911 Panorama Trail South
Paychex, Inc. is the second-largest payroll accounting service in the United States. The company processes payrolls for over 200,000 businesses nationwide. Paychex finds its clients mostly among small businesses with fewer than 100 employees. Its typical client has just 14 employees. Though payroll processing is its main service, Paychex also provides payroll tax calculation, payment, and filing of tax forms for about half its clients. It also offers a direct deposit service, sending employees' pay directly to their bank accounts. Paychex also handles human resources recordkeeping for some of its clients, keeping track of employee benefit plans. The company operates out of close to 100 offices across the United States.
Paychex was founded by B. Thomas Golisano, who still heads the company. In 1971, Golisano worked as a sales manager at Electronic Accounting Systems (EAS), a payroll processing company based in Rochester, New York. EAS aimed its services at large companies with at least 50 employees. Its minimum charges were generally too much for smaller companies to afford, and EAS did not pursue the small-company market. But Golisano, then 29 years old, speculated that small companies had as much need for a payroll accounting service as large companies. A little research at the library confirmed Golisano's suspicions that the potential market was enormous--in 1971, 95 percent of the nation's 3.5 million businesses had fewer than 50 employees. Golisano's father ran his own small heating contracting firm, and Golisano knew first-hand that making out payroll checks was a big headache for the small businessman. Golisano decided to market a payroll service that would be cheap enough for small businesses like his father's to afford.
Golisano first took his idea to EAS, but the company was not interested in pursuing small clients. But EAS did agree to rent Golisano an office for his venture. So in 1971 Golisano started his own company, then called PayMaster. His service was offered to companies for only a $5 minimum charge per pay period, and the total fee was proportional to the number of employees. Not only was the price reasonable, but Golisano made his service extremely convenient. Whereas clients of EAS had to fill out forms each pay period and turn them in to the company, Golisano's clients only had to make one phone call. The client simply called in the hours each employee worked, and any changes, and the company did the rest. The process only took about four minutes.
It took Golisano a year to attract 42 clients, and Paychex did not break even for three more years. During that time, Golisano kept the business afloat, somewhat precariously, with borrowed money and credit card loans. Because Paychex clients were small, the company needed a lot of accounts to keep going. Golisano marketed to CPAs, and increasingly got referrals from satisfied customers. After five years, Paychex had attracted about 300 clients in Rochester, and the business was relatively stable.
The impetus to expand the company came from two friends of Golisano, who approached him independently in 1974. One suggested opening a branch office in Syracuse, and he and Golisano would be co-owners. The second asked Golisano to sell him a franchise, and he started up a branch in Miami. Then Golisano began to recruit people to open branches in other cities. By 1979, he had 17 partners, 11 of them joint ventures, and six franchises. These operated in 22 cities, spread across the country. Golisano's partners came from various backgrounds. They were teachers, salesmen and engineers. Some were high school friends or friends of the family; some were his softball buddies. One partner, Golisano met on a trip to Florida--the doorman of the Boca Raton Hotel. Golisano trained them at his Rochester base, and then helped them set up business elsewhere.
By 1979, it began to be apparent that there were problems with the looseness of the organization. Paychex had 200 employees, 5,700 clients, and 18 principals. Different partners had different skills and different aims. Some locations offered different services than others, so that the Paychex product was not consistent. There was little central planning, and little input from one office to another. Golisano decided he wanted to consolidate Paychex into one company. For this he needed the acquiescence of his partners. It was difficult to persuade people who had headed their own branches that they would be better off as part of a more traditional company organization. Golisano came up with an equitable stock distribution formula, and presented a five-year plan for the future of the company, which included taking it public. After a tense two-day meeting in the Bahamas, all the principals agreed to the consolidation. In 1979, the company incorporated as Paychex, Inc.
The company began to change quickly. People who had been president of their own branches became vice-president of the new corporation. The company immediately began hiring and training a crew of sales professionals. The branches, which had previously operated more or less independently, were now subjected to management controls such as location-by-location comparisons of productivity. The company also strove to standardize its services. This was extremely important as the company grew. Most of its new business came from referrals from satisfied clients. It was crucial that if one company praised the way its account was handled by, for example, the Syracuse office, a company in New York could also expect the very same service. Golisano himself kept careful track of his growing organization, lugging around a three-ring notebook with hundreds of pages of relevant figures wherever he went.
Paychex initially experienced financial difficulties as a result of the reorganization, and at one point in 1980 cash-flow problems caused the company to suspend salaries. But this crisis was quickly resolved, and Paychex did grow as expected. With its new professional sales team in place, Paychex began to attract clients in numbers much higher than anticipated. By 1982, the average salesperson was bringing in 100 clients a year. This figure rose steadily. In August 1983, Paychex made its initial public offering. The company raised $7.7 million, which was used to fuel further expansion. By 1986, Paychex had close to 60,000 clients. The company had 58 offices in 32 states. Sales doubled in the three years since the public offering, to $51 million. The company was far bigger than Golisano's former employer, EAS. In fact, Paychex was the second-largest firm in the payroll accounting industry, behind only giant Automatic Data Processing Inc. (ADP).
