Decentralized ADP Seeks Strength of Monoliths

By Michael Fitzgerald  |  Posted 05-05-2005

Decentralized ADP Seeks Strength of Monoliths

Before outsourcing was a political hot potato. before it became an international phenomenon. Before Infosys Technologies, Lou Dobbs and the World Trade Organization, there was Automatic Data Processing Inc. Founded in 1949, ADP was outsourcing payroll when BPO still stood for the Buffalo Philharmonic Orchestra. Today, 46 years later, one out of every six people in the U.S. sees the letters "ADP" printed on their paychecks. But few, if any, think to ask, "Who is this company that pays me every week?"

Which is, of course, just the way ADP wants it. The less attention the Roseland, N.J.-based company receives, the better it is doing its job. And while ADP may have payroll services down to a quiet science, the company hasn't stood still since it pioneered the market more than four decades ago. ADP has diversified well beyond payroll processing, and now handles a range of human resources, benefits and government compliance issues for companies. It's become an $8 billion enterprise with more than 40,000 employees, pulling down $1 billion a year in profits. Given its market leadership in payroll outsourcing, and the current momentum of business outsourcing in general, it would seem ADP is perfectly poised for rapid growth.

Despite its diversification efforts, however, ADP's largest unit remains Employer Services (ES), where most of the payroll processing lives. Employer Services generated 62 percent of ADP's revenues in 2004, and 66 percent of earnings—not exactly the revenue diversification the company has been looking for. And a large percentage of ES's 475,000 customers still use ADP for payroll services alone.

Also, ADP hasn't been growing all that much: The company has experienced only 10 percent revenue growth in the past two years, and that with shrinking margins, even while the annual outsourcing market is growing at a rate of 25 percent or more, by analyst estimations. Part of the problem is that with diversification came decentralization. ADP's four divisions—Employer Services, Brokerage Services, Dealer Services and Claims Services—all have autonomous executive teams and balance sheets. Employer Services alone has six divisions. And each of those groups has its own profit and loss statements, its own sales and marketing staff, its own IT leaders.

To tie all its product offerings together, and to start leveraging their respective successes, ADP is turning to technology. Specifically, a unified Web services interface that can offer ADP's varied services as a total package for the first time. "This will change the way we sell, service and implement products," says Bob Bongiorno, senior vice president and CIO of Employer Services. That makes it a bellwether IT project for how Web services could transform the entire company. If it works.

ZIFFPAGE TITLEPromises, Promises

Promises, Promises

Web services has been a long time coming, and not just at ADP. Web services was absurdly hyped in 2000 and 2001, when an acronym soup of technologies based around Extensible Markup Language (XML) began to emerge. The various tools promised to help companies easily and quickly pull together disparate applications from both inside and outside the corporate firewall.

As with most new technology, Web services did not take off as easily, or as quickly, as promised. Jason Bloomberg, an analyst with ZapThink LLC, a Waltham, Mass. research firm, acknowledges that the market for Web services software "hasn't grown as fast as analysts such as ourselves had predicted." In part, that's because companies realized they could build their own services using software they already had, such as Microsoft Corp.'s .NET tools, IBM Corp.'s WebSphere or BEA Systems Inc.'s WebLogic, rather than by buying expensive new software.

While Web services technology is reaching maturity, Bloomberg says the bigger issues are those involving development organization. "The technology is relatively straightforward. But organizational issues are not." He cites problems such as how to organize the IT department to support shared services that can be accessed from different departments, or even from companies outside the organization, or how to fund a services-oriented architecture (SOA) initiative when services are shared across departments.

Those problems are familiar to Bongiorno at ADP, even though he is relatively new at the company, having joined in October of 2002, after he left the ailing airline industry in the wake of Sept. 11. Bongiorno had been United Airlines's managing director of IS, customer satisfaction and planning, and though his previous job had glamour, it offered something less than job security: United has been operating under bankruptcy protection since 2002. But that doesn't mean that Bongiorno is without new challenges at ADP.

The major problem in tying together the business units within ES through the Web is that each division has been independent in its approach to software design, sales and marketing. That inherent disunity presented itself to customers as well. If an ADP payroll customer decided it wanted to add benefits administration services from ADP, it would be required to buy a separate product that had a different look and feel, training process, and authentication and password screens. You couldn't move from one ADP product to another without logging out of one and then onto the other. As a result, there was no incentive for a customer to sign up for multiple ADP services.

But that is now changing. Enter technology, in the form of a Web services-oriented architecture, which ADP is using to create a Web portal that can work with all its products. Each of its current customer offerings will become a "portlet" that fits within the master portal. Each will have a similar look and feel, thus saving ADP customers time and money spent training employees to use them. And customers with multiple ADP products will be able to access any of them by signing in to one of them, once.

