PEO Insider - July 1998

Taking Care of Business: Why Administaff's Well-Rehearsed Organization Gets Rave Reviews From Wall Street to Washington

Witness a session featuring Kathleen Hillegas, Jerald Broussard, or Richard Rawson and it's like having great seats for a Broadway play - the orchestral hum of the speakers tuning the mic, the palpable excitement of the members buzzing about as they take their seats, the quiet hush as the speakers take their place. It's a performance that features known talent who inevitably get rave reviews from even the strongest of critics. Administaff is known for its talent, and also for their talented director, Paul Sarvadi.

Sarvadi has played the leading role for more than a decade, carefully scripting their organic growth, approach to insourcing, and recognizable brand name. Launched on April 1, 1986, Administaff has grown from a one-state operation into a $600 million public company with a nationwide presence. Along the way, Sarvadi has cast some of the best industry talent in supporting roles, ensuring Administaff's successful run.

PEO Insider sat down with the brain trusts behind Administaff's operational, financial, regulatory, and marketing success to learn more about the Administaff mission and the personalities who shape it. We found it takes teamwork, a million frequent flyer miles, a genuine appreciation of the industry (and each other), and the bottom line belief, "We take care of your people so you can take care of your business."

PEO Insider: After twelve years in the business, you are considered an industry veteran. How did you become involved, and what has been the biggest change since you started?
Paul Sarvadi: When I first heard the concept in 1984, I said, "Someone should have thought of this 100 years ago." At the time, I was the owner of a small to medium-sized business, and the idea resonated with me. The biggest change is the potential for success for the industry. Early on, it was a long shot. We were changing the way business was done and challenging long held views on employment. Today, there is no limit to what we can do.

PI: You were one of NAPEO's first members. Why is membership in the trade association important to you? As one of our largest members, do you feel you need NAPEO membership as much as you did when you were starting up?
PS: There are always issues that can best be addressed by a larger group of people with common interests. When companies work together, you accomplish a great deal more. Though our needs have changed, NAPEO membership is still important and valuable to Administaff. When we were starting up, the main thing we needed was a sense of community, of knowing others were out there trying to make it work. Now our needs revolve around larger issues, such as H.R. 1891, in which we join together for the good of the industry.

PI: What was your greatest or proudest moment as president of NAPEO?
PS: My proudest moment was at the end of my term. Before I became president, all of NAPEO's challenges had been external. During my presidency, we faced internal challenges for the first time. We had to decide how to move forward and how to manage the association. There was a big difference in the position the association was in when I began as president and when I left. We made our first significant budget decisions and changed the way the association was funded, the dues structure, etc.

PI: Administaff offers many services that help small clients grow their businesses. How do these services affect your clients?
PS: One of Administaff's core competencies is helping small businesses see the role human resources management plays in their success. We perform the full spectrum of what a proactive HR department does for a company - recruitment, selection, training, performance management, development of compensation plans, and the like.

Clients are pleased with our services. In surveys, 91% of our clients say they feel our service is a good value, and 99% refer us to other companies. The average number of times a client refers us is seven. Forty percent of our client base has originated from client referrals.

We want to provide the best of both worlds for our clients - the benefits and services of a large company and the working environment of a small business. We always ask, "What other things can we bring to increase the value for the client?" We recently arranged a partnership with Dell computers to bring the hottest computer technology to our employees. Not only do clients and employees get a discount, but they can pay for the equipment through special financing arrangements and payroll deductions.

PI: As an industry innovator, what are you most proud of?
PS: I am most proud of the success of our client base. What we set out to do has occurred at the client level. Many people refer to PEO services as outsourcing, but it is a combination of outsourcing and insourcing. You cannot outsource something you were not doing before. You may outsource payroll administration, but you insource human resources. We bring tools they did not have before.

PI: How do you think the industry will evolve over the next ten years? What role will there be for small PEOs?
PS: I think we will see an increased level of penetration and an evolution in the breadth of service. There will always be a role for small PEOs. There are approximately six million businesses with less than 500 employees. Right now, we only have reached 3% market penetration. However, I think the small players will function best as local niche players.

PI: Do you think we will see a brand name PEO?
PS: Administaff has had a game plan to become the first distinct, recognizable brand name PEO. Our advertising efforts have focused on that. Nothing we do happens by chance. Our success requires careful planning. We had to carefully position ourselves to become the only PEO traded in the New York Stock Exchange.

