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Date: October 5, 2013
From: Matthew Mintz
Subject: External Environment of Paychex
The following contains a summary of the external environment of Paychex explaining the
current, economic conditions, legislation affecting Paychex, Demographics, relevant societal
values, technology, suppliers, buyers, rival firms, and substitute products.
Macro environment
Economic conditions
Paychex is impacted severely when economic conditions begin to turn downwards. This
is shown in Paychex stock in February of 2009 when economic conditions were at their worst
and small businesses were failing quicker than they were starting.
“Paychex reported that its total client base decreased by 2.1% from May 2009 to March 2010,
attributable to the following factors: first, Paychex is finding it tough to add new clients at
historical rates because of the decline in the rate of new business formations and fewer
companies outsourcing their payroll processing. Paychex’s new client base decreased 6% in the
first three quarters of 2010 compared its client base over the same period in 2009. Secondly,
payroll processing companies like Paychex lose clients when businesses either fail or they move
to competitors (like ADP). In 2009, Paychex’s client loss was around 23%, much higher than
historical levels of 19-20%.”1
Paychex will continue to be at risk of this primarily because they focus on small to medium size
businesses increasing the risk that their clients will go out of business. The longer Paychex
clients stay in business the more return Paychex receives on their investment in salesmen,
because as the businesses survive longer, they grow bigger. This gives Paychex the opportunity
to increase revenue due to the increase in the amount of paychecks printed for the business.
1Investorplace.com, http://investorplace.com/2010/05/paychex-payx-automatic-data-processing-
adp-unemployment-economy/,10/11/2013
2
Paychex is also heavily impacted by the jobless rate. If people are not getting jobs, the
companies either have no use for a payroll company because they can handle the smaller amount
of checks internally (worst case scenario) or there will be less employees in the market so the
revenue potential for Paychex will be significantly less because of the decrease in paychecks that
need to be supplied (best case scenario). During this last quarter Paychex has reported that the
number of checks per payroll increased 1.2%2, this is primarily because the jobless rates for the
US has decreased .8%3 due to the turnaround of the economy.
Paychex relies heavily on consumer confidence. Consumer confidence Consumer
confidence is an economic indicator which measures the degree of optimism that consumers feel
about the overall state of the economy and their personal financial situation.4This means when
consumer confidence is high, consumers are more willing to spend more money.
This is an important measure because as consumer confidence is increasing, businesses
receive an increase in revenue. The more revenue, the more willing companies are to increase the
amount of employees they have on staff to cover the increase in demand. This leads to an
increase in jobs which ultimately leads to more payroll business for Paychex.
Paychex invests in low risk securities. Primarily their investment of choice is US
municipal Bond. Paychex generally invests 3 billion dollars a year in low interest conservative
bonds5. The value of bonds affects Paychex bottom line, therefore it is important to them that
bond interest rates stay high in order to get a return on investment.
The Government Shutdown is hurting Paychex investments. Because of the shutdown
bond rates have decreased in value meaning that the values of their investments are affected
2 CNBC Mad Money, http://video.cnbc.com/gallery/?video=3000204140, 10/11/2013
3 Census Data, http://data.bls.gov/timeseries/LNS14000000, 10/11/2013
4 Wikipedia, http://en.wikipedia.org/wiki/Consumer_confidence, 10/11/2013
5 cnbc.com, http://video.cnbc.com/gallery/?video=3000204140, 10/11/2013
3
negatively. This will ultimately hurt the company’s return. In order for their investments to be
lower risk, the government needs to increase the debt ceiling in order to stop bond values from
falling through the floor.
Legislation
Much of the legislation that has been passed in this last year has been to the benefit to
Paychex. Government taxation has become so complex that the average small business owner
does not know or have the time to learn how to fill out the forms and risk a mistake. Many of
these small business owners reach out to a payroll company to minimize their risk.
According to Martin Mucci,
“In fiscal 2014, health care reform is one of our most important initiatives, as this legislation is
expected to have far-reaching effects on businesses and employees. During the first quarter, we
launched new comprehensive solutions to help with certain mandates under health care reform.
