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Paychex puts emphasis on human resources amid tech shift

Paychex Vice President of Corporate Strategy and Product Development Tom Hammond, CEO Martin Mucci and Senior Vice President for Corporate Strategy and Product Development Mike Gioja.

Paychex Vice President of Corporate Strategy and Product Management Tom Hammond, CEO Martin Mucci and Senior Vice President for IT and Product Development Mike Gioja. (Photo by Gino Fanelli)

There is no talking about business in the Greater Rochester area without mentioning Paychex.

Not only is it the largest publicly held company based in Monroe County, with $3.4 billion in revenue in the fiscal year ending May 31, 2018, and total assets valued at $7.5 billion, but it also serves as the fourth largest employer in the Rochester area, employing 4,755 locally and around 15,000 company-wide, behind the University of Rochester, Rochester Regional Health and Wegmans Food Markets Inc.

Paychex has been a presence in Rochester since its founding in 1971 by Thomas Golisano and was officially merged into a single company in 1979. Forty years later, payroll services are still a critical part of the business model, and the company’s client base continues to be small and mid-size businesses, mostly in the under 1,000-employee category. On the other hand, a rising focus on tech savvy offerings and diversification has shifted what Paychex does. In addition to being a payroll company, it is now also a software company, a human resources firm, a retirement plan manager and a number of other services under the same umbrella.

“What clients and their employees from their small and mid-size businesses have looked for, from a service perspective, has changed very much to technology and personal,” said CEO Martin Mucci. “We always prided ourselves on, whether it’s payroll, HR, insurance, retirement services, we do everything for you in person, either face to face or on the phone, but clients’ needs have changed to wanting to do more things themselves” by having easier mobile access, among other services.

Mucci has been with Paychex for 17 years and has served as CEO since October 2010, following up on the six-year tenure of Jonathan Judge. He points to the last five years as holding among the largest changes the company has seen since its founding, driven primarily by technology. Rolled out in 2014, Paychex Flex, the company’s modular payroll app, has served as the core of the company’s tech-focused future, tacking on new offerings on a regular basis. In January, the company added an expansion to the HR portion of the app, featuring a configurable events calendar, performance management, workflow approval and analytics, accessible and usable by employees and employers from mobile or desktop.

On top of that is QuickBooks integration, released in December 2018, and in May 2018, Workplace by Facebook was added to the platform, allowing employees a secure space for communication. This is the tip of the iceberg for tech investments into the company, led by senior vice president, IT and product development Mike Gioja and vice president, corporate strategy and product management Tom Hammond. Such products do not come cheap.

“It’s a lot of money, I’m always telling them it’s too much money,” Mucci laughed. “But it’s actually a very tight process, Tom runs all product management and sort-of strategy for the company, what are clients looking for, what products should we invest in, and Mike implements it, he creates the products and the infrastructure.”

In FY 2018 alone, the company spent $500,000 on the purchase of data processing equipment and software from EMC Corp., totaling out at $6 million in purchases over the course of three years, according to the company’s FY 2018 annual report. On Gioja’s end, Paychex is, for all intents and purposes, a tech company above all else, one hinged on synergy between all of the moving parts at the company.

“We look at it as a portfolio; Tom and I evolved several years ago to look at all of our assets as a portfolio,” Gioja said. “Instead of looking at it as several businesses that kind of have their own teams, we look at these and try to create cross-pollination and try to build agile teams. We look at the whole portfolio and say, with all of the resources we have, what are our priorities?”

In FY 2018, those priorities included a number of pieces of innovative tech added onto Paychex’s platform, including the InVision Iris Time Clock, a biometric clock that scans the iris for real-time capture. In other words, an employee can use InVision to clock in by simply looking at the app.

“It’s just trying to make things simple,” Hammond said. “That mobile experience to us is more than just the mobile app, it’s the way we design every single thing that Mike’s team delivers, and it’s done in a way to say ‘what is the most simplistic way that I can get a new hire into the application?'”

The goal of Paychex’s tech is, ultimately, to make it so employees and employers don’t have to dwell on the daily minutiae of time keeping, HR and other business protocol. But as the company shifts to a more tech-forward atmosphere, the pitfall is security. Sensitive information like financial records hosted on a digital platform are prime targets for hackers, and security can be just as much of an investment as tech itself.

Gioja is confident that Paychex Flex is designed, from the ground up, with security in mind.

“The same app you use on your laptop is exactly the same app you use on your phone,” Gioja said. “It is not a separate app that is separately managed, it’s all part of our software as a service hosted code line…at the same time, we also don’t store anything local on that device, so if anybody hacked into your phone, there’s nothing kept and stored, it’s always going back to the system with information we need.”

From security to new product design, Paychex is in a convenient area for tech. A major portion of the team is pulled from the University of Rochester and Rochester Institute of Technology talent pool. Paychex is a cooperative employment partner at RIT and regularly hosts recruiting events on campus.

“Being in this community, you can partner with the schools as well, we’ve done partnerships with RIT and U of R as well, on programs, certifications, training and that’s been really helpful to us,” Mucci said. “If we were in a really big city, I’m not sure we’d have quite as much clout on those kind of things. There’s a great partnering atmosphere in the business community here.”

RIT’s emphasis on design programs, from game development to graphic design, bleeds well into Paychex’s user experience (UX) development. UX is the front facing portion of an app or program, the part that the employee physically interacts with, and good or bad UX can effectively make or break a product, no matter how good the underlying tech is.

“A lot of them (UX designers) come from RIT with advanced degrees in design, and a lot of those designers are developing our mobile application and our whole Flex suite of products,” Hammond said. “What we’re really proudly of is we’ve been able to evolve that over the past five years to a five-star rated application that is very, very simple to use.”

