Payroll / HCM Landscape

• 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 industry

• 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

  • Bundling examples

    • 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

Macro Tailwinds.

• 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.

Consolidation.

• 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:

• Gusto

• Rippling

• Hibob

• BambooHR

• iSolved

• Bambee

• JustWorks

• Namely

• Homebase

• PrismHR

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.

• Benefits

  • Cost and time savings

  • Support

  • 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

• Largest players

  • ADP

  • TriNet

  • VensureHR

  • Paychex

  • Also fragmented and concentrated! Major players own ~50%

ASO Model

• 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

• Largest Players

  • ADP

  • PAYX

  • NSP

  • TNET acquired Zenefits

Common Business Models

• Consider:

  • Client Count

  • Client Size

  • Offerings Per Client

  • Pricing per revenue

• Common pricing models

  • PEPM

  • Fixed fee + PEPM

  • Transaction + subscription

  • A la carte

  • Various bundles + discounts

• Revenue composition

  • Recurring is 90%+ of revenue, non-recurring usually around 1 off implementation, extra sales, etc.

    • higher margin

  • Float revenue too

    • volatile and dependent on many factors

• Seasonality

  • Q1 is heavy and declines throughout the years

    • Lots of clients going live

    • Annual form filings

• Sales and Distribution

  • Direct

  • Resellers

  • SEO

  • Referrals

• Margins

  • GM

    • 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

  • EBITDA

    • ~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

• Common risks

  • Client churn - especially as they scale or go bankrupt

opportunity for expense management providers to move into benefits?