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.
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.
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
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.
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
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.
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
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.
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
Employment-Laws.aspx, 10/11/13 10
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