Automatic Data Processing, Inc.

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Automatic Data Processing, Inc.

One ADP Boulevard
Roseland, New Jersey 07068
U.S.A.
(201) 994-5000
Fax: (201) 994-5495

Public Company
Incorporated: 1949 as Automatic Payrolls, Inc.
Employees: 19,000
Sales: $1.70 billion
Stock Exchanges: New York Midwest Pacific

Automatic Data Processing (ADP), from its very modest beginning has evolved into one of the leading computer services companies in the United States. Since becoming a public company in 1961, ADP has, without fail, increased its earnings every quarter. This enviable record can be largely attributed to the business sense and work ethic of its founders.

In 1949, Henry Taub, a recently graduated accountant, borrowed $2,000 and started a company processing payrolls for small businesses in his New Jersey hometown. He gave the company the modern-sounding name “Automatic Payrolls, Inc.,” although the equipment he used—aged calculators, a mechanical bookkeeping machine, and an addressograph—was old fashioned even for then.

A few years later, a young insurance salesman named Frank Lautenberg met Taub and saw great promise in his company. “I sold Henry some insurance, and he sold me on his company,” said Lautenberg. Like Taub, Lautenberg was the son of a silk mill worker. When he was ten, his father took him to the factory to experience the frightening clatter of the machines and breathe the fiber-filled air. “Get an education so you never have to work like this,” Lautenberg’s father said, and the boy did so.

Lautenberg, who recognized a good idea that needed marketing, persuaded Taub to let him print cards at his own expense, and in his spare time, began selling the services of the young payroll processing company. He succeeded in gaining several accounts for the company, and in 1952, took a pay cut to become the company’s first full time salesman. By 1957, the company’s accounts numbered 100.

Taub, his brother Joe, and Lautenberg devoted themselves to making the business succeed. Taub told Forbes, April 23, 1984, “We were young, none of us was married.... We wanted to prove ourselves, and we had an opportunity to incubate. The concept of farming out payroll was not widely acceptable so we had the chance to develop slowly.” He added, “It was a labor intensive business with low capital requirements. We didn’t have to raise a million dollars in the stock market and then turn somersaults the next morning to please the stockholders.”

In 1957, the company encountered modern technology when they invested in an IBM tab machine. Yet theirs was a company that was market driven, not technology driven. Lautenberg explained to Katherine Davis Fishman in her The Computer Establishment, “Our customers were not concerned with the means we used to provide a solution to their payroll problems. We were never asked whether we were using the newest accounting machine or a dated version, whether delivery would be made by bus, truck, or car—or whether our staff was full-time or part-time, where we saw the future, or how fancy our offices were.... The customers’ only care, as it is today, was about our ability to deliver the promised service. The methods we chose... were selected based on the minimum needed to get the job done properly.”

The company was able to move smoothly into large-scale automation when the time and the technology were right. ADP invested in an IBM data-processing system in 1961. It developed its own elementary software, and the investment paid off in increased capacity and greatly reduced turnaround time. That same year the company changed its name to Automatic Data Processing, and made its first public offering.

In 1962 ADP opened an office on Wall Street to provide brokerage firms with payroll and basic accounting services. Opening this office was a well-calculated move, based on several successful client relationships in that market, and a clear demand for ADP’s dependable recordkeeping services. Its success with this particular industry enabled ADP to build its reputation as a company that could package and deliver industry-based standard services and databases.

Between 1963 and 1968, the company’s sales grew from $1 million to $15 million. The growth was due primarily to ADP’s acquisition of payroll and accounting service-bureaus in large cities. Many service bureaus, although relatively successful, were struggling to custom-tailor their offerings for too few clients in specialty markets. ADP, however, operating from a marketing perspective, not a technology perspective, was determined to keep programing costs down. They ignored the lure of exotic software packages for small, low-margin markets and concentrated primarily on delivering basic payroll and general ledger accounting services to a broad market. “We are suspicious of anything that won’t return 20% before taxes,” Lautenberg told Business Week, May 24, 1969.

In each newly acquired operation, ADP installed its widely useful software packages, and if possible, retained local management, supporting it with sophisticated marketing methods. This strategy proved enormously successful. Josh Weston, then ADP’s president, told the author of The Computer Establishment, “When we bought the Miami service bureau, it had revenues of less than $20,000. The principal stayed on, and now sits on a business three times the size of the whole company at the time we bought him out.”

