Gevity Going Back to Its Roots

Professional employer organization Gevity Inc., a provider of turnkey human resources services for small business, has shuttered a company acquired one year ago, ditched 200 unprofitable clients, closed and consolidated some offices, and taken millions in write-offs and restructuring and severance charges.

    As a result, the company barely made a profit in the fourth quarter of 2007, reporting net income of $301,000, compared with $10.6 million in the same quarter a year earlier.

    Company officials say the cuts and restructuring have refocused Gevity on its original business, positioning it to take advantage of future opportunities in the continuing trend toward turnkey outsourcing of human resources functions by small businesses.

    “We feel like we have made a couple of missteps in terms of our strategic direction in the last couple of years,” said Patrick C. Lee, Gevity director of investor and media relations.

    “But by refocusing on our core business, we expect to be back to the market leader position we were in a few years ago.”

    Based in Bradenton, Florida, Gevity started out as a professional employer organization aimed at small businesses. A PEO serves as a co-employer of the client companies’ employees and takes over a wide range of human resources functions, including payroll, health insurance and workers’ compensation.

    The company sought to expand into the HR outsourcing business, in which clients could outsource certain services like payroll to Gevity without a co-employment relationship and without having Gevity provide health and workers’ compensation coverage. The HR outsourcing business was seen as a way for Gevity to attract larger businesses that were able to contract for health and workers’ compensation coverage on their own but still sought limited outsourcing of things like payroll as a cost-saving measure.

    To bolster its HR outsourcing business, Gevity bought HR America Inc. in February 2007 for $10 million. But the move faltered, creating confusion among clients about various Gevity offerings and causing a spike in client turnover.

    In October, Gevity axed the architect of the strategy, former chairman and CEO Erik Vonk, a move that cost the company $1.6 million in severance charges. New chairman Michael Lavington, a British resident who is still awaiting U.S. work authorization to assume the second post of CEO, spent three months with the Gevity management team evaluating the company and visiting Gevity sites. His conclusion: Gevity needed to ditch its HR outsourcing business and concentrate on its core PEO expertise.

    “It is more important at this moment in time for Gevity to maintain leadership in PEO than to develop an alternative revenue stream,” Lavington said at an analyst conference call on February 26. “In 2008, we do not need distractions.”

    Lavington shuttered HR America and the related HR outsourcing business at Gevity, taking an $8.5 million charge for the loss. Gevity was unable to sell HR America and decided it was cheaper to simply close the business than to continue operating it while searching for a buyer. The $8.5 million charge indicates that HR America had already declined sharply in value from the $10 million that Gevity paid for it in February 2007.

    Gevity also took a $2.5 million charge to pay for restructuring its remaining business, including closing some of its offices and streamlining its corporate operations. Gevity maintains operations around the country, but more than half of its business is in Florida.

    Gevity has been working with its HR outsourcing clients to find replacement vendors or to switch to the Gevity PEO service. Lee said Gevity’s HR outsourcing clients employed 15,000 to 20,000 workers, although he did not have an estimate on the number of companies involved. (For a list of midmarket HR outsourcing providers that Workforce Management compiles, Gevity reported that in early February, it had 23 HR outsourcing clients whose workforces numbered fewer than 15,000 employees each, including Danka Business Systems and Delphi Mechatronic Systems.) The number of clients for its HR outsourcing services was a fraction of the 7,000 companies that contract with Gevity for its PEO services, the company said.

    As part of its internal evaluation, Gevity also decided to drop 200 PEO clients who were deemed unprofitable and to increase fees for another 150 unprofitable PEO clients. Gevity had previously emphasized adding clients and increasing market share as its top goal, even if some of those clients were initially unprofitable.

    Gevity is a publicly traded company, and so far Lavington’s actions have had only a modest effect on the stock price. The company traded as high as $30 a share in 2006, and dropped to a low of $4 late last year. It climbed back to near $7 in early March.

    Cynthia T. Houlton, an analyst at RBC Capital Markets, was encouraged enough by Lavington’s actions to raise her target price on the stock to $9. In a February 26 report, Houlton said Gevity’s decision to close HR America and drop unprofitable customers were both positive signs.

    “While we believe 2008 will be a challenging year, we believe management’s focus on its core PEO business should deliver more stable results in 2009,” Houlton wrote.

    But Gevity’s retreat from HR outsourcing may not be permanent. Lavington noted in his comments to analysts that while the HR America move failed, he remained convinced that the HR outsourcing market is attractive and might be a growth target in the future.

    “If we decide to re-enter the market, it will not be this year, and it will be with a different market approach,” Lavington said.