PI: How would you describe your growth strategy? What are its advantages and disadvantages?
PS: We have chosen to grow organically through expansion as opposed to acquisition. We did one acquisition, but when we looked at the cost and our ability to control the process, we felt our best bet was to grow organically. All the growth we have accomplished has been part of a predetermined plan to have 90 sales offices in 40 markets. Right now, we have 21 offices in 13 markets. Altogether, though, we have a service footprint in every state.

PI: Whom have you admired?
PS: The person I admire the most is the man who split time - Jesus Christ. He motivates and inspires me. I have also been inspired by historical figures, especially ones involved with the founding of our country - George Washington, Ben Franklin, Haym Solomon - people who make a difference.

PI: What is your personal or professional motto?
PS: There is a saying I use often: "Half of being smart is knowing what you do not know." You always have to be willing to learn. Several other thoughts guide me as well: We hire people for their input not their output. Work to live, don't live to work. And, of course, there is Administaff's slogan, "We take care of your people so you can take care of your business."

PI: We love to hear how people became involved in the industry. What is your story?
Richard Rawson: In the eighties, I had a business that provided consulting, computer, and accounting services for small businesses. I heard of the PEO concept from Paul Sarvadi in 1984. I then tried to sell PEO services to my client base. In 1989, Administaff hired me as a consultant. During the next four months, the amount of work I did for them grew until I was hired as their CFO in 1989.

PI: What are the unique challenges of being CFO of a publicly traded company?
RR: The CFO of a public company is considered the "conscience" of a company. That is not to say the CEO is not also a conscience, but Wall Street looks to the CFO as the last word on the financial stability of the company. Because of the Securities and Exchange Commission laws about insider trading and disclosure of information, the most challenging part of my job is to always disseminate information evenly to all constituencies. I have to ensure that I do not give any one person, in a phone call, meeting, or dinner party conversation, information about the success of our company that everyone else does not also receive.

PI: You invested a great deal of time in NAPEO's Accounting Practices Committee, steering the effort to create the NAPEO Financial Ratio Survey. What is the importance of this survey?
RR: When I attended my first NAPEO meeting in 1989, I realized the industry, because it was in a formative stage, had no financial reporting standards. One of the most exciting things I have ever done was chairing NAPEO's Accounting Practices Committee for four years. We developed financial reporting standards and industry ratios for PEOs to operate by. You do not often get a challenging opportunity like that. Long before Administaff went public, I began teaching Wall Street about the industry by using the financial standards and ratios.

PI: You and Administaff's founders have sought not only to build your company, but to build an industry. Why is this goal so important to Administaff?
RR: First, I believe a true professional, regardless of whether he or she has three, or six, or no letters behind his or her name, inherently wants to give back, to share with others. Second, if you really believe that PEOs are changing the way small businesses operate, then you do not care as much about the details of how you get there as long as you get there. This business is bigger than life, that's why we have to continually move the industry toward education and awareness.

PI: We heard the industry has become a bit of a family affair for you.
RR: That's right. My wife, Dawn, works for Administaff as director of community relations. She organizes the company's volunteer program, through which Administaff employees participate in community service programs. We have two daughters, and a few years ago we began taking them with us to NAPEO's Sales and Marketing Conference. It usually occurs right after school lets out, so we make it a family vacation. For me, it's a way to combine work and fun and give my daughters an opportunity to see what I do.

PI: When did you first hear about PEO services? What sparked your interest?
Jerald Broussard: I had been in the investment business for twelve years when a friend of mine told me about the concept. I come from a family of small business owners, so I grew up with that mentality. As a child, the way we earned our spending money was not to get a job, but to start our own business. I sold produce in a roadside stand. The entrepreneurial spirit is part of my experience.

PI: You were not an easy sell, though. You spent a long time researching the industry before you joined Administaff in 1989. Why the personal due diligence?
JB: The PEO concept invigorated me, but I was cautious about getting into the business. I had seen many deals that were going to "change the world" and then did not last three years. In 1984, I began to research the industry, a process that would take four years.

I met Jerry McIntosh and Paul Sarvadi before Administaff was formed. We talked and continued our dialogue for several years. The sealing vote for me, however, came from the clients. I talked to fifteen business owners who used PEO services. Each had similar negative experiences with their PEO. Some had lost their deposit money; some had not had their health or workers' comp insurance premiums paid. At the end of my conversation with each, I would ask one question: Based on what has happened to you, under what circumstances would you go back to doing business the way you did before? Their answers were the same: "There is no way I would go back." One man said to me, "Jerald, if I had to go back, I would sell the company."