In 1968 a sharp increase in Wall Street trading volume buried the brokerage firms’ back offices in paperwork, and trading hours at the exchange had to be curtailed. Part of the reason was the inability of many brokers’ new electronic data processing systems to handle the sudden major increase in volume. ADP’s shirtsleeve approach to doing business proved especially valuable to its Wall Street clients, and throughout the crunch, none of its clients was put on restriction by the exchanges because of paperwork problems. Around this time, the company moved its headquarters from its founders’ hometown of Paterson, New Jersey, to Clifton, New Jersey.

Although 1969 was, as The New York Times on November 29, 1970, termed it, “a grim year” for Wall Street, it was ADP’s best year in the brokerage service business, having added 15 new clients. ADP’s characteristic dependability, coupled with careful product development, was paying off. The head of operations at Bear, Stearns estimated that installation of ADP’s new management system to control and route securities had cut the error rate in the security tracking area to one-tenth of the former rate.

Growth continued. In 1970, ADP was the first computer services company to reach the Big Board at the New York Stock Exchange. It was servicing more than 10,000 payroll accounts through 16 data centers around the country and was doing the back office chores for 55 brokerage firms, more than all competitors combined. One of its most significant purchases during this period was of a main competitor in brokerage services, the RCA Systems Center, in 1971. The purchase added 10 clients. In 1973 sales reached $90 million and pretax earnings amounted to $16.7 million.

The days when customers handed their data over to computer service companies to be batch-processed, with the paper load delivered back the next day, were changing. Technology gave customers more choices. One of the choices available was interactive computer services, in which the user rented a terminal and access to a vendor’s computer and software, and did its own processing. Another choice was timesharing, in which the customer took advantage of the economies of scale, and sent data into a shared system for processing.

Many time-sharing companies started up quickly, and died the same way. ADP changed with the times, albeit, slowly and carefully. The company batch-processed the majority of its payroll work, and used its fleet of more than 100 vehicles for delivery. With the acquisition of the time-sharing giant Cyphernetics Corporation in 1975, however, ADP acquired telephone lines covering the United States, and satellite transmission to six European countries. As it had in the past, ADP developed and applied its new capabilities in response to customer need, but it did not rashly abandon its older methods just for the sake of the new.

ADP continued its steady growth and continued to develop its strong market position. By 1978, it had acquired more than 60 companies, it had 50 service bureaus around the United States and 4 overseas, and its yearly return on shareholder’s equity was 30% higher than IBM, Digital Equipment Corporation, or Control Data Corporation.

The recession of the early 1980s caused many of the 80,000 companies using ADP’s payroll processing services to reduce their staffs, resulting in some business loss for ADP. This development, coupled with the growing number of companies buying their own computers and processing payroll in-house, had ADP looking at additional, related lines of business.

The company turned the computer revolution to its advantage by becoming a hardware supplier. It offered customers “value added” services such as systems configuration, communications networks, training for particular software, and constant updating. “Most of the customers we deal with have more important things on their minds than to muck around with what we can do better,” Weston said in The Computer Establishment.

Another new, related line of business for ADP was electronic banking. The market was hardly penetrated when ADP licensed this program from its creator, and began selling automatic teller machines to banks all around the country.

In early 1983, Frank Lautenberg left the company to serve as U.S. Senator for New Jersey, and ADP President Josh Weston assumed the additional title of chief executive officer. Soon after, the company brought on William J. Turner, a group president whose computer expertise and managerial vision quickly began to change the company.

Turner first oversaw a major reorganization, in which the company went from product-based and geographical divisions to industry divisions. Integrating the company’s services effectively combined and segregated all the company’s left hands, and all the right hands, and made it easier to determine what each of the hands was doing.

Payroll and commercial services accounted for 55% of ADP’s total revenues in 1984. The company was becoming more diversified, but ADP did not hesitate to divest itself of unprofitable ventures, such as one sold in 1985 which let customers pay bills by phone. “When you get to be over $1 billion big, it won’t help to come up with $1 million ideas,” Weston told Business Week, December 9, 1985.

Several ventures that offered the numbers Weston liked were collision-repair estimating for the insurance industry, as well as related information services for auto dealers and repair shops. ADP was selling tailor-made service packages not only for a type of client, but for several related industries. The company stepped into a virtually untapped market, with service packages that yielded healthy returns. By 1984, ADP dominated this market and was enjoying an annual growth rate of 30%.

