Paychex’s Increasing Focus On Software-As-A-Service May Help Improve Margins

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Paychex (NASDAQ:PAYX), a leading payroll service provider in the U.S, entered the Software-As-A-Service (SaaS) market for payroll processing in 2011 with its acquisition of SurePayroll, an online payroll service provider. Paychex recognized the growth opportunity in offering a self-service, online-based payroll processing solution to small businesses which were used to more manual and laborious methods. The acquisition enabled Paychex to enter a market where its competitors, Automatic Data Processing (NASDAQ:ADP) and Intuit (NASDAQ:INTU), already had significant presence.

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Paychex’s SurePayroll service has shown strong double-digit growth year-on-year since its acquisition. [1] Given the growth opportunity in online based payroll processing and to remain competitive in the outsourced payroll and HR management industry, Paychex made more acquisitions to expand its offering.

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In 2012, Paychex acquired ExpenseWire, a leading SaaS based expense management solution. In June 2013, Paychex extended its SaaS offering through acquisition of HR Services Inc and its web-based recruitment management service, myStaffingPro.

In October 2013, Paychex announced a new SaaS platform which integrated all of its payroll and HR services and provides a one-stop solution for its clients. [2] The platform offers payroll, HR benefits, time and attendance, training and performance management services through a single interface backed by a centralized database. The new service also provides clients with a variety of reporting options and analysis capabilities that will help increase productivity. The platform can be accessed through portable devices such as smartphones and tablets.

The Advantages Of Online Payroll Processing

The primary advantage of online payroll processing and HR services is that it allows clients to access and process payroll from remote locations. Since all the information is centrally located, it can be accessed from any Internet enabled device and at any time. It also does away with the need to hire an in-house payroll professional or even outsource one, thereby lowering costs and also increasing efficiency since the client can now focus on its own business. However, Paychex believes that the online payroll service and a payroll professional complement one another. Paychex’s clients may use its online offerings to deal with simpler payroll and HR related functions on their own, and may take assistance of a professional in order to work on complex issues.

How SaaS Based Solutions May Benefit Paychex

The primary benefit for Paychex in offering SaaS based solutions is the reduction in costs which will lead to improved margins. SaaS based solutions eliminate the need to hire professionals to help clients manage their payroll and HR responsibilities. As more and more clients shift to these online services, labor costs for Paychex will decrease and help in improving margins. Also, since the service is online, scaling up the service will be easier and would not require intensive capital expenditures.

Additionally, SaaS based solutions helps Paychex remain competitive with other players in the industry who have been offering such services to their clients for quite some time. For example ADP has been offering Vantage HCM, a SaaS based employee life-cycle management system, since 2011. [3] At present, Paychex’s SaaS based solutions are at a very nascent stage and are mostly offered as a bundle along with other services to enhance client experience. Hence, it is difficult to see its impact on margins, overall revenues and revenue per client.

Once the SaaS business grows and contributes higher revenues, we believe that Paychex’s margins will see significant improvement. Paychex plans to create a separate division of its SaaS based offerings once the services have grown to a considerable size. [4]

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Notes:
  1. Paychex’s CEO Discusses F1Q 2014 Results – Earnings Call Transcript, October 2013, www.seekingalpha.com []
  2. Paychex Cloud-Based Platform Combines Technology and Service for Streamlined Workforce Management, October 2013, www.marketwatch.com []
  3. www.adp.com []
  4. Paychex Management Discusses Q4 2013 Results – Earnings Call Transcript, June 2013, www.seekingalpha.com []