Alan Horowitz

Thursday, 29 June 2006 20:00

Change agent

The date sticks in Paul J. Sarvadi’s memory: Sept. 14, 2001. And it’s not because of the terrorist attacks on New York and Washington, D.C., three days earlier.

His company, Administaff Inc., headquartered in Houston, suffered its own form of attack on Sept. 14 — a major supplier suddenly upped its charges, an act that would eventually cost Administaff an extra $12 million that year and $25 million the next year. And there was nothing Sarvadi and his management team could immediately do about it.

“It was really a disaster,” says Sarvadi, Administaff’s chairman and CEO, who co-founded the $1.2 billion company in 1986 and has headed it ever since. “It was going to dramatically affect profitability [and] it basically plateaued our growth.”

As the company’s financial performance deteriorated as a result of the additional costs and other related factors, its stock dropped, closing at $5.92 on Dec. 31, 2002, down from an average high around $26 the previous September. It lost hundreds of millions of dollars of market capitalization, its growth momentum came to an abrupt halt and its reputation was in ruins.

But the long-term result is that today, the company is better and stronger, and the stock is at record levels in the $40 range.

Administaff is the country’s largest professional employer organization. It acts as an off-site, full-service human resources department for small and medium-sized companies, for which it arranges employee benefits, management services and productivity resources such as training. Client companies number about 5,000 with more than 90,000 employees who are served by Administaff’s 1,500 employees.

Among the services Administaff provides is health insurance for the employees of its client companies, and it was on this very important cost component that Administaff got blindsided that September day in 2001.

The company that provided the medical insurance had troubles of its own. It was responsible for providing Administaff with accurate and timely claims information, which Administaff needed to price the health insurance component of its service.

The insurance carrier was merging 17 claims systems into three and had problems with the data and payment processes.

“They were paying claims twice and paying wrong ones and crediting some to the wrong account,” Sarvadi says.

Data accuracy was compromised not just for Administaff but for the insurance company’s other clients, as well. As a result of its inaccurate cost data, the insurance company sought to reprice the contract it had with Administaff not just immediately but retroactively, despite a contract provision that required it to give Administaff six months’ notice for any rate increase.

“We had to make a decision at that point, and this is what led to the loss in the next year,” says Sarvadi. “If we didn’t pay them, they were going to terminate the contract within 30 days. That would put all of our employees and their families on the street without health coverage. That’s not an option, so we paid them.”

Sarvadi says Administaff could have tried to get reimbursed from its clients for the higher expenses, but its contracts with customers called for prices to be changed only once a year, when contracts were renewed.

“I had to make the decision that basically said, just because someone didn’t honor their contract with us, was I going to go back to all of our 4,000 customers and break my contract with them?” says Sarvadi.

Instead, Administaff paid the insurance company, absorbed the higher costs — and then constructed a strategy to help it avoid a similar situation in the future.

“We certainly weren’t going to continue to do business with someone who did business that way, so we left them,” says Sarvadi. “And, of course, we left them without the accurate, timely claims data that we needed to price our service.”

The immediate effect of the higher insurance charges, says Sarvadi, was a dramatic impact on Administaff’s profitability and growth. Administaff lacked the information it needed to make sound pricing judgments and customers, when their contracts came up for renewal, were faced with increases of between 20 percent to 50 percent in their health care costs. Administaff’s salespeople, who had been focused on finding new client companies and spurring growth, now found themselves working on retention, as some clients were hesitant to renew in the face of such higher costs.

The consequences of focusing on retention rather than on growth were significant. Historically, Administaff had grown at a double-digit annual rate, as much as 20 percent, 30 percent or more, year-over-year. In 2002, with the company focused on damage control, unit growth fell to minus 3 percent. It was the one and only year in the company’s history when the number of employees covered fell, and profitability evaporated.

Sarvadi and his management team knew something had to change, and they created a strategy to turn the company around and make it better than ever.

“Generally, what doesn’t kill you usually makes you a whole lot better,” Sarvadi says.