These new solutions include our Paychex Employer Shared Responsibility Service, designed to
make it easier for business owners to determine if the employer shared responsibility provision
applies to them and the actions they may need to take. We also offer our new ESR Complete
Analysis and Monitoring Services for those clients who want a more robust solution.”6
Paychex has seen an increase in sales for one primary reason, the American Care Act. Many
Small to medium size businesses are looking to figure out how to cut costs with the restrictions
of the ACA. Some companies are working on splitting their company into two companies in
order to avoid having to pay for their health insurance.7 This is where Paychex comes into play,
they can consult their clients on how to best handle the situation and direct them toward a path
that will allow them to save money.
Paychex moved into Germany in early 2000, Germany has opportunities in the human
resource fields that Paychex has been able to capitalize on.8 One example is that Germany’s laws
6 Martin Mucci, Earnings call Q1 2014, 10/11/2013
7CNBC Mad Money, http://video.cnbc.com/gallery/?video=3000204140, 10/11/2013
8 Neil Rohr, personal interview, 08/17/2013
4
regarding background checks are much more stringent than the United States.9 This means that
Paychex is able to provide background checks to small businesses in Germany in order to add
value to their clients.
Paychex is currently moving into Brazil10
, which is a huge up and coming market. This is
opening the opportunity for Paychex to get into the small business market and ride the countries
growth rate. However Paychex will have to adjust their services in order to compete with local
firms and ultimately add value to their clients.
Demographic
Paychex is located in Rochester New York. Despite the state’s high tax rate on
corporations, Rochester is a great place for Paychex to be located. This is because they are
closest to their best clients and right in the middle of the majority of their client base in the north
east.
Paychex is also located near multiple universities which increases the odds of recruiting
from colleges. Paychex keeps their sales force young and energetic, this increases employee
turnover but the employees that stay around generally make it to senior management. Paychex
generally does not outsource because they do not feel that outsourcing provides the amount of
service that is required for their company’s standards.
Societal Values
American companies tend to focus on the cheapest solution when it comes to business
support functions such as Human Resources and Payroll. Generally these businesses have to
9 Crossborderempoyer.com,
http://www.crossborderemployer.com/post/2012/01/13/Germanye28099s-Labor-and-
Employment-Laws.aspx, 10/11/13 10
Paychex, http://media.paychex.com/news-releases/paychex-expands-to-latin-america.htm,
10/11/2013
5
focus on cutting costs and place the risk of filling out the taxes wrong on themselves. Many
companies see the advantage of having someone else do their payroll for them that way they are
able to mitigate the risk of doing business.
Despite the 99 Dollar flat rate a month11
Paychex focuses on selling the fact that if the
small business makes an error on their payroll taxes it could raise a flag with the IRS which
could ultimately cost the business far thousands if not millions of dollars. By mitigating this risk
Paychex has increased the value of their services by causing simplicity.
The main penalties that Paychex focuses on when selling services to clients is, failure to
deposit withheld taxes on time, failure to issue 1099s, excluding reimbursements from
company’s’ taxable wages, and excluding travel expenses from taxable wages. All of these small
errors can add up to thousands of dollars in penalties to the company.12
Companies that are located in Brazil and Germany are beginning to receive (or also have)
complex payroll and human resource laws imposed by their governments. This opens up the
niche for Paychex to offer their services and minimize the chance that they make an error, which
would cost them significantly more than hiring a payroll company.
Technology
Paychex researches new and innovative technology that can be applied to solve business
problems or to provide new product and market opportunities. Paychex is also responsible for
strategic planning aimed at technology introduction and obsolescence planning to address growth
11
Certifiedqb.com, http://www.certifiedqb.com/Payroll.html, 10/11/2013 12
Accounting Today, http://www.accountingtoday.com/gallery/Top-10-Payroll-Mistakes-
Companies-Make-62641-1.html, 10/11/2013
6
in clients, employees and new products. Paychex maintains the belief that if they are not working
to make their own products obsolete, someone else is.13
Paychex also manages security incidents, conducts vulnerability assessments, provides
security awareness training and monitors adherence to security policies and standards.
Information Security also manages requests for information access.14
The Paychex development team is responsible for the design, development, testing and
ongoing maintenance of Paychex software applications and databases.
The information technology team manages the company's networks, systems, data centers
and telephone systems. It is also responsible for asset and contract management, systems and
administration, and business continuity planning.
