenue of $750,000 that year.

Today, Administaff has more than 500 corporate employees, and its 190,000-square-foot headquarters is located on a 10-acre company compound in Kingwood. Revenue last year topped $1.1 billion, with profits of $7.6 million.

But even though Sarvadi runs a billion-dollar company now traded on the New York exchange, he still thinks of himself as an "entrepreneurial kind of guy."

"We’ll never forget where we came from," he says. "Our heart is for small business."

Over the years, Administaff’s services for small businesses have expanded from basic payroll and benefits functions to the full spectrum of human resource services. Administaff can provide everything from recruiting and hiring to performing work site safety inspections and providing safety training. At "Administaff University," the company offers courses on subjects ranging from team-building to workplace liability. Through an Administaff-organized Christmas gift-giving program, customers can even outsource good deeds to Administaff.

Sarvadi takes obvious pride in helping small businesses compete with the big boys. (His average customer has 16 employees.) "I’m excited to be doing something that changes the success equation," Sarvadi says. "We’re part of leveling the playing field by being a high performance human resources department for small businesses."

Sarvadi says he still meets with new employees in small groups, and encourages them to maintain the company’s small business mindset. He admits that the transformation from small business to large public company has been a challenge.

"As a company grows, the way you accomplish what you set out to do has to change," he says. "The values of the corporate culture don’t change, but how you do what you do has to change."

Sarvadi says he’s not one to spend many late nights at the office, and doesn’t expect that of Administaff employees.

"This is an 8-to-5 business," Sarvadi says. "I want people to go home to their families."

With five children at home, the pace at the Sarvadi house is often just as hectic as in the office. Tuesday nights the Sarvadis host a Bible study group. Thursday is the church youth group.

McIntosh says Sarvadi’s family is more important to him than his business. But that’s how they planned it all along.

"He would set things down at work for his family," McIntosh says. "He’s translated that thinking to the business."

It’s been more than a decade since Sarvadi and McIntosh made what they both call "Entrepreneurial mistake No. 1." They asked "What if?"

"We said ‘I know we’re not going to start this company, but if we were going to, how would we do it?’" Sarvadi recalls.

They started outlining their ideas for what would become Administaff, starting with the kind of corporate culture they would create.

Even before buzzwords like values-driven management and employee empowerment were in vogue, Sarvadi says he and McIntosh believed employees should "work to live, not live to work," and should be hired "for their input, not their output."

They drew up a model for a company that would provide small businesses with a full-service human resources department. McIntosh would handle the operations, and Sarvadi would head sales and marketing. They would bring on board the necessary experts in insurance, information technology, accounting, finance and law.

"Half of being smart is knowing what you don’t know," Sarvadi says. "Beyond that, you just fill in the holes."

Sarvadi’s strong suit has always been sales. He became an Amway distributor when he was 19 to support his wife and the first of their six children while attending Rice University and the University of Houston. He spent 10 years in multi-level marketing and other businesses, eventually becoming a salesman for OmniStaff, a Dallas-based staff leasing company.

McIntosh, who retired last year, heard Sarvadi’s first OmniStaff sales pitch.

"He didn’t tell me that I was his first sales call," McIntosh says. "But then, I didn’t tell him that I’d just sold my company."

McIntosh was so taken by the concept of staff leasing that he too went to work selling for OmniStaff. But about that time, OmniStaff went under.

Sarvadi and McIntosh contacted OmniStaff clients offering to help them resume management of their personnel. But those clients didn’t want to once again be hassled with handling their own payroll and benefits functions. They asked Sarvadi and McIntosh to help them find someone to take over for OmniStaff.

That’s when the two made "Entrepreneurial mistake No. 1."

Sarvadi recalls that McIntosh was pretty frugal with company resources in those early days. When sharing the company’s one phone became a hassle, Sarvadi suggested they spring for another. Instead, McIntosh bought an extra-long phone cord.

But even then, Sarvadi says he and McIntosh saw the future of Administaff.

"We had the end in mind from the beginning," he says. "We didn’t want growth for growth’s sake. We were always concerned with consistent, predictable results."

Sarvadi says they planned out the entire future for the company, including the eventual public offering and a marketing alliance with a large company. He says he came up with a plan to approach American Express way back in the late 1980s. That plan came to fruition last year when Administaff reached a joint marketing agreement with the financial services giant.

As they built Administaff, they had to help build the PEO industry, Sarvadi says. In the beginning, the industry had to define its product and establish a legal framework. In 1993, financial markets started opening for the industry, with Kelly Services acquiring a large California PEO. Administaff received major equity investments the next year from Bankers Trust and the Texas Growth Fund. Now, the industry is in its "rapid expansion phase," Sarvadi says.

Administaff’s long standing goal is to open 90 sales offices in 40 markets, averaging at least one new sales office per quarter. So far, it has 21 offices in 13 markets and serves employees in every state.

There’s plenty of room for expansion. While small and midsize businesses racked up $1.3 trillion in wage and benefits costs last year, only 2 percent of that was handled by PEO’s.

That’s a lot of potential sales, and Sarvadi hopes the new alliance with American Express will help tap that market.

When the deal with American Express was announced in February, Administaff’s stock soared from around $21 to a high of $49 and has been around $42 for several weeks.

American Express will pitch Administaff services to its 1.6 million small business clients and will get commission on their prospects that translate to "paid worksite employees" – customer employees transferred to Administaff’s payroll.

Although he doesn’t expect to begin seeing results until the third quarter, Sarvadi says the agreement is good for Administaff because American Express assumes the cost involved in setting sales appointments.

"That’s where the bulk of our marketing expense occurs," Sarvadi says.

American Express also bought a 5 percent stake in the company, with warrants to buy up to 20 percent as the stock price increases.

"I wanted them to have some skin in the game," Sarvadi says.

Clarification: This article indicates that Administaff is the first publicly traded PEO in the country. Rather, Administaff is the first publicly traded PEO listed on the New York Stock Exchange.

Reprinted with permission of the Houston Business Journal.