ADP’s Turner-led internal reorganization, along with its strong penetration in information-rich industries laid the foundation for a significant shift in the company’s direction. Long the dependable back-office number cruncher, ADP was moving to provide clients with integrated information services for the front office. The movement to the front-office got its fast start in 1983 when it purchased GTE Telenet Information Services, a stock quote company, and was further aided in 1985 through the purchase of Bunker Ramo Info Systems from Allied Corp.

The company in 1985 began wooing large customers in addition to the moderate-sized companies it had always considered its market. Before long, the company won clients such as Beatrice, Harcourt Brace Jovanovich, and B. F. Goodrich.

As large as ADP itself was growing, however, those in charge remained in touch with the rank and file employees. The company moved its headquarters to Roseland, New Jersey, and in this building, as in the old one, there was no executive dining room and no parking slots reserved for management. All employees are able to buy equity at a discount, and over 50% of the work force own company stock.

Turner, with his technological expertise, effectively led the company out of the past and into the future. Elected president in 1986, he ushered in a huge capital improvement program to bring its brokerage information services up to date, and, at the same time, leave its competition well behind.

The 1980s were a time when information services were becoming more and more sophisticated, a time when clients wanted customized, real-time services that they could control from their own versatile workstations. ADP began developing its FS Partner, a sophisticated market-data quotation and branch-office automation system that also gave brokers the power to study the trading patterns of potential clients and to run elaborate “what-if” scenarios. In 1987, ADP reached agreements with Merrill Lynch and Shearson Lehman Hutton, to further develop and install its FS Partner systems. These two companies had been clients of ADP’s biggest competitior, Quotron. As the FS Partner began taking hold in the market, it was rendering the Quotron system obsolete.

The Wall Street fiasco of 1987, and subsequent layoffs and mergers in the business resulted in a 10% reduction in brokerage services revenues at ADP. Many saw ADP’s capital-intensive investment in the brokerage information services as risky but acknowledged that risk was the nature of the business. The enormous investment was part of a long-term plan, and although ADP suffered from the cyclic nature of the investment industry, it was also counting on it.

As part of its $100 million investment in brokerage information services, the company moved its brokerage computing centers to a new facility in Jersey City. It doubled the capacity of its Mount Laurel, New Jersey, stock-quote computing center.

Turner’s impact on this company goes beyond the nuts and bolts aspect. His technological revival at ADP is supported by a new management strategy he calls “turnaround management.” He takes a stint at the head of each of the business units and shakes up management’s ingrained assumptions about its business, and, ideally, makes it responsive to the present climate and future direction of this new ADP.

In 1988, the company’s smaller ventures such as information services to auto dealers and insurance companies, interactive accounting services, and computer leasing services were flourishing. ADP was processing 10% of the nation’s private sector paychecks, and had the lion’s share—40%—of the U.S. brokerage information business. That year, Turner left ADP.

As part of ADP’s continual pruning of business ventures that fail to yield high returns or that do not fit its long-term strategic objectives, the company sold its automatic teller machine and its banking businesses in 1989. An industry expert commented on ADP’s business acumen in the Wall Street Transcript, November 13, 1989, “We’ve seen a dramatic decrease in the revenue growth rate, coupled with continued gains in profitability. It shows that the business is managed well. It shows that ADP has cost control, and that management understands the leverage points within the organization and can screw down costs. It’s a rare trait in the computer services business. It’s a rare trait in the technology sector in general.”

ADP’s future success will depend on its ability to keep operating costs low, while producing not only dependable, but state-of-the-art information and data processing services. It has come a long way from the time when it toed a cautious technological line and stayed away from specialty software applications.

Principal Subsidiaries

ADP Atlantic, Inc.; ADP Automotive Claims Services, Inc.; ADP Benelux B.V. (Netherlands); ADP Central, Inc.; ADP Credit Corp.; ADP Dealer Services Ltd. (Canada); ADP Financial Information Services, Inc.; ADP Information Services, Ltd. (U.K.); ADP Network Services International, Inc.; ADP Network Services, Ltd. (U.K.); ADP of New Jersey, Inc.; ADP of North America, Inc.; ADP-WHT Corporation; American Computer Trust Leasing (79%); Automatic Data Processing Limited (U.K.); Automatic Data Processing (H.K.) Ltd. (Hong Kong); Automatic Data Processing Community Urban Redevelopment Corporation; Canadian-Automatic Data Processing Services Ltd. (Canada, 50%).