Paychex also provides first and second level resolution support, problem management
and incident communication. Support also manages service level requirements, provides root
cause analysis and manages the release of changes into the production environment.15
Paychex in the past has purchased technology that they have considered game changers
in the near future. One example of this is the purchase of Time in a Box16
which was an
electronic time and attendance service that helped assist Paychex further the simplicity of their
service.
In 2007 Paychex purchased a benefit provider called Hawthorne Benefit technologies,
this helped Paychex Jumpstart their floundering human resource side of the business. In 2010
13
Efrain Rivera, Personal interview, 08/17/2013 14
Rochester Institute of Technology, http://www.rit.edu/explore/?q=node/57, 10/11/13 15
Rochester Institute of Technology , http://www.rit.edu/explore/?q=node/57, 10/11/13 16
Paychex, http://www.paychex.com/a/d/corporate/history_print.pdf, 10/11/13
7
Paychex continued to acquire Sure Payroll which was the nation’s leader in online payroll
management, leading Paychex to embrace the benefits of the internet completely.17
According to Efrain Rivera, “One of the biggest questions I am asked by investors is
what keeps me up at night? My response is Technology. Right now somewhere there is someone
in their mothers basement or garage creating the next best or next worst thing, wither it be a
computer virus or the next operating system… I like to focus on buying these things before they
become a problem.”18
Micro Environment
Suppliers
Paychex does not have physical suppliers, meaning they do not import goods or services
from any specific suppliers. They do however receive large lines of credit from banks. As of
May 31, 2013, the Company had unused borrowing capacity available under four uncommitted,
secured, short-term lines of credit at market rates of interest with financial institutions such as JP
Morgan Chase Bank, $350 million, Bank of America, $250 million, PNC Bank, National
Association $150 million, Wells Fargo Bank, National Association $150 million.19
The primary uses of the lines of credit would be to meet short-term funding requirements
related to deposit account overdrafts and client fund obligations arising from electronic payment
transactions on behalf of clients in the ordinary course of business, if necessary. No amounts
were outstanding against these lines of credit during fiscal 2013 or as of May 31, 2013.20
These lines of credit allow Paychex to be more flexible with their investments. It
decreases the risk that they will overdraft their accounts when they make large investments with
17
Martin Mucci, Personal Interview, 08/17/2013 18
Efrain Rivera, Personal interview, 08/17/2013 19
Paychex, Paychex 10k, 10/11/2013 20
Paychex, Paychex 10k, 10/11/2013
8
the funds held for clients. These lines of credit also allow Paychex to make acquisitions and
further grow the company. This is how Paychex can afford to make aquizitions of future
competitors, to further add value to their company or increase their market share. Paychex makes
it a point to keep Debt at zero, this last year, Paychex never made use of their lines of credit in
order to keep their debt at zero.21
Buyers
Paychex focuses on selling their services to small and medium size businesses throughout
the United States. They focus on placing sales offices in small to medium size business hubs
such as Savannah and Charleston. They also have a large center of customers within the
Rochester area because of the location of Paychex when it first started in 1973.
Paychex has an increased risk of their businesses going out of business as compared to
ADP who caters to larger, more stable businesses. Small businesses account for 55% of all jobs,
and 66% of all new jobs. According to some resources, the small business failure rate for within
18 months is between 50%-70%. This is a major threat for Paychex because their entire business
model is relying on the strength of small businesses.
Paychex took the strategy of minimizing their risk of losing customers by creating a
website called Build My Biz. This website offers features that include marketing tips, licensing
information, formation of businesses, and tax information and resources.22
This is a great way for
Paychex to invest in their buyers to ensure that they minimize the risk of losing customers.
Customers of Paychex have many choices as to how they want to handle their payroll and
taxes. One of the major ways is to just handling it themselves. This gives the buyer the upper
hand in leverage when selling Paychex services, because there is a cheaper option. Paychex
21
Paychex, Paychex 10k, 10/11/2013 22
Buildmybiz.com, http://buildmybiz.com/about/, 10/11/2013
9
works at lowering the price to get as many customers as possible; they also work to price match
when the customer receives a lower quote from a competitor.
Because of the amount of information online, the consumer has become very informed
about the payroll process. This makes it easier not only to get the information themselves but
also to price shop between competitors. Because of this Paychex is exposed for being one of the
most expensive services.23
Because of this the buyers contain all of the power when it comes to
selling Paychex services. Paychex must work to service their customers in order to receive
interest in their product let alone a sale.
