payroll landscape is fragmented
big opportunity for spend beyond payroll
The market is huge ($30bn+ TAM) and can be segmented in many different ways.
By size of customer
By geography served
Vertical vs horizontal (point solutions vs suites e.g. talent acquisition or accounting)
PEO, ASO, HCM, etc.
The market is fragmented.
5 largest vendors (INTU, Gusto, ADP, PAYX, iSolved) control well over 50% of the US SMB payroll market
Besides the large vendors, small players have almost negligible market share (<1%)
Big opportunity here
Many product expansion opportunities here. Can the large players keep up?
People are thinking more than just simple payroll.
HR / payroll providers are getting bundled up depending on their target audience
HR + payroll
HR + benefits
HR + expense management
HR + insurance
Rise of services and tech-enabled services
Excel is out!
Tailwind in digitizing everything and having 1 clean UI to manage it all
Focus on digitization and automation
Rise of the remote workforce makes it even more important to have fewer digital platforms to maintain a consistent culture and reporting
💡NEED TO HAVE, not a WANT TO HAVE anymore for SMBs. Critical to stay competitive.
Relatively lower switching costs as more move into the space
Important to make the experience as seamless as possible
It is easier to access data
Rise of embeddable offerings
Rise of white label offerings
Payroll data, employee data, etc. Verticalized Plaid.
The larger players have spent years building integrations but the newer ones understand trends and customers better - and there is a very long tail of them. Not a new theme, but one that will hit even harder as the market takes a downturn.
Merging point solutions
Enterprise + SMB —> expand offerings and client base
Overall increasing number of SMBs and segmented offerings creates opportunities to bundle and create a better, tailored product.
Well Known Players:
What is a PEO?
You outsource your entire HR function to 1 partner and enter into a co-employment relationship
The partner does all HR stuff while clients just focus on their business
HR service that includes insurance
The PEO becomes the EOR (employee of record) under 1 federal EIN when it comes to taxes. Essentially they become the umbrella.
PEO helps with payroll and benefits, compliance, workers comp, other insurance, software, etc.
Cost and time savings
Getting more bang for your buck because as an SMB it can be hard to get access to what a PEO already has access too
Will this space grow?
Previously was just used for outsourcing and saving time / money
Now even more important given the macro trends of distributed workforces, having 1 united HR front, and engaging / retaining employees
Also fragmented and concentrated! Major players own ~50%
Administrative Service Organization
Similar HR services but NO insurance coverage or direct access to benefits, NOR EOR (client has to handle payroll tax)
Why ASO and not PEO?
Businesses think they can get insurance / benefits elsewhere for cheaper
Risk of the business is unattractive for PEOs because PEOs bear insurance risk
TNET acquired Zenefits
Common Business Models
Offerings Per Client
Pricing per revenue
Common pricing models
Fixed fee + PEPM
Transaction + subscription
A la carte
Various bundles + discounts
Recurring is 90%+ of revenue, non-recurring usually around 1 off implementation, extra sales, etc.
Float revenue too
volatile and dependent on many factors
Q1 is heavy and declines throughout the years
Lots of clients going live
Annual form filings
Sales and Distribution
Payroll lowest and is susceptible to employee turnover
HCM > PEO
PEO is more service heavy and involves insurance (they take on the risk, faces regulations too)
HCM tends to be more software
~30% Adj. EBITDA is a good target, some are operating much above such as PAYX
Critical to achieve revenue scale as costs stay rather flat (focus on cost efficiency)
PEO is different
low double digits or single digit margins are reasonable
Client churn - especially as they scale or go bankrupt
opportunity for expense management providers to move into benefits?