The Advisory Board Company

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The Advisory Board Company

2445 M Street N.W.
Washington, D.C. 20037
U.S.A.
Telephone: (202) 266-5600
Fax: (202) 266-5700
Web site: http://www.advisoryboardcompany.com

Public Company
Founded: 1979 as Research Council of Washington
Employees: 681
Sales: $141.6 (2005)
Stock Exchanges: NASDAQ
Ticker Symbol: ABCO
NAIC: 541611 Administrative Management and General Management Consulting Services

The Advisory Board Company is a Washington, D.C.-based public company that provides best practices research and hosts seminars for 2,500 health care industry members, including hospitals, insurers, pharmaceutical companies, and biotech firms. The company gathers information from its membership and beyond to produce daily and weekly news briefs, and generate about 50 major studies and 3,000 customized reports each year. These publications document the best, and sometimes worst, practices in the industry as a way to help members improve their management and ultimately save money. The Advisory Board approach has proven to be a cost-effective alternative to high-priced consulting firms like Boston Consulting Group, Bain & Company, and McKinsey & Company. Consequently, the firm maintains a yearly membership retention rate of around 85 percent. Through its Web site, Advisory.com, the Advisory Board allows its members to search and download the complete findings of its major research studies, underlying data, case profiles, news stories, and other documents. The firm also offers H∗Works, a program that helps hospitals implement the best practices revealed through Advisory Board studies.

ORIGINS VIA A NIXON ADMINISTRATION INTERN

The Advisory Board Company was founded by David G. Bradley, who was born in the nation's capitol, perhaps accounting for his early interest in politics (especially Republican politics from the age of 15). Born in 1953, he was of college age when Richard Nixon was elected president in 1968. While earning a B.A. in political science at Swarthmore, Bradley landed a college internship at the White House during Nixon's first term in office. Bradley also went to work for the Committee to Re-Elect the President, the infamous CREEP of the Watergate scandal that would end in Nixon's resignation from office. Bradley's dream was to run for the United States Senate by the time he was 30, and he viewed a business career as a way to achieve that end. In preparation he earned an MBA from the Harvard School of Business, followed by a law degree from Georgetown University.

In 1979, at the age of 26, he established the Research Council of Washington as a firm that was willing to conduct any type of research for any company in any industry. He initially set up shop in his mother's Watergate apartment with four Princess telephones and four folding card tables. Already he had an exit strategy in mind: build the business, sell it for a few million dollars, and then use his fattened bank account to seek elected office. Executing that plan, however, proved more difficult than anticipated.

It soon became obvious to Bradley that the business model he had designed for the Research Council was too broad and impractical. After four years he was earning about $25,000 a year, barely enough to pay the bills, let alone make him a wealthy senatorial candidate. And even if he tried to sell the company, he was unlikely to find any buyers. He had no choice but to put his dreams on hold and focus all of his attention on building the Research Council, which until this point had enjoyed a modicum of success, doing work for 200 of the Fortune 500 companies. However, the firm had not been able to gain expertise in any particular area, with the possible exception of such esoteric subjects as jet engine sales and the European fountain pen market. In 1983 the firm made a key shift in emphasis by establishing a dedicated financial services research unit, and to reflect this shift in strategy the firm changed its name to The Advisory Board Company. By 1987 its client roster included every major North American retail bank as well as large European banks.

In 1986 the Advisory Board launched a research division dedicated to the health care industry. It enjoyed steady growth over the next decade, building up its membership to include more than 1,500 hospitals and health systems. Nevertheless, the practice would only receive secondary status at the Advisory Board, which focused most of its attention on financial services. Then, in 1993, the firm established a corporate division to serve the research needs of the top executives of the world's largest corporations. The unit's first program, the Corporate Leadership Council, targeted the heads of human resource offices. In a matter of just 18 months, the Advisory Board signed up nearly half of the Fortune 500, a successful debut that further overshadowed the health care division.

As the Advisory Board finally found its footing in the 1980s and early 1990s, Bradley achieved the wealth he had long desired, but by now his political ambitions were moribund. More so, his life was far from glamorous and filled with drudgery. He told the Columbia Journalism Review, "My best friend threatened, if he outlives me, to have 'a man of fine research' chiseled onto my tombstone." On a 13-hour flight to Vietnam after turning 40 years old, Bradley had the rare opportunity to devote some time to reflecting on where he was in his life. As he recalled for Columbia Journalism Review, "I looked older. I was living in D.C., which had no elected senators. I wasn't a Republican anymore. I was never going to be a senator." Also during the trip, Bradley bought a magazine to read, prompting the thought that perhaps he could fulfill his interest in politics through the media. "If I couldn't take the course, then at least I could audit it," was how he later described his new ambition.

BRADLEY BUYS MAGAZINE: 1997

Bradley soon contacted a magazine broker and attempted to buy his favorite magazine, The New Republic, only to find the price tag more than he was willing to pay. Instead, in 1997 he purchased the National Journal, which covered all aspects of the federal government. At this juncture, Bradley turned his attention from the Advisory Board, although he continued to own it, and devoted his time to building a small publishing empire, adding the Atlantic Monthly in 1999.

To fund his journalistic endeavors, Bradley began to repackage the assets of the Advisory Board and sold off large interests in them through public offerings. In October 1997 the financial services and corporate practice divisions, serving 1,300 clients across ten different research areas, was spun off as the Corporate Executive Board. In 1999 Bradley raised funds for his media aspirations by taking the spin-off company public, netting $142 million.

COMPANY PERSPECTIVES

The Advisory Board provides best practices research and analysis to the health care industry, focusing on business strategy, operations and general management issues.