In the App Store, Paychex Flex currently has a 4.8 rating averaged across 61,372 reviews. In Google Play, the rating is four stars out of 6,945 reviews.

“There’s a great example of leveraging that internal talent from RIT, being able to pull that into Paychex and be able to turn that into something that 650,000 clients use,” Hammond said.

A major part of Paychex’s UX emphasis is a particularly tricky tool. Chatbots, those automated customer service messaging systems most major companies have integrated into their sites, either work well or they don’t work at all. Gioja said a massive amount of work was put into developing machine learning that is intuitive, easy to use and convenient.

“We have lots of things to manage that and it’s constantly being tweaked,” Gioja said. “There’s a team that’s looking at it at all times, between operations and product, constantly looking at what’s going on every day and determining what to tweak and how to get stronger and stronger answers.”

Despite being a tech company, Paychex is ultimately still a payroll company, but even that is gradually changing as the company’s services become more and more diversified. In FY 2018, across over 650,000 payroll clients, payroll service revenue came in at $1.8 billion. While still the largest chunk of the business, the growth rate from the previous year was 2 percent. Comparably, human resource services grew 14 percent from FY 2017, to $1.5 billion in revenue.

“You can buy payroll from us, you can buy payroll and retirement, but more and more clients are coming to us and saying ‘hey, manage our HR for us,'” Mucci said. ‘”Because even though I only have 15-20 employees, I have minimum wage issues, I have paid family leave issues, I’ve got retirement issues, I’ve got immigration issues, I’ve got a lot of drug policy issues.'”

For investors, Paychex has served as a wise investment over the course of its life. Having worked in the financial advisement field since 1999, Brighton Securities financial advisor Doug Hendee said he likes Paychex as a company, and has seen clients receive solid returns over the course of his career.

“It’s been a great investment over the long haul,” Hendee said. “It’s had its ups and downs, obviously, like any other company. Currently, lately, over the last several years, they’ve been raising their dividend, which is always great for investors. The stock price made a nice move in the past six or eight months.”

What he refers to as a “long-storied company in Rochester” that many locals have profited off of, Hendee now gives pause for investments at this stage of the company’s life. That’s due to a high stock price and the uncertainty of how much it could rise over the next few decades of the company’s life.

“Candidly, right now, am I recommending people initiate a position here? No,” Hendee said. “It’s hard for me to give a specific, we’re not supposed to give specific investment advice, but let me put it this way, the stock is not cheap, it’s not inexpensive where its current market price is.”

While Hendee is not thrilled about the current stock price of Paychex, he is about how the company has adapted its business model recently. Rather than sticking to its legacy offerings, he sees Paychex as having grown and adapted in a forward-thinking and innovative manner.

“The trend in the business community right now is to outsource things, if it’s cheaper to let somebody else do it and they’re better at it and more efficient and it makes the most sense,” Hendee said. “They’re in an attractive area in the business community, that’s why you like the company.”

Year over year, Paychex’s business model is focused on becoming more and more revolved around human resources. That shift presents some lucrative opportunities, but also builds a challenge to overcome. Paychex is known as a payroll company, even the company’s name cements that reputation in place, even though the company logo now includes “payroll, benefits, HR, insurance.”

That’s a hurdle Mucci said the company is still working on getting over.

“It’s a lot of branding work,” Mucci said. “It’s a brand you’re overcoming from the many, many years we were payroll only, but we’ve been in these other businesses for over 20 years now, we got into mid-market payroll business in ’96, into HR outsourcing in ’96, ’97. It’s been around for over 20 years, but it’s always about how do we continue to advertise and build our brand.”

The diversification Paychex is utilizing, from a performance standpoint, is working. While primarily focused on the U.S. market, Paychex has clients in Germany and, following the March 2018 acquisition of the Danish Lessor Group, a spattering in Norway, Denmark and Sweden. As for market value, Paychex’s stock has doubled in the five years following the introduction of Paychex Flex, from $39.92 on April 11, 2014 to $80.74 on April 5, 2019.

Doubling down on its HR outsourcing services, Paychex acquired Florida-based Oasis Outsourcing Acquisition Corp., which in turn brought Paychex’s number of worksite employees served through HR up to 1.4 million. At the time of the $1.2 billion acquisition, Oasis served 8,400 clients in all 50 states.

While the Lessor acquisition brought a larger presence in Europe, Mucci said the future of Paychex is still focused on the U.S.

“Europe is still small for us, but we saw an opportunity with Lessor to grow that, they had a platform that would grow to multiple countries, we hadn’t seen that before,” Mucci said. “We’ve been in Germany for over 10 years selling payroll and a little bit of HR, so that’s been going okay, but not growing quickly, so we were looking for something to expand into other countries, but the biggest opportunity is still right here in the U.S.”

Looking forward, the future of Paychex is still a mixed bag of old mainstays and uncharted waters. Payroll will still be a major business, small and mid-size companies will still be the premier clientele and Rochester will still be home. Yet, the company is still in an experimentation phase, pushing the boundaries of everything from the role it plays in its clients’ operations to the tools it uses to do those jobs.

“In the last nine years, we’ve gone from $2 billion in revenue to an annualized rate of $4 billion in revenue, so we’ll continue to see growth in that, both in organic growth and acquisitions,” Mucci said. “We’re going to continue being known as an HR service enabled company, and certainly known for our tech enabled service. So as the shift turns to technology, whether it’s our mobile app, etcetera, it’ll still be service, but the way clients need it.”

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