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Passing the Bucks

September 2, 2003
Related Topics: Outsourcing, Featured Article

It’s Big Monday in Houston, and the 19-member Exult, Inc., payroll team is working past the dinner hour. Tonight, they are producing 12,500 paychecks for refinery and chemical workers at BP, the giant British petroleum company. Another run of 10,000 checks will be prepared for employees of Pactiv, the maker of Hefty bags and other packaging products. Despite the high stakes--missing even one check is one too many--everyone stays cool. This is people business performed by machines, and guided by CPAs and bookkeepers handling keyboards. All are part of the Exult formula, which promises clients an annual savings of 15 to 25 percent and has turned a venture-capital investment of $50 million into a cash cow that Wall Street now values at $1 billion. Exult’s earnings illustrate that people management can be profitable, and can provide core strategic value.

    On Big Monday, software feeds software, blending in nanoseconds crucial data about each worker’s dependents, overtime and job classification. For the workers at the receiving end, who live in California and Indiana, Texas and Washington, the paychecks are vital. But for Exult employees in the sprawling 71,000-square-foot service center, it’s all in a day’s work. Next Monday, the team will produce 28,000 checks for Prudential Financial workers.

    This is the juiced-up, wired world of eHR, the Web-based information- and technology-rich universe of human resources outsourcing. Payroll is just part of what goes on under the tree-shaded roof of the company’s Houston operation, located in a lush suburban technology park. Here, about 300 office workers tend to the human resources needs of seven corporate clients. Concentrating on Global 500 companies, they prepare, bundle and mail about 1.8 million payroll and expense checks a year, put together severance packages, coordinate domestic relocations and house sales, and handle recruiting and relocation of overseas workers.

    Exult, which is based in Irvine, California, is just one of a number of companies in the increasingly crowded field of human resources business-process outsourcing. Competition is fierce, with companies like ACS, Convergys, Accenture and Aon competing for a share of the HR BPO market, while companies like EDS, IBM, Mellon and Fidelity are circling the wagons. Analyst George Sutton, of Craig-Hallum Capital Group, says that other companies are providing serious competition for Exult, but that the company has such a good head start that it should continue to grow. Sutton figures that, with $3 billion in contracts in the pipeline, a debt-free balance sheet and $100 million in cash, the company is an attractive takeover target. "There is a lot of value to this business," he says.

    Exult’s rapid rise offers dramatic evidence of the potential in outsourcing. The company is what investors call a pure play in integrated human resources management. Managing people programs is its only business, and it offers a soup-to-nuts menu of human resources services such as recruitment and relocation, not just, say, handling payroll or 401(k)s. Exult payroll wonks are no longer confined to the back office. They are ditching inefficient processes, streamlining and producing bottom-line profits. They are helping to change the face of human resources management.

Buyer beware
    John W. Boudreau, visiting research director at the University of Southern California’s Center for Effective Organizations, says CEOs and CFOs like outsourcing because an outsider can take over a company’s business processes for a fee and give them back, completed, at a reduced cost. He says there is even a phrase to describe it: "Our mess for less." He cautions, however, that organizations that rush into outsourcing human resources "may be taking a myopic view." If driving down recruiting costs is emphasized too much, companies may end up spending more on training. Retention rates could go down, and higher turnover may result. As for Exult, he says that its success in attracting large companies like BP allows it "to achieve economies of scale that many companies cannot hope to achieve."

    But Tony DiRomualdo, of Next Generation Consulting, adds this: "You have to make sure that at the end of the day, the vendor isn’t achieving cost reduction by diminishing quality, cutting corners on training or cutting corners on the quality of people they hire." Still, he says, the trend lines are unmistakable. "Everybody and their brother is trying to provide a full service" like Exult’s.