Paychex has focused on training their employees on their products. They received the
rank of 35th
on Training Magazines top 125 training programs.24
During their classes they are
educated on the basics of payroll and human resources as well as with basic sales techniques to
increase productivity.
In the section of the class where they talk about human resources they learn about the key
points where small businesses can be tripped up. Examples of these are W2 forms, and 11099s
which both carry hefty penalties if not executed correctly. These are major selling points for
Paychex payroll services because Paychex assumes all the risk if payroll is done incorrectly.
Employees are also educated on the services that Paychex offers through their HR
department. This includes Benefit packages, Retirement funds, and business insurance. They
learn how to wrap these products up in packages when selling to companies. This increases the
amount of revenue that Paychex makes per sale to a business.
23
Docstoc.com, http://www.docstoc.com/article/154118013/Top-8-Payroll-Services-The-Best-
Small-Business-Options, 10/11/2013 24
Paychex, http://media.paychex.com/news-releases/top-training-organization-for-the-eleventh-
consecutive-year.htm, 10/11/2013
10
Finally employees are schooled in consultative selling techniques. This technique uses
the employee’s education of Paychex products and allows them to educate the customer on what
is most necessary for their business, while also up selling Paychex products as much as possible.
This benefits the customer because of bundling and cost savings for benefits and insurance that
they would need to purchase to begin with.
According to Neil Rohr, the VP of Sales for Paychex, when visiting a small business,
sales representatives work to get their foot in the door with the payroll services. Once they
establish if the client needs a payroll service, they work on asking about their HR needs and their
plans to grow, then ask about the insurance that they need to run their operation. This works well
if the client isn’t interested in purchasing a new payroll provider, but they are having a hard time
with their insurance provider.25
Despite having access to information many of Paychex buyers have a hard time
understanding the complexities and necessities of the payroll operations. That is why Paychex
approaches the buyer with a consultative selling technique, offering information and therefore
building trust with their customers.
Rival Firms
Paychex controls more than 32 percent of the market share for payroll service company’s,
second to its main competitor ADP which controls about 42 percent of the market share. The rest
is controlled by smaller, accounting firms.
Automatic data Processing (ADP) was founded in 1949 by a small business accountant.
This company grew with the invention of the automated punch card which sped up payroll
25
Neil Rohr, Personal interview, 08/17/ 2013
11
processing allowing them to take on more clients. In 1961 ADP purchased their first computer
which allowed them to expand their client base to 300 clients with revenues of $400,000.
Ten years after Paychex was founded ADP reached revenues of one billion dollars,
creating pay checks for just over ten percent of the counties workforce.in the 1990s ADP’s
clients looked to outsource their entire human resource departments. ADP adjusted to their
customers needs, this made ADP the first company to manage both payroll and human resource
functions for other companies.
Today ADP, with more than $10 billion in revenues and approximately 600,000 clients,
is one of the world's largest providers of business outsourcing solutions. Using over 60 years of
experience, ADP offers a wide range of human resource, payroll, tax and benefits administration
solutions from a single source.26
Because ADP entered the market before Paychex, it gives ADP a huge advantage. When
Paychex was getting its first clients in the 70s, ADP was creating 10% of the United States
workforce’s pay checks. ADP also beat Paychex to the human resources market by about ten
years. This gave ADP a huge advantage in selling their services to their clients due to the all-
inclusiveness of their portfolio of services.
Despite having the lead in time in the market, Paychex was first to embrace online
technology to support their sales force. This helped Paychex close the gap on ADP’s new client
acquisition because of their ability to cater to the convenience of using the internet and not
forcing their clients to call to speak to a sales representative.
Where Paychex focus on higher risk, small to medium size businesses, ADP focuses on
large corporations where they receive a larger amount of income per client because of their
26
ADP, http://www.adp.com/careers/uscareers/who-is-adp/history.aspx, 10/11/2013
12
employee base. ADP still has small business services; however Paychex does a better job
catering to the small business person with their specialization in the industry.
