Can New Entrants Disrupt ADP’s Operations ?

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With the Human Capital Management market becoming an open ground due to technological innovations, more and more players are entering the market and considerably changing the competitive landscape. Recently, a New-York based Human Resource (HR) software platform startup, Namely, raised $45 million in series C funding and will soon be opening an office in San Francisco. [1] Zenefits, another HR software platform startup, has been in the news for quite some time due to its remarkable growth in the industry and unique business model. The company has also been gaining popularity due to its recent spat with Automatic Data Processing (NASDAQ:ADP), which escalated to the point where ADP filed a lawsuit against Zenefits. [2]

Since the incident with Zenefits began, many in the industry have developed the belief that ADP is threatened by Zenefits, and other new players for that matter, and is trying to push them out. While Zenefits and Namely’s technology and innovation are certainly impressive, and their business models look like they will be effective, they are a long way from posing any threat to ADP. Here’s why:

See our complete analysis of ADP here

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ADP Caters To Businesses Of All Sizes

Unlike its competitors, ADP does not cater to a particular segment of the market. It provides services to small, medium and large sized businesses, whereas new entrants generally cater to small and medium-sized businesses due to their lack of scale. At its investor conference held in March, ADP revealed that it has over 435,000 small business clients (average of 10 employees), 55,000 medium business clients (average of 200 employees) and several thousand large business clients (with more than 1,000 employees). [3] With $10 billion in revenues in fiscal 2014, ADP is the largest payroll outsourcing company in the world. While its small business clients could potentially be poached by new competitors, the small business market is so vast that there is room for ADP to grow alongside any potential competitors.

ADP’s Plethora Of Services 

ADP provides a wide range of services that cover HR functions ranging from recruitment to retirement and payroll to benefits, while most of the new entrants provide more focused services, which forces clients to look for other HR outsourcing vendors to fill the gap. ADP also provides PEO (Professional Employer Organization) services, which accounts for 22% of its revenues, something neither Zenefits nor Namely provide. Since ADP covers the entire gamut of HR services, offering a one-stop shop for clients, many are more likely to approach ADP to fulfill all of their needs.

There is no doubt that the software and products provided by Zenefits and Namely are innovative and competitive. However, ADP is no slouch in that area, having been at the forefront of technological innovations in the industry for a long time. It also been offering cloud-based services for the past few years, with around 80% of its clients using these services. [4] The company’s mobile services have also gained tremendous popularity, going from zero to 4 million users in three years.

ADP’s Global Presence

These new entrants, and many of the established players as well, have fairly limited geographic footprints. ADP, on the other hand, has a global presence and offers its services in 104 countries. It even offers customized services for multinational companies, which is a big differentiating factor for large employers, which is a primary reason we believe that its large business client base is not at much risk at the moment.

Impressive Client Retention

With competition in the Human Capital Management industry increasing every day, it is obviously important for the major players to be able to retain their clients. Despite the rise of innovative new entrants, ADP’s client retention has increased from 89.9% in fiscal 2010 to 91.4% in fiscal 2014, the highest in the industry. The company has also seen an increase in new business bookings; in the third fiscal quarter, ADP’s new business bookings rose 6%. Given the continued growth in ADP’s clients and retention rates, it is clear that clients are satisfied with ADP’s service levels.

Have any thoughts on how players like Zenefits and Namely may affect these companies? Let us know in the comments section.

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Notes:
  1. ADP, Zenefits competitor raises $45 million, opens S.F. office, June 22, 2015, Upstart Business Journal []
  2. ADP Sues Zenefits for Defamation, June 10, 2015, Wall Street Journal []
  3. ADP’s 2015 Investor Conference Presentation, ADP’s Website and company communication []
  4. ADP’s 2015 Investor Conference Transcript, ADP’s Website []