    Exult didn’t exist five years ago. Beginning with one client and a lot of technology know-how, the company grew into a global player with a blue-chip client list that includes Prudential Financial, International Paper, Bank of America, Vivendi Universal Entertainment and, in August, healthcare-services giant McKesson Corp. It is now one of the largest, if not the largest, stand-alone human resources outsourcing companies--with global operations producing nearly $500 million in annual billings. The company became profitable in the fourth quarter of 2002, and in the first three months of this year earned 3 cents a share, with revenues up 20 percent over the same period last year. Wall Street analysts say the stock could earn as much as 16 cents a share by the end of this year. Clearly, the stock market likes the company, and has given it a market capitalization of $1 billion. It also has made millionaires of its key executives.

    It’s heady stuff for high-flying Exult and its top officers. The firm grew out of a series of fortuitous meetings between investors looking for a New Economy-type start-up and entrepreneurs willing to build a company from scratch in return for a bundle of company stock. From two employees in 1998--CEO James C. Madden and his secretary, Sharron Lathrop, who is still at the firm--the company has grown to around 2,000.

    Exult got its initial infusion of $50 million from the venture-capital firm General Atlantic Partners in Greenwich, Connecticut. Signing up London-based BP, which had been looking for an outsourcing provider, as the company’s first client was crucial. Madden, joined by his longtime business associate Stephen M. Unterberger, directed the sales pitch to the British energy giant. "Initially, it was a 10-page PowerPoint presentation that proposed the deal," Madden says. "The final contract was a couple of binders thick."

    Speed is essential to Madden, a competitive yacht racer who knows what it means to be a few seconds ahead of the pack. He once won a 1,000-mile sailboat race from San Diego to Puerto Vallarta by 50 seconds. The same rush to the finish drives Exult. Madden says his only frustration in signing up BP was the time it took to make the transaction. "The pace we wish to work at was not always achieved," he says. "When we completed the deal, Steve and I were absolutely thrilled. We had taken a huge step toward a new business model that many had said could not be done."

    Both men also became multimillionaires. In the past two years, Madden has sold or proposed to sell $17 million worth of company stock, and Unterberger, president of an Exult division and the company’s chief technology officer, about $6 million. "Get good timing, some luck, a good idea, and when all three happen at once, stuff happens quickly," Unterberger says.

The first client
    For BP, the decision to go with the new company was full of risk. But it came after months of due-diligence research and consideration of proposals from other outsourcing companies. "We went through a beauty parade of Big Five consulting organizations," says Nick Starritt, now a London-based consultant but at the time a human resources chief at BP. "No one had ever outsourced as much as we envisioned." Starritt says that they came very close to contracting with one big firm, which he declined to identify, but the company pulled back when BP insisted they use the same human resources programs they wanted to sell to BP on their own employees.

"One could say we went from the sublime to the ridiculous."

    Starritt says that he wanted them to share the risk and "put their own skin in the game." When they refused, BP went looking for another partner. "One could say we went from the sublime to the ridiculous," Starritt says about going with a start-up. "We went from one of the largest organizations to one that had no experience and only a few employees. Many people wondered what I was smoking in those days." But he says that General Atlantic Partners had a good track record, and he was impressed by the firm’s promise of a heavy investment in the new enterprise. The contract is now in its third year, and the British executive says there have been some problems, but mostly the type that would be expected with the kind of innovative arrangement that developed with Exult. "There are many benefits to being an early mover, but you must expect some pain," he says.

    With the success of the BP contract, Exult began adding new clients. "We’ve grown really fast primarily because of the size of our clients," Madden says. Along with the service center in Houston--established because of its proximity to BP’s Texas oil operations--the company has service centers in Tennessee, North Carolina, Canada, Scotland and India. In June, Exult bought PricewaterhouseCoopers’ international BPO operations, enabling it to extend its reach to Eastern Europe, Asia and South America. Exult, like many other companies, is finding the lure of well-educated, technology-focused foreign workers with a good command of English to be irresistible. Though it doesn’t consider itself an offshore outsourcing company, Exult executives estimate that its service center in India will grow from handling about 2 percent of its work flow to about 30 percent. "The world is not a United States-based place," Unterberger says. "There are advantages and opportunities in realizing that."