The second largest competitor to Paychex is Intuit which owns 1.9% of the market
share.27
Intuit Inc. is a US software company that focuses on the development of financial and
tax preparation software. The company provides products such as QuickBooks, TurboTax and
Quicken to help customers with business and financial management problems. The company is
primarily active in the Payroll and Bookkeeping Services industry through its employee
management solutions products and services. Employee management solutions include
subscription services to small businesses that use QuickBooks and either organize their own
payroll, or require assistance.28
Intuit focuses on making the Payroll process as easy as possible offering two different
services. One is an assisted service that allows the business owner to call in hours and have Intuit
input the hours in for them. The other is a do it yourself method which is the most popular.
Intuit comes with a guarantee that payroll taxes will be filed accurately and on time. In
addition to its error-free paycheck guarantee, Intuit also backs its tax filing services with a
guarantee. This payroll service also provides your employee W-2 forms at the end of the year for
no additional cost.
Intuit is the cheapest option when it comes to a payroll provider. The flat rate for a year is
very attractive to a small business owner who is trying to control their costs. The downside to
Intuit is that in both aspects of its payroll options, there is a do it yourself component. Both
options make the customer print the checks out themselves, which adds costs to the business. For
27
IBIS World
http://clients1.ibisworld.com/reports/us/industry/majorcompanies.aspx?indid=1397, 10/11/2013 28
Ibis World,
http://clients1.ibisworld.com/reports/us/industry/majorcompanies.aspx?indid=1397, 10/11/2013
13
business owners that are not that tech savvy or are confused on how to handle their payroll, Inuit
is not the best option.
Another smaller competitor to Paychex is called Onpay. The Onpay payroll service offers
employers the option to pay employees in different ways. With the Onpay payroll service the
business is not bound by a long-term contract. If the business decides that Onpay is not working
for their business, they are free to cancel at any time without any penalties.29
Onpay will also handle the business’s employees' W-2 or 1099 forms. Another benefit of
Onpay to small business owners is that Onpay’s software connects with QuickBooks, which is
the primary tool used for small businesses in the United States. On top of that Onpay is
significantly cheaper than Paychex.
Because Onpay is a little known firm, it poses little threat to Paychex at the moment.
However this company has the potential to be a large player in the market if it catches on. That’s
is because the pricing model is significantly better because of their harnessing of the internet,
which appeals to small businesses that don’t want to spend a good portion of their income on a
payroll service. Onpay is not yet in on the Human Resource market and it does not look likely
that they will be likely to enter that market.
Similar to Onpay, Paychex also competes with a company called ProPayroll. ProPayroll
is a near completely web based company that files the businesses payroll. ProPayroll also does
W2 forms, however they are more expensive than the industry average. ProPayroll has also
created a mobile application to assist their customers with interacting with the payroll company.
29
Toptenreviews.com, http://online-payroll-service-review.toptenreviews.com/onpay-
review.html, 10/11/2013
14
The mobile application has been largely successful. Paychex has started moving toward
the mobile application direction with their new Paychex Online mobile application. This allows
business owners and managers to finish and submit their payroll functions on the move.
Another smaller competitor to Paychex is CBIZ. CBIZ provides its clients with services
including accounting, tax, financial advisory, government health care consulting, risk advisory,
merger and acquisition advisory, real estate consulting, and valuation services. Employee
services include employee benefits consulting, property and casualty insurance, retirement plan
consulting, payroll, life insurance, HR consulting, and executive recruitment. CBIZ is one of the
largest accounting and valuation companies in the United States, the Company’s services are
provided through nearly 100 Company offices in 32 states.30
CBIZ is a large publicly traded accounting firm that poses the most threat to Paychex.
CBIZ focuses on the same services that Paychex does while also offering more in depth financial
services such as corporate taxes and other needs. CBIZ overall growth has been stagnant, staying
in the same geographic region, therefore this threat is not as relevant as others to Paychex.
Some banks are starting business services to better cater to their business clients31
One
example of this if Bank of America. This allows a small business to keep their banking and
payroll service all in one spot which limits the amount of information transfer that is necessary to
get payroll services for the company.
This is becoming a trend with other banks as well, who are trying to cater to their
customers’ needs. Wells Fargo has also started a payroll service which has been catching on with
small businesses as an added feature of banking with them. This could pose as a potential threat
30
Paychex, http://phx.corporate-ir.net/phoenix.zhtml?c=73481&p=irol-irhome&pid=4508,
10/11/2013 31
Toptenreviews.com, http://online-payroll-service-review.toptenreviews.com/paychex-
review.html, 10/13/2013
15
to Paychex because of how accessible and convenient it is to have the same bank and payroll
provider.