PI: As senior vice president of business development, you were instrumental in forging the alliance between Administaff and American Express. What is the importance of such alliances to Administaff, and the PEO industry?
JB: The importance of the alliance to Administaff and to the industry is similar for both. For us, it means we have partnered with one of the greatest companies in the history of American business. American Express' corporate culture is in touch with the needs of small businesses, so the partnership made sense for us, since we serve small business clients. For the industry, it further validates the PEO concept and raises the water for all the boats. AmEx did not enter this partnership casually; they undertook a lengthy due diligence process. The alliance that was ultimately forged speaks volumes about the value of the concept.

PI: You developed a system to sort you client list by congressional districts so you could show legislators how their constituents were positively affected by PEOs. What kind of success did you meet with in this initiative?
JB: Well, it is true that I became a registered lobbyist in Texas to help get a bill passed - however, that's not something I ever told my mother. But yes, it was very successful. Our database divided our clients into their congressional districts. We showed the list to legislators to demonstrate the types of businesses involved with PEOs. We also encouraged our clients to write to their legislators about how important our services are to their business. This was all part of a highly orchestrated team effort. The legislators, for their part, were happy to learn such a service was out there. Our services fulfill goals of their legislative agenda. Legislators could see we are good for business owners and their families, good for employees and their dependents, good for government.

PI: You have long been a crusader for the "whole package" sale. You believe the industry should be full-service, long-term, and value-oriented. Where did you learn that philosophy?
JB: It came more from a "make sense" approach than anything else. We are not there to show small business owners a better way to handle comp, or health insurance, or unemployment insurance. We show them how to remove themselves from the process altogether. If you make those elements the primary piece of the sale, you remove the focus - that you are trying to get him or her out of the employment business in the first place. The focus should not be on workers' comp but on the impact your services have on the owner's and employees' lives.

Our industry has a tendency to apologize for being paid for what we do. Yet, few services that a business owner can buy have as great an impact as ours. No other service will be good for the owners, the employees, their families, the health of all involved, and the profitability and net income of their business. No other service can make the impact of a well-run PEO. That's why we're changing the way America does business.

PI: You are a living example of how Administaff seeks to "build an industry." You assist PEOs with legislative battles in states where Administaff does not even do business. Why is this outreach such a priority for your company?
Kathleen Hillegas: It has always been Administaff's philosophy to provide direction where we can. States often look to one another in terms of legislation, with laws creating ripple effects in neighboring states. If a law is passed in Illinois, a similar law will likely be passed in Wisconsin, Minnesota, and Iowa. It behooves us to share our expertise with any state facing legislative challenges.

PI: How many days a year would you estimate that you travel? How many states have you visited?
KH: I travel about 150 days a year and have worked with about 20 states.

PI: What are the most common challenges PEOs are facing at the state level? What have been some of the more unique battles?
KH: The most common battles concern the employer status of the PEO for the purpose of state UI and workers' comp policies. The most unique issue I have ever come across thus far concerned whether the PEO can be the employer for the purposes of prevailing wage acts.

PI: Today, we see many legal specialties. How difficult is it to be a generalist, to know a little about all issues?
KH: I was not always a generalist, I had a labor and employment law specialty, with a particular expertise in ERISA and employee benefit plan issues. My background positioned me well for the work I do at Administaff, but I had to learn the business issues affecting PEOs - the business of unemployment insurance or workers' comp - areas lawyers do not traditionally focus on. I did a great deal of research and read every resource I could find. I am not an expert in certain areas, such as the business side of workers' compensation policies, but I know the issues.

PI: Who do you most admire?
KH: Professionally, the people I admire are the industry veterans, the people who shaped this industry - Paul Sarvadi, Jerald Broussard, Jerry McIntosh, Richard Rawson, Carlos Saladrigas, Lou Basso, Mike Gatsas, Rex Eley, Marc Moore, Fran Morrissey. When I first entered the business, I was surprised to see the level of professionalism and knowledge these individuals brought to the industry. They shared a vision for what the industry could be. They imposed business ethics on themselves to ensure their viability and good reputation.

For more information about Administaff, contact the nearest office at 800-465-3800 or visit the company website at http://www.administaff.com.

Reprinted with permission of PEO Insider, The Official Publication of the National Association of Professional Employer Organizations.