A little more than a year ago, Irvine-based Exult Inc. was an unknown start-up with a relative trickle of $2 million in yearly revenue. But then Exult convinced no less than global oil colossus BP Amoco PLC to turn over its human resources operations to the company.
Nowadays, Exult counts $2 billion in backlog orders and has added Unisys Corp. and Bank of America Corp. as clients. The pact with Bank of America, signed in November and worth $1.1 billion, calls for Exult to manage the bank’s electronic human resources needs for a decade.
“It’s huge,” said James C. Madden V, the 39-year-old chairman, president and chief executive of Exult. “It makes our revenue numbers very predictable. Investors are say ing that they want predictability. They can look at us and say, ‘We don’t have to worry about them selling contracts every month because Bank of America is for 10 years.'”
Exult provides electronic employee communications, development, organization, payroll and recruiting services. Having gone public in June, Exult counts a market capitalization of around $1 billion. The company’s shares have had their ups and downs, but Exult has held its own in a lackluster market for technology stocks. Last week, it was trading at 13, down from a high of 19 last year but still above its debut of 10.
Greenwich, Conn.-based venture capital firm General Atlantic Partners LLC, which has about $10 billion in capital under management and $4 billion of capital available for investment, started Exult in a bid to capture a slice of the human resources outsourcing market.
Exult counts some heavyweights on its board of directors,a factor that has helped the company land the big deals. 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. Another director is Thomas Neff, chairman of Spencer Stuart & Associates, the executive headhunter who Investor’s Business Daily once called a “kingmaker.”
And Exult’s executives have plenty of corporate experience, having worked in top positions at MCI Corp., PG & E; Corp., Sears, Roebuck and Co., ExxonMobil Corp. and Ernst & Young LLP.
Exult plans a big employment push.
“We have 600 people in the company today. In the next 30 days, we’ll have 1,200,” Madden said.
The doubling will come from the addition of 600 people moving over from Bank of America’s human resources department.
But that’s just for starters, Madden said, noting that Exult plans to hire another 1,000 people this year.
Most of those employees are expected to be added at the company’s facilities in Houston, Charlotte, N.C., London and Glasgow, Scotland. In Orange County, Madden said the company expects to expand its workforce from 100 to 200. He also said the company is looking for more building space.
Analyst Robert C. Stimson of Merrill Lynch & Co. said Exult “represents an intriguing mid-cap idea for investors.”
Another analyst, Patrick M. Burton of Salomon Smith Barney Inc., was less bullish, but said Exult has a “strong pipeline” of back orders and it “still has enough cash on hand to fund itself though profitability.” Both analysts, whose firms underwrote Exult’s public offering, project the stock to reach 20 to 24.
Because Exult deals with sensitive employee information, the company uses an intranet where data is accessed from within the firewalls of its clients. The information is as safe as the security of its clients, Madden said.
A typical human resources department is divided into executives who set strategy and the personnel who actually do operations. Companies are outsourcing the latter to Exult.
“We don’t determine who to hire and what to pay,” Madden said. “Think of us as the administrator and executioner.”
While the market is crowded with companies trying to do outsourcing, many are focused on small companies. Exult’s biggest competitor is Price-waterhouseCoopers LLC, Madden said. Other rivals include Administaff Inc., Automatic Data Processing Inc. and HR Logic Inc.
The barriers to entry are low for human resources companies managing smaller companies, Madden said. But the barriers get much higher for those trying to win contracts from companies with more than 30,000 employees. A competitor would need some $200 million in capital to build the required system, he said, not to mention a management team with experience in human resources.
“Can you do that? Absolutely,” he said. “It took us a year to assemble that. It might take competitors two years. How many companies do you think can get to the revenue as quickly as this model? Believe me, I’m sure the venture capitalists want to copy what General Atlantic did.”
Market researcher Gartner Group Inc. estimated the online human resources market could be worth $11 billion in 2003.
“There’s no way that Exult can get all that market. There’s room in the marketplace, so I fully expect in the next year that we’ll see some formidable competitors,” Madden said.
The company came about because Steven Denning and J. Michael Cline of General Atlantic Partners were looking at the human resources market and wanted to create a big outsourcing company.
“They weren’t really sure what or how, but they obviously had capital,” Madden said.
(Denning is the current executive management member of General Atlantic. Cline was a former managing partner until starting his own firm, Accretive Technology Partners, in 1999. Cline was Exult’s chairman until last year, when he stepped aside in favor of Madden. Both remain on Exult’s board.)
Through an executive search, General Atlantic found Madden, who was quickly rising through the ranks to become chief financial officer of MCI’s outsourcing unit, MCI Systemhouse, where he was overseeing $2 billion in sales annually.
Madden saw Exult’s potential and helped start the company in November 1998. He picked Irvine for its headquarters because he’s lived in Newport Beach for the past seven years and said this area is “one of the best business communities in the country.”
Exult got started just as dot-coms were taking off.
“There was a great temptation from some people who said, ‘Why don’t you call yourself Exult.com?'” he said. “But we said, ‘No, that’s not what we’re about.’ That turned out to be the right decision.”
The company’s goal from the beginning has been to build a business model with a clear source of profits, he said. While the Internet is a big part of his business, Madden said he doesn’t see Exult as an Internet company, saying that’s only about one-third of the company’s business.
“We saw the Internet as a tool, which is very different from saying how can we make a business about the Internet,” he said.