New Entrants
In the Payroll service it is easy to start a payroll business. All a Payroll startup company
needs to create the business is a computer, and knowledge of the United States Payroll Tax
System and knowledge of human resource law. However it is much more challenging to become
successful and gain ground in the market.
The challenged that is faced, which has also been faced by Paychex, is that when a
company signs up with a Payroll service provider the process to get them all the information they
need to perform their duty is immense. There are hundreds of forms that need to be filled out,
along with employee information that needs to be transferred, and account information that needs
to be updated. All that coupled with a contract with the company to supply the service gives the
advantage to the company that receives the business first a major advantage.
After a business signs on with a payroll company it is much more difficult for them to
switch providers because not only do they have to repeat the same process they had to do when
they first signed on with the company but they also have to work to get the information back
from their original company, which has the potential to be a hassle.
This is why many businesses never switch from their provider despite their dislike of
them. Paychex struggled to gain market share from ADP in the seventies for this same reason32
,
and it continues today which is why there is competition in the small business payroll market
because startups don’t have a company that they are already tied to.
32
Neil Rohr, Personal Interview, 08/17/2013
16
Technology has also made it significantly cheaper for startup Payroll companies. Because
of the increase of efficiency of technology, it costs these startups less money in wages for
employees because they have the capability to have the payroll process automated.
The largest up front expense for these companies are computers and servers and a CPA
and IT to ensure their algorithms are functioning correctly. These companies have the advantage
of low costs to start up and low labor cost which allows them to undercut large competitors such
as ADP and Paychex.
The best example of a startup payroll company is a company based out of the Stanford
area called ZenPayroll. ZenPayroll has a modern simple look. It’s set up and run payroll online
in minutes, from any web enabled device. All government payroll taxes and reporting are taken
care of automatically and paperlessly. Their customers are small and large businesses, from
flower shops to technology start-ups.33
ZenPayroll capitalized on cloud technology and a simplistic design to capture their
customers. ZenPayroll uses cloud technology to store information managing their costs. It also
claims that the simplicity of the site allows a customer to setup their profile and payroll
information in minutes from anywhere.34
It also uses the new mobile technology to offer
convenience to the business owner that uses their service.
Another startup that is using a similar platform is called Payroll Hero. Payroll Hero
claims to be a “Consumer friendly time, attendance, scheduling and payroll app that is in the
33
Startupscanner.com, http://startupscanner.com/company.php?domain=zenpayroll.com,
10/11/2013 34
ZenPayroll, www.zenpayroll.com, 10/13/2013
17
cloud built for web and mobile PayrollHero.com application”35
It claims to have a user friendly
time, attendance, scheduling and payroll in the cloud for web and mobile.
Payroll Hero also features an innovative technology, “We use your employees face as our
primary biometric to avoid buddy punching and ghost employees. These clock-in pictures are
further given a mood rating to establish an array of business intelligence to your company’s
corollaries between productivity and mood.”36
With being able to track your employees mood
and productivity, it allows companies to correlate their company’s culture with how their
company performs, allowing them to justify their companies culture to their investors.
The major disadvantage to these new startup companies is that because they are all online
base, they are a major target for hackers that want to get a hold of employee information, or
business information. This could cause potential lawsuits and potentially run the companies out
of business if their cyber security is not up to date.
These companies, at the moment, pose no threat to Paychex market share; however they
could give a competitive advantage to a rival competitor if they are purchased by another
company. This is generally why Paychex purchases new Payroll companies that pose any type of
threat to them, or could look potentially enticing to competitors.
Substitute Products
Paychex competes with a lot of cheaper products which can pose a threat to their market
share. There are many ways a small business can handle their payroll that does not involve
outsourcing their information to another company to handle it for them.
35
Crunchbase.com, http://www.crunchbase.com/company/payrollhero#ixzz2hYTIIFsP15,
10/11/2013 36
Crunchbase.com, http://www.crunchbase.com/company/payrollhero#ixzz2hYTIIFsP,
10/13/2013
18
Intuit is by far the largest competitor to Paychex.37
Intuit has been creating technology for
small businesses in order to make their tougher problems more simplified. Intuit has been
investing a lot of time in creating credit card readers and inventory control systems that sync up
with their products.