The transformation is underway. ADP rolled out the first set of Web-enabled portlets in September 2004. The company also created a strategic marketing position to oversee its business unit marketing groups, and then moved longtime executive Stuart Sackman into the job. Sackman is developing an overall sales strategy to help ADP's salespeople sell the portal, and shift from selling one product to multiple ones. "This technology really is critical to enabling us to achieve our long-term growth goals," says Sackman. "It is a strategic shift, and we think it'll help significantly in new sales. We have very broad product sets versus our competitors, but haven't gotten as much mileage out of them as we would have liked. Salespeople never sold them together because then they'd have to tell the customer how different each product is." He's already having some success: During ADP's most recent quarterly conference call, he told analysts that more than 300 clients had signed up for the portal.

Meanwhile, ADP is using Web services to support its Comprehensive Outsourcing Services strategy, which is ADP's effort to compete for human resources business-process-outsourcing contracts from large companies. The COS was launched in June 2004, and already has more than 30 customers and $40 million in annual revenues (as well as a $45 million revenue backlog).

Wall Street has taken note of ADP's still nascent Web services strategy, but remains skeptical. "The model is intended to help them extend their addressable market, and it seems like a pretty common sense use of a new technology," says Craig Peckham, an equity research analyst at New York City-based Jefferies & Co. "Three hundred portal customers is relatively impressive, but it's hard to see how this is going to move the needle in terms of growth. And this kind of heavy spending on product investment does put pressure on margins."

ZIFFPAGE TITLETechnical Difficulties

Technical Difficulties

When Bongiorno first arrived at ADP, in 2002, he went out on sales calls. It quickly became clear that customers wanted better-integrated products from ADP. The market opportunity was very large: Getting even a small percentage of ADP's 475,000 Employer Services customers to add an ADP product would offer substantial growth. In addition, while ADP's overall customer retention rate hovers around 90 percent, that number goes up when customers have multiple products.

Bongiorno wasn't the first person to recognize that ADP's customers wanted the company to do a better job of integrating products. In fact, it was a long-standing problem at ADP. But Bongiorno quickly found he had at least one kindred spirit—vice president and CTO of Employer Services IT, Darko Hrelic, who had arrived at ADP about a year earlier than Bongiorno, after spending more than 20 years at IBM Research and IBM Software Group. Hrelic, who had also been out on sales calls (a standard practice for IT officials at ADP), had been trying to get the company to start using Web services to integrate its products, but to no avail. There were a number of reasons why. For starters, the decentralized culture within ADP meant that it was comfortable with different groups taking different approaches (there were, in fact, multiple small efforts to develop Web services already underway at different divisions within Employer Services). The company's sales and marketing had also evolved as distinct groups selling individual products. As a result, only a small percentage of customers used more than one ADP product.

ZIFFPAGE TITLED

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D-Day

Internal politics wasn't the only issue. There were also serious technical concerns about whether Web services would work at all, given the immaturity of the technology being offered by vendors. "It'll never work," says Sackman. "That was the first reaction I had." But after months of reassurance by Bongiorno, Sackman came around. "Now, it feels like it's pretty straightforward."

Bongiorno loves to crack wise and shoot straight—at one point he says, "Look, you guys will take [this project] in the magazine and call it 'Web services' and make it sound real sexy. But it's not." His matter-of-factness makes him a natural-born technology salesman. He knew at ADP that he had to make the project sound simpler than it was in order to get internal buy-in. Luckily he had an ace in Hrelic, who had worked on elements of IBM's Web services strategy. "I knew what was real and what was not," Hrelic says. So Bongiorno put together a Web services presentation, and started peddling a vision inside IT and out.

Though he pitched it to ADP executives as a slam dunk, Bongiorno knew just how daunting the integration project would be. In fact, it was clear to him at the first CTO council he convened, in March of 2003 (just five months after he joined the company), that moving to Web services at ADP was considered an insurmountable problem.

So Bongiorno scheduled a meeting with top corporate brass (displaying his flair for the dramatic, he scheduled the meeting on June 6, D-Day). The meeting garnered at least one high-level backer for an integration project—Gary Butler, the company president who was also acting head of Employer Services. Butler felt that integrating its products was a strategic imperative for ADP, and he put his management muscle behind Bongiorno, which made it easier for Bongiorno to set development priorities for the divisions. "If you go to Gary Butler or Art [Weinbach, chairman and CEO of ADP], and you ask what are the three most important things in Employer Services, this integration portal effort will be one of them," says Sackman. So Bongiorno killed all other existing Web services projects and shifted resources into the effort he had started.

Bongiorno and Hrelic broke down the move to a services-oriented architecture into manageable projects: a wrapper, or interface layer; single-sign-on capability for users who worked with multiple systems; a common look and feel; a common reporting tool; and a messaging engine to handle data transfer.

