Paycheck Please

Lost in the coverage of layoffs that took place over the last few years — some 8 million since the recession began — was the fate of companies that count on a healthy workforce for their own livelihood. Among them are payroll vendors.

Payroll vendors saw revenue dip 3 percent in 2009 after posting a 6 percent gain the previous year, according to IDC, a technology researcher. That 3 percent drop isn’t as bad as what some industries saw in 2009, in part because these firms gained new customers who no longer wanted to bear the cost of payroll processing. But it’s enough of a dip to create opportunities for mid-size businesses.

Market leader ADP, with more than half its 2009 revenue of $8 billion coming from payroll services, noted in its latest fiscal report that the general workforce decline led to a 2.5 percent drop in processed pay slips. Another top payroll outsourcer, Paychex, saw its revenue drop 6 percent. The other of the three largest payroll outsourcers, Ceridian, is privately held and doesn’t report results.

The contraction isn’t great news for vendors, who’ve also had to contend with more rivals entering the field.

But mid-size companies stand to benefit from the dynamic that slackening demand and increased competition have created. It’s put them in the driver’s seat if they’re considering giving their current payroll provider another look, shopping around or negotiating better terms.

“All the vendors are hungry,” says HR consultant Mark Stelzner of Inflexion Advisors.

Vendors get paid on the number of pay slips they process, and according to technology analyst Gartner, roughly 89 percent of mid-size companies outsource payroll. That makes mid-size companies a formidable force for payroll outsourcers. That wasn’t good news for vendors during the recession, when mid-size enterprises led companies of all sizes in layoffs, with 3.2 million jobs lost, according to an ADP report. But the segment is slowly starting to rehire, adding 9,000 workers to payrolls in the first quarter of 2010, also according to ADP.

Competition Benefits Mid-Size Buyers
In times gone by, mid-size companies didn’t have many payroll vendors to choose from and changing providers was a nightmare, says Sheila Mullan, director at Expense Reduction Analysts, a New York-based cost management consulting firm. “You could threaten to change providers and no one believed you.”

That’s changing, now that there are a handful of competent suppliers and transitioning from one to another is a much smoother process, Mullan says.

Where ADP once accounted for a large majority of accounts, the company now owns about a third of the market. ADP, along with Paychex, Ceridian and Intuit – which deals mainly with small businesses – make up about half the $14 billion market, according to IDC. The balance of mid-size companies’ payroll business is highly fragmented, according to IDC's 2009 U.S. Payroll Forecast, split among newcomers such as SurePayroll, CompuPay and Paylocity, which aim to compete on price and online services.

Mid-size companies are a natural for payroll outsourcers. Fortune 1000 and other large companies have the capability and inclination to manage payroll services internally, notes Stelzner, the HR consultant. Small businesses are a fragmented market. Mid-size companies are a chance for vendors to land larger contracts. As a result, many have developed services specifically aimed at the segment. Competition has also led some payroll services to expand into other areas of HR outsourcing. ADP, for one, rolled out a product called Workforce Now, an online program helps mid-size companies with a range of HR services, including payroll, benefits processing, tax accounting and attendance.

“A lot of payroll providers have become full-service [HR] outsourcing firms. So by adding an HR software solution, you get everything under one roof and give suppliers an incentive” to lower rates, Mullan says.

Furnishings Business Cuts Payroll Costs
Last year, Mullan helped one client find that out for themselves. The client, Gracious Home, a $70 million New York-based home furnishings chain, was opening a new store and adding jobs and wanted to keep costs from ratcheting up.

It’s no easy task to increase the number of pay slips while shaving fees off of payroll processing. Mullan managed to help Gracious Home cut costs by leveraging vendors’ expanded menus of services.

Mullan and Gracious Home’s CFO Kenneth McDermott first broke apart the bundle of payroll-related services the company was outsourcing to its existing vendor. They decided which of those were essential, which could be brought back in house and which the company wanted to continue farming out. Then they drew up a request for proposal for the newly repackaged services they sent to a handful of providers.

In the end, the company switched to a new provider that offered the desired services at a competitive rate. The switch ultimately eliminated 40 percent of its payroll costs, a $100,000 savings.

Mullan is a big advocate of switching providers to save money, and keep the market in check. In the case of Gracious Home, bidding for a new vendor “definitely got the attention of the incumbent,” she says.

Mid-size companies like Gracious Home are in control of the relationship, says Lisa Rowan, an IDC human resources analyst, “because there’s a lot of shifting from vendor to vendor.”

Companies are inclined to shift more frequently in part because payroll is often their greatest expense. Managing this expense adds a layer of cost. But for payroll departments that cut staff due to hard times, outsourcing has been a useful option, notes Inflexion’s Stelzner. “It created a co-dependency on third-party providers because they can’t do it in-house anymore,” he says.

That’s part of the reason why payroll processors remained relatively flat — at a time when flat was the new up — because “outsourcing became a viable alternative when companies were cutting staff,” notes IDC’s Rowan.

As companies look to restructure their payroll costs in the name of savings, paring back services, as Gracious Home did, is one alternative. But so is adding more, Mullan notes. “I know it sounds contradictory,” she says. But if companies are asking vendors to provide more services, they can ask for better rates. She suggests that both bundling and unbundling, depending on a company’s needs, could be strategies for negotiating lower rates.

As the economy pulls out of the recession, paring back on payroll costs won’t go away. Reevaluating, and shopping around, will always be good options, she says.

“Downturn or no downturn,” says Mullan, “companies should always consider switching.”