    As unnerving as it is to traditionalists, Exult’s swift growth is proof that there is a market for a stand-alone company focused on outsourcing human resources business processes. In an attempt to address those who are alarmed by the trend, Madden says that Exult is not a rival to traditional human resources programs. "Here is what Exult is not. It is absolutely not human resources policy and strategy," says Madden, 41."Every one of our clients decides what people get paid, what the pay cycle is, and when they hire and who they terminate. They make all the decisions. We run the factory. I don’t want to be in the business of telling a senior HR executive or senior manager of HR how to run their business. I want to be their partner to basically do the administration and the technology."

A change in course
    Madden works in an office where he surrounds himself with photos of his wife and daughter and pictures of his racing yacht, Stark Raving Mad. The name came from his wife, who thought the amount of money he was pouring into the $1 million yacht was crazy. He recently sold his first boat, which won several big races from Southern California to Mexico, and is awaiting delivery of a newer, faster craft. It was his passion for sailing that prompted him to base the company in Irvine, adjacent to his Newport Beach home.

    The chief executive was introduced to sailing 30 years ago in Oyster Bay, Long Island, by his father. Both sides of his family were involved in heavy-construction projects, building roads, bridges and airport runways throughout the country. "I guess you could say I am the outcast by being the only one in the most recent generation who did not go into construction," he says.

"Do you want to design sailboats for a living or own one?" the school’s dean asked. "I thought about that for a second and said, ‘I’d kind of like to own one--a big one if I could.’"

    Madden’s love of boats led him to attend the highly competitive Webb Institute of Naval Architecture for a year. At Webb, he says, he got the best advice of his career. "Do you want to design sailboats for a living or own one?" the school’s dean asked. "I thought about that for a second and said, ‘I’d kind of like to own one--a big one if I could.’ " He then transferred to Southern Methodist University in Dallas, where he earned degrees in geology and finance.

    Madden and Unterberger met at Systemhouse, a global technology company that went through several ownership changes before becoming MCI Systemhouse. Madden was chief financial officer at the company before being recruited in late 1998 by General Atlantic Partners because of his background in business-process outsourcing. The idea was to start a new technology company built around outsourcing. Once he and Unterberger focused specifically on human resources outsourcing, the idea swiftly took off, beginning with the landmark $600 million contract from BP, which took ownership of about 5 percent of Exult. General Atlantic Partners is the largest shareholder, with just under 50 percent of the outstanding shares. The company went public in 2000 and trades over the counter. "Jim has executed superbly," says Steven A. Denning, managing partner of General Atlantic Partners.

Just getting started
    The recent purchase of Pricewaterhouse Coopers’ international BPO operations added seven new names to Exult’s growing client list, and makes the company less dependent on a few large businesses. Baird, the equity research firm, says that Exult’s three largest clients produced about 86 percent of the company’s revenue in 2002, making the loss of even one client a significant threat to profitability. But Baird says that the company will be fighting for a piece of a pie expected to grow from $2.5 billion in 2000 to $21 billion by 2005. As a new company that turned profitable last year for the first time, Exult executives say they’ve only just begun. Asked about the possibility of selling the company to a larger partner, as suggested by Sutton of Craig-Hallum, company officials say they are interested only in growing. Starritt, BP’s consultant, says Exult’s first big catch is happy and that no fallout is expected. "BP is seeing quality going up and costs going down," he says.

    Meanwhile, the company’s human resources professionals remain amazed at the turn their lives have taken. Maureen Scholl, general manager of the Houston office, says she never has to justify her existence to C-level executives at Exult. "I spent a long time being a back-office person, and fighting the budget fight," she says. "Here, there is no question why we are all here. This is where we make money, where we generate revenue, where we make the margin. It’s a very different feeling."

Workforce Management, September 2003, pp. 30-36 -- Subscribe Now!

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