The result was several systemic improvements in the company’s strategy. First, Sarvadi and his team decided that the company would never again rely on just one supplier for a service as important as health care insurance.

“We didn’t just move from one carrier to another,” says Sarvadi. “We now have a national network of eight different carriers.”

Next, they reorganized part of the business. The pricing group, which typically was in the sales area, and the cost-management group, which was in a separate area, were brought together.

“We put these two together so they would have direct and timely throughput between cost data coming in and pricing going out,” says Sarvadi. “We have to estimate what the health care costs are going to be per year, then we have to manage those expenses. And at the end of the year, you see how well you did between estimating costs that you built into the price and the actual costs as they turn out a year later.”

The net effect of bringing these two functions together is more timely information and more accurate pricing.

Doing this meant bringing in-house actuarial capabilities that previously were provided by the insurance provider. As another part of the company’s reorganization, expertise in benefit plan management has now been developed within the company.

“We actually triangulate on an ongoing basis between our internal staff, the carrier’s staff and an independent third-party actuary to make sure that we’re paying for what we bought and to make sure that our customers are getting the most value out of the dollars that are allocated for benefit costs,” says Sarvadi.

The benefit of developing this in-house expertise is to ensure that Administaff provides its customers with the best value. In addition, says Sarvadi, “For us internally, it helps us to manage in a way that we make sure we have a match in how we price to our customers and what our costs turn out to be, which means we have a more stable, reliable earnings model.”

The reorganization wasn’t the only thing Sarvadi was focused on. At the same time, the company sued its insurance carrier. A jury found in favor of Administaff and awarded it $8.25 million, but that was much less than the losses it incurred and was not much more than the $6 million the company spent on legal fees.

“But much more important to us was to be vindicated in terms of our reputation,” says Sarvadi.

By 2005, the sales force was again selling, and Administaff’s annual growth had returned to 20 percent. Client retention numbers are also returning to precrisis levels. And Sarvadi says that the company’s internal surveys find that 91 percent of customers say Administaff is good value for the money, 94 percent say they are likely to recommend the company to others and 91 percent say the company meets or exceeds their expectations.

“Probably the most important lesson is that you have to keep the faith, you have to persevere,” Sardavi says. “You sometimes have to ignore what’s being said when you know that the perception doesn’t line up with the reality. Perceptions are a strong force to contend with, but you just have to persevere.”

When things are going particularly badly, when it seems that the sky is falling, that’s when you really have to dig deep and carry the responsibility you have for your people and your company, Sarvadi says.

“Follow your instincts to do the right thing, and then persevere through it,” he says. “It will pay off.”

In addition, he says, the company has developed a corporate culture to deal with adversity. Sardavi says upper-level management has to recognize that change is inevitable and talk about how it will deal with it.

“We literally put in writing that, in our company, we want to anticipate and respond to change as an opportunity to innovate and learn,” says Sarvadi.

The most important element to doing this is to build a senior leadership team that you can trust, but one that is also diverse in how the individual members think, he says.

“CEOs have to be brutally honest about what’s working and what’s not working, and they have to have the people around them who can be part of the solution,” Sardavi says.

For Administaff, a serious shock to the system led to a re-examination of how it operates, how it views its core competencies and how it organizes itself. Millions of dollars in profits were lost, and the company lost even more in market capitalization. But the end result more than four years later is a stronger company that is more self-reliant and less at risk to outside forces. From adversity, opportunity can really come knocking.

HOW TO REACH: Administaff, www.administaff.com

Saturday, 29 July 2006 07:30

The Martineau file

Born: Cleveland, Ohio

College:
Jacksonville University, Jacksonville, Fla.; graduate work, Rollins College, Winter Park, Fla.

Biggest business challenge:
Getting people to understand the value of the product U.S. Concrete sells —concrete. It has long been undervalued, because customers think of it as a commodity, which it is not.

This is a product that can be value-differentiated, value-added, in many, many ways. It has durability, it doesn’t burn, it doesn’t rot, termites don’t eat it, and hurricanes don’t blow it down.