Company Profile
Company | Automatic Data Processing Inc.

Corporate Headquarters | Roseland, N.J.

CIO | Bob Bongiorno (CIO of Employer Services)

Revenues | $8.28 billion (trailing 12 months)

Net Income | $1 billion (TTM)

Stock Price | $43.44 (April 29, 2005)

52 week high-low | $47.31–$38.60

"When you break the problem down, each of those are very solvable problems," he says. The reporting tool was adapted from one developed at ADP Brazil, and the single sign-on and authentication from Sun Microsystems Inc.'s version of the Lightweight Directory Access Protocol (LDAP) and Netegrity Inc.'s SiteMinder (now merged with Computer Associates International Inc.).

Final approval for the project came in October of 2003. What followed were six months of intense discussion and review of standards, including strong debates over details as minute as what a button should look like on the screen. ("It looked like a Tylenol pill and some people didn't like that," Bongiorno says. "We had a lot of discussion over things like that.") These issues were brought before the CTO council, which became the vehicle for hashing out the standards and setting development priorities. It took about six months to develop an architecture that all the divisions could agree on. In March of 2004, it finally got underway.

The first project was the most obvious: creating a portal environment to give a common user interface for ADP's products. As each service gains Web services technology, it will be added to the portal.

The portal environment was the obvious first step for several reasons, says Hrelic. "It was the biggest issue clients had—as we were rolling out self-service components to our systems, clients kept saying they were too burdensome for users, with too many ways of navigating, or multiple passwords."

The new user interface will give ADP clients the ability to switch between products without having to log into a different system, and without needing to remember an entirely different way of using each system. It will also give them more control over how the system looks, where their branding appears and how data is accessed.

The new UI will also help those clients that use only one ADP product. There are three access levels for each portal: a manager level, an administrator level and an employee level. The new user interface provides a uniform way to use the system across levels. It also makes it much easier for end-users to learn the system—a big help, as many companies shift to letting employees service their own accounts.

Finally, the Web services architecture should help the company digest acquisitions more effectively. "Every time you add a new acquisition, you acquire a new technology," Hrelic says. The services- oriented architecture means that ADP can keep each acquisition's systems in place, open up the pieces that need to work with outside systems, and add another tab to its portal interface.

ADP rolled out the first Web-enabled portlets in September 2004. The key applications were the Pay eXpert payroll product, HR eXpert, Enterprise HR, iPayStatements, FSA (Flexible Spending Accounts) and USS (Unified Self Service). In March 2005 ADP added more transactions and functionality to the products, and the cycle of new development efforts is accelerating.

Resources
Service-Oriented Architecture: A Field Guide to Integrating XML and Web Services
By Thomas Erl Prentice Hall PTR, 2004

Web Services and Service-Oriented Architecture: The Savvy Manager's Guide
By Douglas K. Barry Morgan Kaufmann, 2003

It helped sell the initiative internally that Bongiorno didn't ask for more money for the project. For one thing, ADP saved money by reusing entire processes. Bongiorno estimates that he can reuse a minimum of 70 percent of his code, so every time ADP builds a new product offering, it's likely to already have a reporting tool. In the past, that would have been built each time it was needed. Now, Bongiorno's group just uses what was built for another product.

Bongiorno warns that it won't be that easy for every company to copy what he's done. Web services fits ADP's business model extremely well. Things such as reporting tools are common across ADP products, and there's little need to rewrite such a tool for new products. "Web services is a perfect fit for what we do," says Bongiorno. "I could not go back to United Airlines and reuse code like I do here."

But cost-savings is not the reason ADP went to Web services. The company wants to boost its business and, especially, to get those 475,000 ES customers to add other ADP services.

One of those customers, Vanessa Cline, a project manager at Royal & SunAlliance USA, an insurance firm based in Charlotte, N.C., says the advantage of the portal is simple: It takes the human resources department out of most employee HR dealings. Employees "can take charge of transactions that were typically in the hands of our HR community. It eliminates the need for the middleman."

ADP is also using Web services to let it integrate human resources and payroll processing into SAP's Business One portal, in addition to its own portal. Over time, ADP wants to use Web services standards to let customers use other non-ADP applications from its portal as well. So if a client uses a stock-option management program from a Wall Street firm, that application could be accessed via ADP's portal.

Like the still-emerging field of Web services itself, ADP is just beginning to see the technology's impact. It's likely to be substantial, since, when finished, it will provide the foundation for a potentially radical remaking of the company's business model. But that will take years, and depend on factors still being worked out, such as how well ADP can shift its marketing and sales structure to reflect the new Web services package. In that sense, ADP is the rare example of a company using Web services to drive change throughout the entire enterprise.

Michael Fitzgerald is a business and technology freelance writer based in Massachusetts.