paychex external environment

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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. Paychexs 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, Paychexs 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

    http://investorplace.com/2010/05/paychex-payx-automatic-data-processing-adp-unemployment-economy/http://investorplace.com/2010/05/paychex-payx-automatic-data-processing-adp-unemployment-economy/

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    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

    http://video.cnbc.com/gallery/?video=3000204140http://data.bls.gov/timeseries/LNS14000000http://en.wikipedia.org/wiki/Consumer_confidencehttp://video.cnbc.com/gallery/?video=3000204140

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    negatively. This will ultimately hurt the companys 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 Germanys 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

    http://video.cnbc.com/gallery/?video=3000204140

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    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 states 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 companys 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

    http://www.crossborderemployer.com/post/2012/01/13/Germanye28099s-Labor-and-Employment-Laws.aspxhttp://www.crossborderemployer.com/post/2012/01/13/Germanye28099s-Labor-and-Employment-Laws.aspxhttp://media.paychex.com/news-releases/paychex-expands-to-latin-america.htm

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    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