Exult Targets Heavy Hitters for HR Outsourcing
James Madden seems to have had a good idea at the right time.
Madden, chief executive of Irvine-based Exult Inc., thought he could lure big companies to outsource their human resources operations with promises of big savings and an efficient, Internet-based operation.
So Madden founded Exult with Greenwich Conn.-based private investment firm General Atlantic Partners LLC in 1998 on the notion that large companies could cut their annual human resources costs by a third through outsourcing.
“And,” Madden said, “I really wanted to find a venture we could do on the Internet.”
But Exult has transcended the dot-com bubble. A downturn in the broader economy has pushed companies to make just the sort of economies Exult is offering.
Now, nearly three years after Exult’s launch,with the company boasting a $3 billion business backlog and a new pact with International Paper Co.,Madden’s idea seems to be one Internet push that’s sticking. Last week, the company counted a market value of nearly $1.6 billion.
While Exult has won over cost-conscious employers, the company still must prove it can handle the daunting task of pleasing the thousands of employees at its clients while integrating the systems of its new customers.
In September, Exult took a big step in that direction when Bank of America Corp., which had signed a $1.1 billion, 10-year agreement last year for Exult to manage its payroll and benefits, handed over hiring duties for its regional branches to Exult. Along with the new responsibilities came $550 million in added revenue over nine years.
“We have been very pleased with the successful implementation of our alliance with Exult,” said Mary Lou Cagle, a Bank of America manager, at the time. “Our decision to expand our relationship is a tribute to how well we have been able to work together and execute our plan.”
In the third quarter, Exult posted revenue of $75.3 million, a 17.1% increase from the second quarter and a 261% jump from a year ago. Exult managed to trim its loss to $11.9 million in the third quarter, down from a $17.5 million loss in the prior quarter and $17.6 million the year before.
Exult says it expects to be profitable by June. Madden ties that lofty goal to another: “We’re going to close five accounts next year,” he said.
So far, Exult’s multiyear accounts average $800 million each.
The company’s revenue to date largely has come from Exult’s accounts with Unisys Corp. and Bank of America. Exult engineers have moved the human resources systems of both companies to Exult’s Internet-based system,the exact plan the company had outlined earlier in the year.
“The achievement of positive gross profit on existing contracts was a significant event as we continue to transform our existing clients to (Exult’s platform),” Madden said at the time.
But each client has a price. While Exult has landed a marquee list including BP Amoco, Pactiv Corp. and Tenneco Automotive Inc., it invests a huge amount of resources for each one,a fact the company mentions in its quarterly filings with the Securities and Exchange Commission.
“Our client contracts involve significant commitments and cannot be made without a lengthy, mutual due diligence process during which we identify the potential client’s service needs and costs, and our ability to meet those needs and provide specified cost savings,” according to the filing.
For each potential client, Exult must devote precious management personnel to lead a team that researches whether the company can be helped by Exult’s services,and whether Exult can make money doing it. Each investigation takes four to six months, allowing the company to process “only a few of these due diligence undertakings at one time,” the filing said.
And an investigation doesn’t always bear fruit.
“This lengthy due diligence process limits our revenue growth, and we have invested significant time in some potential client relationships that have not resulted in contracts,” the company said in a filing.
Moreover, Exult’s clients have large personnel databases that must be converted to Exult’s platform,a task that normally is done in several stages that take about a year or so and can involve delays, according to the company.
“We cannot realize the full efficiencies of providing services to the client through our infrastructure until this transition is complete. Therefore, any increase in our earnings that could be expected from our agreements can be delayed for at least several months after the contract is signed,” the company said in a filing. “And it could take a significant amount of time for our agreements to contribute significantly to profits or cash flow.”
But Madden said the company has closed six of the eight contracts Exult has looked into so far. He said he expects the company to continue doing the same.
“The industry average is one out of three,” Madden said. “We’re doing better than that.”
Exult officials aren’t concerned about its competitors, which include heavyweights such as PricewaterhouseCoopers LLC, Administaff Inc., Automatic Data Processing Inc. and HR Logic Inc. Many of them focus on smaller companies, Madden contends.
“We like to stick with companies that are above 25,000 (workers),” he said.
Exult executives point to the company’s recent International Paper deal and Bank of America’s decision to expand its contract as testament to Exult’s operational skills.
A powerhouse board doesn’t hurt, either. Directors include Michael Miles, the former chairman and chief executive of Philip Morris Cos. and Kraft Foods Inc., and A. Michael Spence, the former dean of Stanford University’s Graduate School of Management and Nobel Prize winner. Another director is Thomas Neff, chairman of Spencer Stuart & Associates, the executive headhunter who Investor’s Business Daily once called a “kingmaker.”
While Exult’s deals with Bank of America and Unisys stand to buoy the young company, the pressure is on Exult to give a flawless performance.
“We believe our ability to secure future clients and revenues will be largely dependent upon our ability to perform and achieve the contracted service levels and cost savings for these clients,” the company said in a federal filing. n