Intuit has other systems such as inventory control systems that tracks the inventory that
leaves the store as it is scanned during the check-out transaction. They also have a go payment
option which allows a user to hook an I-pad up to a register device and it tracks the sales
information of the stores, allowing the stores to accurately track their sales.
Despite Intuit’s QuickBooks system being a do it yourself type of product it is quite
popular.38
This is because of the ability to acquire add-ons from Intuit that match the type of
business that your business performs. It is reasonable that small business owners go to Intuit to
acquire all of these pieces for their business because it affects the efficiency of their entire
business and not just the payroll aspect of their business.39
The major aspect that Paychex has over Intuit is that it is a full service. Where Intuit
creates tools for the small businesses to function off of, Paychex handles every aspect of payroll
for the business. This is a major advantage for Paychex when selling to business owners that
have little knowledge of the payroll tax systems.
Other, Larger businesses have their own payroll department to manage their payroll and
deposits internally. This is a minority of Paychex business because the cost of having their own
37
Ibis World,
http://clients1.ibisworld.com/reports/us/industry/majorcompanies.aspx?indid=1397, 10/11/2013 38
Toptenreviews.com, http://online-payroll-service-review.toptenreviews.com/onpay-
review.html, 10/11/2013 39
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payroll department is immense coupled with the risk of a mistake makes this the least popular
substitute to outsourcing payroll to another company.
The benefit to a company having their own payroll department is that having a dedicated
payroll department for their business. This means that they payroll is done much more quickly
than it would be if it was outsourced to another company and if there are any issues with W2s or
1099s the department can contact the employee directly which is much more efficient than if the
company outsourced the department.
Another benefit to having an internal payroll department is keeping your information
secure. When a business signs up for a payroll service they have to give over a lot of information
about their business along with tax information. The business that is in control of those records is
then charge to keep them safe from hackers and other threats to information security. Although
this is not as large of a threat as it would be down the road when hackers develop more and learn
how to be security technology, it is still a threat in the long run.
The issue with having an internal department that controls all aspects of the company’s
payroll is risk. If there is an error in payroll taxes the IRS comes directly for the company, and
the company is held liable for all mistakes made. This can be an added expense because even a
small error can be costly when dealing with the IRS.40
Some very small one to two person businesses use Excel to track payroll and other
expenses. This is a familiar tool to almost every business person which allows them to create a
spreadsheet that will be custom to their business.
Tracking payroll with their own spread sheet increase the risk of a mistake because the
smallest error in coding the spreadsheets can cause a major error in taxes and in payroll. The
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business owner has to file their payroll taxes themselves every week by hand and pay their
workers with a check or transfer.
Because of the complexity of these sheets it amplifies the risk of the business. Because
they did not outsource their payroll functions, the business also assumes all the risks of mistakes
on their payroll taxes.
The final substitute to Paychex products are business ledgers. This has become
increasingly more unpopular because of the increase in technology and ability to use computer
programs to determine how much each employee gets paid. This is very out of date compared to
other options on how to track payroll and is by far the riskiest way.
Paychex primary edge over its substitutes is that it assumes all the risks of payroll
mistakes and that it handles all taxes and payment choices of the company. Because it offers
direct deposit, it gives an edge over most other options such as excel sheets and ledgers. This is a
major benefit to companies saving the costs of buying checks for employees.
Because Paychex is focused on providing payroll services to other companies, businesses
can insure that their taxes will be filed on time and accurately, decreasing the risk of penalties
from the IRS. Paychex is working to make the process of signing up for Paychex services a lot
quicker, and more hassle free.
Paychex also offers other services that businesses need such as insurance and 401k
benefits. This is a major factor as benefit packages are becoming important to attract more
effective employees.41
These products do pose a threat over the long run, however they do not currently. As
technology improves and these products become more simplified with add-ons that automatically
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do some of the riskier tasks for the business owner they will become more prominent and be
more of a threat.
At this point Intuit poses the largest threat because of the simplicity of their products and
that they still have some of the services that Paychex offers. As intuit keeps adding features and
makes their products simpler they will begin to make Paychex obsolete unless Paychex develops
their products to become more simplified and useful.