Revenues close to doubled again in the next three years. In 1989, the company brought in $101 million, from its client base of 115,000 accounts. Some of the growth came from acquisitions, such as the 900 clients acquired when Paychex bought a Minneapolis company, Purchase Payroll, in 1987. Paychex also began to expand its services. In 1987, Paychex opened a division of Benefit Services, to keep track of clients' employee benefit plans. The next year, the company opened a Personnel Services division. The new services under this rubric included preparation of employee handbooks, providing information on new laws affecting the workplace, and updating clients on equal-employment regulations. And Paychex began offering a new service called Taxpay in 1989. For clients selecting Taxpay, Paychex prepared payroll tax returns, made the payments, and actually filed the returns with the government. Taxpay provided a real revenue boost to Paychex, for two reasons. For each client who selected Taxpay, Paychex gained about a 45 percent increase in revenue on that account. Salespeople who were soliciting regular payroll accounts could also try to enroll customers in Taxpay, with only a little additional work. Paychex also benefited from Taxpay because it accepted money in advance to pay the taxes. Before the taxes came due, Paychex could collect interest on this so-called "float" money. Paychex invested the "float" money, an average daily balance of $4,000 per customer, in tax-free municipal securities, and earned an average annual return of three to four percent. Taxpay proved very successful. In just a few years, almost half of Paychex payroll clients were also using Taxpay, and Paychex experienced a vital boost in revenue.
Paychex had experienced growth of around 20 percent annually in the 1980s, and the company was consistently featured on lists such as Forbes' "Best Small Companies in America" and the OTC Review list of "100 Most Profitable NASDAQ Companies." The company's success did not go unnoticed, and Paychex began to have competition from the leading payroll accounting service firm, ADP. ADP began a separate sales division to try to hook small business accounts. By 1989, ADP had 400 sales representatives in this division, versus Paychex's 310. In that year, companies with fewer than 50 employees made up 60 percent of ADP's accounts, and brought in about twice as much revenue as did Paychex. Even so, the small business market was enormous, and there was still room for growth. And about 80 percent of Paychex's clients renewed every year. Most of the clients the company lost did not turn to another provider. The rate of failure among small businesses is very high, and most lost clients simply went out of business. But to keep up with this turnover, Paychex sales representatives had to bring in an average of 160 new clients a year, or over three a week.
To train salespeople to keep up with this demanding quota, Paychex opened its own school at its Rochester branch. In 1991, Paychex spent approximately $3,500 per trainee to put its new salespeople through a seven-week course in tax law, accounting principles, and selling skills, and to send them on rounds with experienced sales representatives. The expense of the school, which had 11 full-time instructors, was far less than it cost Paychex to recruit a replacement for sales reps who quit or were fired. And new hires who had come through the training school started making money for the company twice as fast as before. Paychex had started in the 1970s with people with little or no background in either selling or payroll accounting, and had come full circle in the 1990s, with a highly professional and well-prepared staff.
By 1990, Paychex had 335 sales representatives and around 125,000 clients. But a recession in the autumn set back the number of paychecks the company was processing, and sales representatives found it hard to meet their ambitious quota. Nevertheless, the Taxpay service was increasingly successful. At the end of fiscal 1991, Paychex estimated it had lost several million dollars due to recessionary cutbacks, but it more than made up the difference with revenue from Taxpay. 1991 saw record sales of $137 million, as well as record earnings of $9.6 million. And Taxpay continued to add clients. In 1991, there were around 26,000 Taxpay customers. That number rose to over 50,000 by 1993.
Paychex added other services as well. In 1991, the company formed a Human Resource Services division, offering clients a package of employee evaluation and testing tools, employee handbooks, insurance services, customized job descriptions, and other benefits. Paychex used its expertise to help its Human Resource clients keep abreast of government regulations affecting the workplace, and took over time-consuming administrative procedures. The company then introduced Paylink in 1993. Paylink appealed to businesses that used personal computers, allowing clients to send payroll information in to the Paychex database via computer modem. In 1994, Paychex added a similar service, Reportlink. After a client's payroll was computed, Reportlink sent the figures back to the client's computers, for use in internal reports and accounting.
Paychex continued to roll out new services, though in 1994 over 80 percent of its revenue still came from its basic payroll accounting service. And enrolling new payroll clients was still the key to the company's growth. According to CEO Golisano in a June 13, 1994 Barron's article, Paychex aimed to expand its client base by 11 to 12 percent a year, to keep revenue growing at close to 20 percent annually. This actually meant bringing in even more new clients than it seemed, because Paychex always had to make up the 20 percent of clients it lost each year. And though there were still in 1994 more than 4.6 million businesses with fewer than 100 employees, more than 60 percent of these had only one to four employees, and so were too small to be likely potential clients. Paychex also had to contend with increasing competition from software manufacturers. Business owners with personal computers had an array of cheap software packages to choose from that made doing their own payroll relatively cheap and convenient.
But Golisano was confident the company could meet its goal. He took time off in 1994 to run for governor of New York, as an independent party candidate. Golisano had become increasingly interested in trying to solve Rochester's urban problems, working with city youths on running their own businesses and heading a city campaign to lower the rate of teen pregnancies. Golisano also had an in-depth knowledge of government regulations and tax codes that he believed harassed small businesses. Though Paychex had made its living dealing with government red tape for its clients, Golisano claimed he would work for tax reform and simplification if elected. A long shot at best, Golisano did not win the governorship, but Paychex flourished. In 1995, the company increased its client base by 11.8 percent, exactly as Golisano had wished. Paychex had over 200,000 clients, and half of these were using the lucrative Taxpay service. Earnings were up almost 40 percent, with net income of $39 million. The company increased its penetration in the California market with three acquisitions--Pay-Fone, Precision Payroll, and Payday. The Human Services division introduced a 401(k) recordkeeping service, and other human resources services, as well as Paylink and Taxpay, continued to grow significantly.
Paychex aimed to expand even more through the remainder of the 1990s. Its market penetration was still low enough to leave room for growth. The company also committed to make use of blossoming technologies in computer networking and digital communications to enhance its service and capabilities.