1

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

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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

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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

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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

Intuit, Intuit.com, 10/14/2013

19

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.