As an industry, we could probably double the price of the product and not lose any market share. This is a pretty significant upside for our company.

Most important business lesson learned:
Business is about people, not X’s and O’s and numbers. That’s all part of it, but unless you have a philosophy embraced by people, you’re not going to succeed.

Friday, 28 July 2006 20:00

Aggregate plan

Some people may look at an industry populated by more than 2,000 small, independent companies as a hopelessly fragmented market, with the players doomed to compete on price.

But not Eugene Martineau. He sees in the concrete industry not only an opportunity to be a consolidator, but an opportunity to start competing against other building materials industries.

Martineau, president and CEO of Houston-based U.S. Concrete Inc., has made accommodations for its acquisition-oriented growth strategy from the beginning, starting with a clear vision of being an industry consolidator and creating a solid foundation to build on.

“Unlike a lot of consolidators or rollup-type companies, we have been building infrastructure almost from Day One to support a much larger organization,” says Martineau.

The acquisition strategy is straightforward: Assemble a leading position in as many target markets as possible. This leading position is vital, because besides added buying power, it gives the company a platform from which to educate consumers about how concrete can be used in new ways, all in an attempt to try to take market share from other building materials, such as wood and steel.

“We are competing against other building materials,” says Martineau. “If you get into a market and start competing against other concrete companies, you are not as focused as a company. We want to be the leading player and consequently offer the customer the best value.

“Everybody nickels and dimes on price, and the customers ultimately suffer because they do not get the advantage of the different types of concrete available.”

The strategy of being the leader in any given market helps U.S. Concrete avoid having its products become nothing more than commodities.

“We want to be sure we can execute a leading position,” says Martineau. “We believe the real opportunity is to help the industry stand out. We have a valuable product that is not being marketed and sold at levels that it could be.”

The company was formed in 1998 and went public in 1999. In its relatively short history, U.S. Concrete has made nearly three dozen acquisitions and increased revenue from $395 million in 2000 to $576 million in 2005.

Choosing targets
U.S. Concrete’s management evaluates potential targets on market share and a host of other factors, such as construction activity in the market, projected population growth in the region and other trends.

But one of the most important factors is people.

“Our process is to really understand if there is a good reason for these companies to get together,” says Martineau. “Is there a cultural fit? Can you change the culture if necessary? There’s a real need to understand the culture of the company one is thinking of acquiring.”

To analyze a company’s culture, Martineau and his executives talk with the sellers and find out what they want from the sale and where they are coming from. It is also important to get a feel for key managers.

“You want to have people that have somewhat of a common philosophy to you in doing business,” says Martineau.

Martineau looks for people who have similar views to his on the concrete industry or who are trying to execute a similar strategy on a smaller scale.

“Maybe they are frustrated by the fact of the fragmentation in the market and that somebody is always wanting the market as a commodity,” says Martineau. “One of the other characteristics we look for is for people that are progressive and thinking outside the box in how they use the product and how they compensate people.”

In one case, Martineau found two brothers running an operation in California. They were very progressive in their marketing and sales, focusing on educating customers on ways to save money, while making investments in customer service and product development. It’s a philosophy similar to his own, which makes the integration process much easier.

“Fly out personally,” says Martineau. “If you are a growth company and have a vision, you better make sure they understand the vision.”

The integration
Once the acquisition is made, integrating the new company into U.S. Concrete becomes the next challenge, and is critical to have a plan for the early stages of the integration.

“You have to know exactly what you will do during the first 90 days,” says Martineau. “The way you start will have a lot to do with your ultimate success.”

He says that if you don’t have a plan for the first 90 days, it is hard to implement one later because people start developing their own plan.

One of the gains from acquisitions is being able to apply best practices at every location to maximize potential, and it’s something that’s implemented as soon as possible.

“The business lends itself to standardization,” says Martineau. “We find the best mousetrap and then we try to duplicate it everywhere.”

But integrating a company goes beyond machines and processes.

