Automatic Data Processing (ADP) Vs. Administaff (ASF)

There are various contributing factors in determining why and how ADP is the clear leader in the employer services industry. For starters, ADP operates internationally providing services in the United States, Canada, Europe, South America (primarily Brazil), Australia, and Asia. In Fiscal 2009, 80% of employer services' revenues were from the United States, 13% from Europe, 5% from Canada, 2% from South America (primarily Brazil), Australia, and Asia (ADP, 2009 p. 1). In addition to the scope of their services dwarfing those of Administaff, ADP serves many large companies compared to its competitors. While Paychex (PAYX), another employer services firm, closely rivals ADP in terms of the number of companies each one serves, ADP had approximately twice the amount of 2007 net income that Paychex did. This is because ADP serves many large companies, while only about 2% of Paychex clients have over 100 employees (PAYX 2007, p. 2-3). In terms of the scope and range of services offered, ADP also has historically provided a larger amount of services than their competitors. ADP offers employer services, business process outsourcing, PEO (professional employer organizations services), and dealer services. Dealer Services has offerings in North America, Europe, Africa, and the Asia Pacific region. None of ADP's major business groups have a single homogenous client base or market. Employer services and PEO Services have clients from a large variety of industries and markets (ADP, 2009, p.5). One of the main reasons why ADP is able to keep its market lead is because the payroll and HR services markets have high barriers to entry. ADP has over 60 years of experience in which they have formed and grown relationships with insurance companies, government agencies, retirement planners and financial institutions. ADP's size and reputations allows for both increased bargaining power with these institutions and also provides referrals from these companies who have a longstanding relationship with ADP. These relationships allow for the ease of entry for a new business to adapt to ADP's model. The large amount of resources available to ADP also allows them to be incredibly competitive in terms of fees and costs. ADP's large profit margins are a direct result of their strong client retention and low capital expenditure requirements to operate the business (ADP, 2009, p. 14).

Administaff is solely a professional employer organization, providing comprehensive personnel management systems (which to small and medium sized businesses in strategically selected markets (Administaff, Inc. 2007). Administaff only operates nationally, with 33% of their business in the southwest of the U.S and with 14% of worksite employees in the company's original market of Houston, TX for the year ended December 31, 2008. This factor makes Administaff particularly vulnerable to economic factors specific to Texas. Additionally, while ADP serves many large companies, Administaff targets businesses with 10 to 2,000 employees (Administaff, Inc., 2007). At the same time the larger and international scope of ADP exposes them to risks that Administaff was immune to in recent years such as, the decline in automobile sales which severely reduced ADP's earning potential and fluctuations in foreign currency rates. ADP enjoys over 60 years of developing and retaining relationships with insurance companies, government agencies, and other related businesses, while Administaff has only been operating since 1986. Due to the fact that Administaff is relatively small and have substantially less resources compared to competitors like ADP, Paychex, and Ceridian they have less bargaining power and thus 92% of their health insurance coverage is provided by one insurer, United. Administaff said their third quarter profits, in 2009, dropped by 51% from a year ago as health benefits climbed amid raising benefit costs, including a number of claims and increased participation in COBRA health-benefit plans (Associated Press, 2009). The inability to secure replacement contracts on competitive terms in the future could potentially affect the company significantly and remains a large risk which ADP is less threatened by. (Administaff, Inc., 2008).

Both ADP and Administaff were impacted by the severe economic conditions in recent years including rising unemployment (which also resulted in lower bonuses, lower wage growth), low interest rates, and volatile financial markers. Employer services and PEO services' new business sales declined 15% worldwide in 2009 (ADP, 2009, p. 14).

Sources:
Administaff, Inc. (2007).Form 10-K. Retrieved January 25, 2010.
Administaff, Inc. (2008).Form 10-K. Retrieved January 30, 2010.
ADP. (2009). Form 10-K. Retrieved January 21, 2010.
Associated Press. (2009, November 9). Administaff 3Q profit down more than half: Associated Press Business News - MSN Money. News: Business, Financial and Investing News - MSN Money. Retrieved January 16, 2010.
Paychex, Inc. (2007). Form 10-k. Retrieved January 28, 2010.