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.


  • 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?