# Payroll / HCM Landscape

**Published by:** [jelca thinks](https://paragraph.com/@jess/)
**Published on:** 2022-09-14
**Categories:** fintech
**URL:** https://paragraph.com/@jess/payroll-hcm

## Content

payroll landscape is fragmentedbig opportunity for spend beyond payrollThe market is huge ($30bn+ TAM) and can be segmented in many different ways.By industryBy size of customerBy geography servedVertical vs horizontal (point solutions vs suites e.g. talent acquisition or accounting)PEO, ASO, HCM, etc.The market is fragmented.5 largest vendors (INTU, Gusto, ADP, PAYX, iSolved) control well over 50% of the US SMB payroll marketBesides the large vendors, small players have almost negligible market share (<1%)Big opportunity hereMany product expansion opportunities here. Can the large players keep up?People are thinking more than just simple payroll.HR / payroll providers are getting bundled up depending on their target audienceBundling examplesHR + payrollHR + benefitsHR + expense managementHR + insuranceRise of services and tech-enabled servicesExcel is out!Tailwind in digitizing everything and having 1 clean UI to manage it allFocus on digitization and automationMacro Tailwinds.Rise of the remote workforce makes it even more important to have fewer digital platforms to maintain a consistent culture and reporting💡NEED TO HAVE, not a WANT TO HAVE anymore for SMBs. Critical to stay competitive.Relatively lower switching costs as more move into the spaceImportant to make the experience as seamless as possibleIt is easier to access dataRise of embeddable offeringsRise of white label offeringsPayroll data, employee data, etc. Verticalized Plaid.Consolidation.The larger players have spent years building integrations but the newer ones understand trends and customers better - and there is a very long tail of them. Not a new theme, but one that will hit even harder as the market takes a downturn.Merging point solutionsEnterprise + SMB —> expand offerings and client baseOverall increasing number of SMBs and segmented offerings creates opportunities to bundle and create a better, tailored product.Well Known Players:GustoRipplingHibobBambooHRiSolvedBambeeJustWorksNamelyHomebasePrismHRWhat is a PEO?You outsource your entire HR function to 1 partner and enter into a co-employment relationshipThe partner does all HR stuff while clients just focus on their businessHR service that includes insuranceThe PEO becomes the EOR (employee of record) under 1 federal EIN when it comes to taxes. Essentially they become the umbrella.PEO helps with payroll and benefits, compliance, workers comp, other insurance, software, etc.BenefitsCost and time savingsSupportGetting more bang for your buck because as an SMB it can be hard to get access to what a PEO already has access tooWill this space grow?Previously was just used for outsourcing and saving time / moneyNow even more important given the macro trends of distributed workforces, having 1 united HR front, and engaging / retaining employeesLargest playersADPTriNetVensureHRPaychexAlso fragmented and concentrated! Major players own ~50%ASO ModelAdministrative Service OrganizationSimilar HR services but NO insurance coverage or direct access to benefits, NOR EOR (client has to handle payroll tax)Why ASO and not PEO?Businesses think they can get insurance / benefits elsewhere for cheaperRisk of the business is unattractive for PEOs because PEOs bear insurance riskLargest PlayersADPPAYXNSPTNET acquired ZenefitsCommon Business ModelsConsider:Client CountClient SizeOfferings Per ClientPricing per revenueCommon pricing modelsPEPMFixed fee + PEPMTransaction + subscriptionA la carteVarious bundles + discountsRevenue compositionRecurring is 90%+ of revenue, non-recurring usually around 1 off implementation, extra sales, etc.higher marginFloat revenue toovolatile and dependent on many factorsSeasonalityQ1 is heavy and declines throughout the yearsLots of clients going liveAnnual form filingsSales and DistributionDirectResellersSEOReferralsMarginsGMPayroll lowest and is susceptible to employee turnoverHCM > PEOPEO is more service heavy and involves insurance (they take on the risk, faces regulations too)HCM tends to be more softwareEBITDA~30% Adj. EBITDA is a good target, some are operating much above such as PAYXCritical to achieve revenue scale as costs stay rather flat (focus on cost efficiency)PEO is differentlow double digits or single digit margins are reasonableCommon risksClient churn - especially as they scale or go bankruptopportunity for expense management providers to move into benefits?

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