“The biggest challenge is people,” says Martineau. “You have to make sure people understand that things are going to change. Things are not going to be done exactly the way they were before. A lot of people will listen and nod their heads, then when something changes, they go ballistic. You have to continually reinforce the message and not just change for the sake of change.”

During that initial period, employees of the acquired company who aren’t willing to follow the new best practices should be removed from the organization.

“Find out who will buy in to the ticket and who won’t,” says Martineau. “It’s a process that takes time. Start with everybody. You have to talk to them, lay out your plans and talk to them some more. You keep communicating and answering questions.

“Some people I’ve told the same thing to 20 times before they started believing it. If you find one person that will not get on board, even though they nodded their head, then you have to figure out a way to move along without them. Try to do it in a manner where people know you made the effort, but remember that a lot of other people will be looking to see how you react. You have to be consistent.”

To get the message across, U.S. Concrete uses slogans to communicate complex ideas in simple ways.

Slogans such as, “We drive out fear of the unknown” and, “We are they” are easy ways to reference the company’s commitment to answering questions so that everyone knows what is going on and its emphasis on teamwork.

Martineau says most of his slogans are variations of things he’s picked up over the years from other sources and put his own spin on.

“Go to outside sources and find something that you really believe in and excites you,” says Martineau. “Then apply it to your situation.”

In addition to the slogans, the most important communication tool is face-to-face contact.

“Don’t be dependent on computers and e-mails,” says Martineau. “Try to get face-to-face with the people. I think in today’s world, we have lost an awful lot because we don’t understand what people are trying to communicate. There’s no personal contact, so you miss body language and other cues.”

Long-term gains
U.S. Concrete has become the largest independent purchaser of cement and aggregates in the United States. That increased buying power has obvious benefits, but Martineau says the company’s size also means that suppliers are willing to work as partners to solve problems.

“The way we do it is you start out with trust,” says Martineau. “We sit down and look at things strategically. What are the opportunities for both companies?”

Building a trusting relationship means sharing intimate data with the supplier so it can fully evaluate the opportunity.

“We put all the parameters out there, and a blueprint is laid out of how everything would work,” says Martineau. “The other things you have to do are stay in constant communication and have leadership from the top. We pledged an alliance that would be supported by the top levels, and it would take the involvement of the CEOs and other key executives to make sure it wasn’t watered down.

“People find reasons not to make things work. Stay involved. We meet on a quarterly basis with the companies and make sure there aren’t any issues.”

The end result is a solid relationship and a situation in which both companies come out ahead.

“We can lower our costs and their costs, rather than us just trying to beat them up for a low, low price,” says Martineau.

Acquisitions are always a challenge, but Martineau and his team have shown that having a clear plan and a commitment to communication can dramatically improve the success rate of an acquisition strategy. But he says it’s important not to forget to have fun.

“There was a lot of excitement here after the first deal, and there still is today,” says Martineau. “You have to keep people excited, have some fun and don’t forget to celebrate your victories.”

How to reach: U.S. Concrete, www.us-concrete.com

Friday, 30 June 2006 06:38

The Sarvadi file

Born: Aurora, Ohio

Education: Attended Rice University, University of Houston

What is the biggest business challenge you’ve faced, and how did you overcome it?
Establishing a legal framework for our service. When we started the company, we had to start not just a business but an industry because there really was no outsourcing of the human resources function at that time.

We had to battle the regulatory environment and get legislation passed. That’s a pretty formidable challenge. The challenge was overcome through perseverance and having the right people. Bring the right people together and give them the right tools and the right reasons to succeed, and you can overcome challenge.

What is the most important business lesson you’ve learned?
Keeping the faith and looking to the future with faith and optimism. And then persevering until you accomplish your goals.

Sarvadi on leadership:
People don’t want to be managed, they want to be led. And you lead people through developing personal influence that comes from caring about them and helping them put their talents and capabilities to work and helping them see the direct result of their efforts.

Having an effective reward system and communication system with your people and setting realistic but challenging objectives and equipping people to get there is what leadership is about. That’s really what the CEO’s job is.