atWe’ll remember years ago Buffett liked Pinkerton’s, specifically because his managers
hated them. They liked the service, which at the time was an improvement on in-house solutions – not just on price.
Pinkerton’s people were properly vetted and trained, and could easily be rotated out to provide the independence that company-employed security people or small-time outfits couldn’t match. So the managers paid up, complained about service to the boss, but stayed with them. Buffett bought into it, and it was good for some time. Pricing power often has its limits, though, and at some margin levels you’ll attract well-financed competition.
These days, when I think of ‘pricing power’ I think of ADP. No matter ADP’s pricing, it virtually always beats the old in-house payroll department model. And as well-meaning as those conscientious payroll ladies were, they could never be as faultlessly accurate with multi-jurisdiction compliance as ADP – even if it was a wash, you’d still keep ADP. In fact most major corporations still have those ladies, but in a limited role, with ADP providing the processing and compliance horsepower.
ADP has a half-million clients and processes almost 50,000,000 individuals’ paychecks - a major proportion of the US employed workforce. Their average client retention averages 10 years, although we might suspect that limitation is more a function of the changing corporate landscape in the US than ADP’s service. They have direct data and funds-transfer links into over 7,000 tax jurisdictions. They made a trillion dollars in various tax deposits last year.
Number two Paychex is equal in number of clients, also at a half-million, but 40% of those have 1-5 employees, and over 80% are under 20 employees. They make good money too, but it’s a harder slog. We might think that that segment is where the growth is, but as companies graduate into the big leagues, they go with equally big-time accounting and other professional services, and with ADP. And as I discovered last year, ADP provides a far more sophisticated offering for that small-business group who gets past pre-conceptions and gives them a try. I’d be hard-pressed to switch from ADP to Paychex based on price. I'd be hard-pressed to hire anybody at all without ADP.
One problem that ADP has it’s that it’s so big, so pervasive, that like other mammoth companies – BRK and WMT included - it can’t fight the economy. But even in tough times, clients themselves don’t bail. Usage – ie, number of paychecks - declines.
Looking beyond payroll, ADP would be well-situated if the US and it’s various jurisdictions got some…nerve… and finally addressed internet sales tax collection issues. I believe ADP is ready for this if it ever comes to pass – but as with highly complex payroll compliance – ADP eliminates the excuses that it’s ‘too tough’. But that’s just an example of possibilities, not a priced-in prospect.
I’m not saying ADP is necessarily a ‘buy’ at current levels. But when it comes to a pricing power discussion, they come to mind.
hated them. They liked the service, which at the time was an improvement on in-house solutions – not just on price.
Pinkerton’s people were properly vetted and trained, and could easily be rotated out to provide the independence that company-employed security people or small-time outfits couldn’t match. So the managers paid up, complained about service to the boss, but stayed with them. Buffett bought into it, and it was good for some time. Pricing power often has its limits, though, and at some margin levels you’ll attract well-financed competition.
These days, when I think of ‘pricing power’ I think of ADP. No matter ADP’s pricing, it virtually always beats the old in-house payroll department model. And as well-meaning as those conscientious payroll ladies were, they could never be as faultlessly accurate with multi-jurisdiction compliance as ADP – even if it was a wash, you’d still keep ADP. In fact most major corporations still have those ladies, but in a limited role, with ADP providing the processing and compliance horsepower.
ADP has a half-million clients and processes almost 50,000,000 individuals’ paychecks - a major proportion of the US employed workforce. Their average client retention averages 10 years, although we might suspect that limitation is more a function of the changing corporate landscape in the US than ADP’s service. They have direct data and funds-transfer links into over 7,000 tax jurisdictions. They made a trillion dollars in various tax deposits last year.
Number two Paychex is equal in number of clients, also at a half-million, but 40% of those have 1-5 employees, and over 80% are under 20 employees. They make good money too, but it’s a harder slog. We might think that that segment is where the growth is, but as companies graduate into the big leagues, they go with equally big-time accounting and other professional services, and with ADP. And as I discovered last year, ADP provides a far more sophisticated offering for that small-business group who gets past pre-conceptions and gives them a try. I’d be hard-pressed to switch from ADP to Paychex based on price. I'd be hard-pressed to hire anybody at all without ADP.
One problem that ADP has it’s that it’s so big, so pervasive, that like other mammoth companies – BRK and WMT included - it can’t fight the economy. But even in tough times, clients themselves don’t bail. Usage – ie, number of paychecks - declines.
Looking beyond payroll, ADP would be well-situated if the US and it’s various jurisdictions got some…nerve… and finally addressed internet sales tax collection issues. I believe ADP is ready for this if it ever comes to pass – but as with highly complex payroll compliance – ADP eliminates the excuses that it’s ‘too tough’. But that’s just an example of possibilities, not a priced-in prospect.
I’m not saying ADP is necessarily a ‘buy’ at current levels. But when it comes to a pricing power discussion, they come to mind.