After the departure of the Corporate Executive Board, Advisory Board became devoted solely to the health care practice, which had been somewhat neglected since 1996 when Advisory Board began focusing most of its attention on the development of the corporate division. Gradually the firm beefed up its best-practices consulting business, offering clients programs on such topics as emergency room reform, nurse recruitment, and heart care trends. Investor's Business Daily offered a sketch of The Advisory Board's health care "shared-cost" business model: the company "uses its own customers as suppliers of ideas and solutions to pressing peer issues…. After arranging study groups among key member organizations, Advisory Board builds research programs around key topics of concern. It then distributes the findings to members. The idea is that health care companies will learn from each other."

It was a clever strategy on a number of levels. The material could be used to form multiple programs that could be cross-sold to the same members, and the addition of new members cost virtually nothing. Most importantly, the Advisory Board programs were effective and far less expensive that those developed by big name consulting firms. The firm's excellent retention rate of its members spoke to the quality of its work. Although the average contract was less than $40,000, compared to the $1 million a large consultant might charge, Advisory Board clients usually bought two or three contracts a year. "That's enough to keep Advisory Board cash-rich," according to Investor's Business Daily. "Customers pay subscription fees upfront, though the company recognizes the proceeds over 12 months." As a result, the firm received about 80 percent of its cash in the first quarter of the year and had it available for use the rest of the year. As the new Advisory Board gained its footing, revenues inched upward, from $52 million in fiscal 1997 to $55.3 million a year later, $57.8 million in fiscal 1999, and $58.5 million in 2000.

At the start of the new century, however, the business really began to find traction. In April 2000 Advisory Board initiated the launch of seven new programs, rolled out in the ensuing months. To accommodate this expansion the firm also doubled it sales force. Five of the new programs offered best practices installation support for a set fee. Program implementation also formed the basis of a new endeavor in 2000, H∗Works, which was dedicated to helping hospitals implement best practice solutions in such areas as patient satisfaction, the recruitment and retention of nurses, bad debts, and the growth of revenue streams. The Advisory Board Company was well established in the hospital field by now, with 15 of the top 16 hospitals as clients, according to U.S. News and World Report, including Duke University Medical Center, Johns Hopkins Hospital, and Massachusetts General Hospital. In the early 2000s the firm began branching out, looking to tap into other potential client bases, such as pharmaceuticals and medical device manufacturers.

ADVISORY BOARD AKEN PUBLIC: 2001

In 2001 Bradley was ready to duplicate what he had previously done with Corporate Executive Board, and papers were filed to make a $95 million initial public offering of Advisory Board stock. With Credit Suisse First Boston acting as underwriter, the IPO was priced at $19 a share and completed in November 2002. All of the proceeds went to Bradley and other company insiders. Afterwards Bradley continued to hold a 30-percent interest in Advisory Board, a number that would decrease as he continued to liquidate his stake in the business and concentrate on his magazine holdings. Advisory Board stock began trading on the NASDAQ and steadily increased in price, peaking above $35 per share by mid-February before tailing off, then resuming a steady climb above the $50 mark.

Wall Street was optimistic about the future of Advisory Board for obvious reasons. As the Baby Boom generation aged, the health care field, which was already one of the largest sectors of the U.S. economy, was poised to grow at an accelerated clip. Moreover, hospitals, a major client base for the firm, were under increasing pressure to cut costs and spending. The Advisory Board was much cheaper than consulting firms, and the information and data it had to offer addressed both costs savings and revenue enhancement, thus making the firm even more attractive to hospitals feeling an economic pinch.

KEY DATES

1979:: David G. Bradley forms the Research Council of Washington.
1983:: Research Council becomes The Advisory Board Company.
1986:: Advisory Board launches its health care practice.
1993:: The company launches a corporate practice.
1999:: The company's corporate and banking practices are spun off.
2001:: Advisory Board is taken public.
2004:: Frank J. Williams is named chairman of the board.

Leading the company was Frank J. Williams, who joined Advisory Board in September 2000 as an executive vice president. He was named chief executive officer nine months later, and like Bradley, he held an MBA from Harvard Business School. He was also well versed in the health care consulting field, having learned the ropes at Bain & Company. He also worked at Vivra Specialty Partners, a private health care services and technology firm. Before coming to Advisory Board he served as president of MedAmerica OnCall, which offered outsourced services to hospitals, managed care companies, and physicians. In November 2004 Williams became Advisory Board's chairman of the board.

Under Williams, Advisory Board launched three new programs in fiscal 2002. The most significant was the Workforce Management program that helped senior human resource executives address the problem of a nationwide shortage of clinical staff and increased staff turnover. For the year, revenues increased 27 percent to $81 million and net income totaled $10 million. Fiscal 2003 was an even better year for Advisory Board, which enjoyed a record-breaking 89 percent renewal rate of institutional clients and a 24 percent increase in revenues, topping the $100 million threshold. Net income jumped to $14.4 million. The company continued to launch new programs—including the Margin Enhancement, Executive Leadership, and Service Line Management programs—and succeeded in cross-selling them to many of its existing customers.

The major program launch of fiscal 2004 was the Nursing Business Performance Program. This provided a comprehensive program to assist nursing executives in improving staff productivity as well as patient care. Revenues continued to climb in fiscal 2004, reaching $121.8 million, while net income increased to $18.7 million. The upward trend continued in fiscal 2005, as sales grew 16 percent to $141 million and net income increased to $23.3 million. Advisory Board had been involved in the health care field for 20 years, and there was every reason to expect the firm to enjoy long-term sustained growth.