With General Atlantic behind the company, Madden said the money and the management were the easy parts. It raised $125 million in private funding, from, among others, DB Capital Partners Inc., the venture capital arm of Deutsche Bank AG, Goldman Sachs & Co., Mellon Ventures Inc. and six affiliates of the Pittsburgh’s Hillman Co. It raised another $71 million in its public offering.
The difficult part has been to convince large companies to turn over their human resources operations to an unknown startup.
That’s when BP Amoco entered the picture. After two big acquisitions, BP Amoco said it was looking to outsource human resources. And Exult had an inside connection: General Atlantic’s Denning was on the board of advisors at Stanford, along with BP Amoco Group Chief Executive Sir John Browne.
In the midst of negotiations with BP Amoco, Denning asked his friend, former Stanford business dean Spence, to join Exult’s board. Spence, who gets about 15 invitations a year to join boards and accepts two or three, said he was impressed by Madden and was excited about the business.
“It’s different,” Spence said. “I don’t think anybody’s really tried this before. Outsourcing tends to be a point solution. This provides a big batch of solutions.”
Once on board, Spence had a key role in Exult’s talks with BP Amoco.
“Sir John Browne is a friend of mine,” Spence said. “When I joined, they were in the middle of making the deal. I tried to be helpful when they hit snags. I told BP that it could work.”
BP Amoco concurred, awarding a contract worth $600 million over five year to Exult. After the deal was done, Exult officials asked Browne why he picked their company.
“He said it wasn’t really because all the fundamentals checked out,” recalled Madden. “It was much more about fresh thinking. He said, ‘If I’m trying to change my company in the world of business, how am I going to do that if I don’t give my employees a different way of doing business? What better way to get a fresh start than how we provide HR services to our own employees?’ ”
The deal sent shock waves through the human resources industry.
Human Resources magazine said, “There is little doubt the BP Amoco’s deal will have an impact on the way that outsourcing will be approached. It is the big deal that outsourcing providers had been waiting for and if nothing else, will ensure that HR directors and their fellow board members at major companies take a serious and dispassionate look at just how much HR work they can outsource.”
Personnel Today, a weekly British magazine, said, “What BP Amoco does usually gets copied.” The magazine ranked Madden No. 2 on its list of the top 40 power players, even higher than Cherie Booth, an employment lawyer and wife of Prime Minister Tony Blair. The magazine said Madden “transformed the market for human resources managers in the past year.”
The BP Amoco deal gave the big corporate seal of approval that Exult needed. Since that 1999 deal, Exult has signed up Pactiv Corp. and Tenneco Automotive Inc. of Lake Forest, Ill. Unisys agreed to pay Exult $300 million over seven years. Then in November, Charlotte, N.C.-based Bank of America, the largest U.S. bank, announced its 10-year contract with Exult. The bank said it expected annual cost savings of 10% by going with Exult.
Under the deal, Exult is buying the bank’s Charlotte facility, valued at $46 million. But that cost was offset when Bank of America purchased $55 million worth of Exult shares, effectively financing the purchase.
Exult is hoping to land contract with other big names, and it’s looking to board members for help. Former Philip Morris executive Miles also is on the boards of Morgan Stanley Dean Witter & Co., Sears, Allstate Corp., American Airlines Inc. and Dell Computer Corp. Spence is on the boards of Nike Inc., Siebel Systems Inc. and General Mills Inc.
But Exult still has to answer three questions, according to Spence: profitability, execution and start-up experience.
“What the market is still waiting to see is how the profitability plays out over time,” he said. “When they get comfortable with that, there should be another jump in value (of Exult’s stock).”
For the third quarter, Exult recorded $20.9 million in revenue, up from $2 million a year ago and $8.2 million for the second quarter. The company reported a third-quarter net loss of $17.6 million, vs. $3.7 million in red ink a year ago. When Exult reports fourth-quarter results on Feb. 15, analysts expect a loss of 27 cents a share according to First Call Corp., vs. 21 cents in the third quarter. As of Sept. 30, Exult had $116 million in cash.
The biggest single issue, according to Spence, is whether Exult can please the thousands of employees of BP Amoco, Bank of America and its other clients.
“If there are major glitches in the implementation, and not just the companies but the employees aren’t pleased, the bloom will blow off the rose,” he said.
Another problem is the lack of experience among Exult’s managers in building a company, according to Spence.
“I was worried about that,” he said. “My concern is that in the past they’ve relied on corporate infrastructure that you just don’t have in a start-up.”
Exult’s management team hails from corporate America. Kevin Campbell, in charge of operations, was previously responsible for Ernst & Young’s $400 million Global Operate practice. Fred Knowles, an executive director, previously was human resources manager for ExxonMobil’s Refining and Supply business. Exult’s vice president of HR Business Processes, Barbara Coull-Williams, previously was vice president of human resources for PG & E.; Peter Ackerson, vice president of Client Service Centers, was previously director of human resources services for Sears.
Another key manager is Robert W. Gunn, vice president, executive client lead, who had founded Gunn Partners Inc., a Boston firm that gives human resources consulting advice to large companies. Exult acquired Gunn Partners in late 1999, and Madden said the deal gave Exult entr & #233;e to many Fortune 500 companies.
Madden said the company should be profitable by the first half of next year.
“We’re very confident about that,” he said. “I sound bold, but the beauty of the outsourcing business is when we sign a contract, we do the financial modeling and we know” the revenue.
The company expects revenue of $60 million this year, $240 million in 2001 and about $400 million in 2002. If it hits those targets, it could become among the 30 largest publicly traded companies with headquarters in Orange County.
“The good news is we’ve already signed up most of that revenue,” Madden said. n
