Making Payroll Services Successful
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Outsourcing payroll functions is just one of many ways that midsized organizations have made their operations more efficient in the past twenty to thirty years. By getting rid of in-house payroll specialists and using payroll companies to manage the process, businesses have been able to reduce the number of people for they have to pay benefits – and are able to spend their money more efficiently. After all, is it really necessary to pay a full-time accountant to process payroll twice a month? Into this gap stepped two companies who would come to take the lions share of the business in payroll administration: ADP and PayChex. Between 2006 and the present day, these two companies have averaged 30 percent growth each year, as more and more small businesses have decided not to handle their own payroll, and they have listened to the marketing pitches that these two behemoths in the industry utilize. Indeed, they have gone into smaller accounting firms that offered payroll services and offered to take over the check writing process for them, and taken the business away from them, one accounting firm at a time. At the beginning of 2006, just ADP had more than 590,000 clients, with annual revenue of $8.5 billion (Uhl).
As part of a business plan for payroll services, it is important to consider the reasons why entering this sector is a good idea – especially considering the domination that ADP and PayChex currently exercise. One reason is that the government continues to write new regulations that govern employment, and regulations never become simpler. Instead, the regulations have increased in complexity, and the vast majority of small business owners do not have the time nor the energy to devote to learning about regulations – that is why they outsource all of this in the first place. However, not everything has become more complicated; in contrast, the technology needed to operate payroll service businesses has become much less costly. This means that smaller accounting firms can take up the complexities of the process for much less of an outlay than it would have cost even a few years ago. By considering the current state of the payroll service business, it is clear that this is a sector that still has plenty of room for growth. In the United States in 2006, there were just 10 million businesses that employed between 1 and 100 people (Uhl). These are the prime targets for accounting firms who are looking to build their business, because these companies really dont have the scale to hire a full-time payroll specialist and are actively interested in outsourcing that part of their operations. There are some accounting firms that might want to take on the added complexity of companies that have between 100 and 1,000 employees, but those companies have the scale to hire their own specialists, and so marketing to them is more of a challenge – as is taking on the larger workload per client. As of 2006, ADP and PayChex has a combined total of about 1.1 million clients. The lesser titans of the industry (TimePlus, Payroll1, and Ceridian) had a total of 200,000 clients. The rest of the firms that hired out their payroll services brought the total to about 1.6 million. This means that, a of 2006, there were still 8.4 million business that had between 1 and 100 employees that still had not outsourced their payroll. This means that there remained a considerable amount of the market that was ripe for new businesses.
ADP and PayChex have noticed this – and their marketing efforts have reflected that. Occasionally, you will hear radio sports on the talk shows that cater to men in the demographic that make those sorts of decisions for their businesses, but you will also find detailed information about their offerings in the trade journals for businesses throughout the United States. While most advertising has taken on much more of a graphic component than a text-based component, especially compared with advertisements in the twentieth century, thee print spots have a great deal of information about what, at least in the mind of ADP and PayChex, makes their business the one to hire if one is outsourcing payroll. These two companies have even put out a set of glossy mailers that they send to existing and prospective clients, the purpose of which is to reinforce the importance of outsourcing payroll functions – and also to reinforce the wisdom of choosing that company.
An analysis of the mailer that ADP sent out to existing prospective clients in November of 2012, is particularly instructive. It starts with the claim that many accountants simply would not take on payroll services for clients. They apparently felt that the work took up too much time, represented burdensome work, and was also risky. This is a tenuous claim at best, as accountants have been entering the payroll services industry at a fairly steady rate over the past decade (Herz). Indeed, as ADPs own mailer points out, the accounting firms that are members of Accounting Todays Executive Research Council made more than a fifth of their revenue in 2012 from payroll, while it was not even 15 percent in 2011. There are several reasons for this growth, not the least of which is the number of accounting firms who are adding payroll services to their suite of offerings available to their clients. If an accounting firm is already handling your taxes, for example, if they come back and offer payroll services as well, if you are a small business owner, you are more likely to go with your existing accountant (assuming you are satisfied with the level of service) and add that line of work to what the already do for you. Also, the fact those different levels of service have emerged, ranging from total processing to simply handling payroll after the fact, leading to a wider range of costs that can make this more of an affordable idea for the small business owner and helped growth (ADP).
An important piece of information in the ADP mailer has to do with the relative profitability of payroll administration as its own sector of business as a whole. In the October 2012 survey referenced earlier, 41 percent of the responding firms were able to charge at cost plus a margin, making it a profit driver in its own right, rather than leading to a loss (ADP). An interesting question, though, is why ADP would put out so much information making the business look like an attractive sector for accountants of various stripes to enter. Taking this argument to business owners directly makes sense; putting these numbers out there would seem to be a bit more helpful to the competition than one might expect. However, given the fact that ADP and PayChex have made a good bit of their business taking over payroll functions from the smaller firms who signed up a ton of companies early on and now have no way to handle the checks, this actually makes sense – there are many accountants who might see this and decide