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The Payroll Paradox

Column: The Bleeding Edge

I left my job working on the Space Shuttle Program for BFGoodrich a few months
after the Challenger disaster, eventually ending up as a technical writer and
network engineer for an advertising agency out of Cleveland. Networking an ugly
mix of Macs, IBM PCs, an AS400 mini-mainframe, Lanier word processors and other
devices was fun and challenging, but what really intrigued me was how thoroughly
the technology was disrupting the whole production system for advertising. One
afternoon, sharing lunch with the two typesetters who made the text for the
ads, I asked them what they planned to do for a living the following year, when
typesetters were obsolete.

They were aghast. Surely I did not understand that they were highly paid professionals.
Or that the text was as important to an ad as the illustrations. Or that no
matter what happened in the world of advertising, they believed typesetting
would be a critical skill. I did understand what they said. I just didn’t
believe it. The matter was moot, as by the following year they were both gone
— replaced by fonts generated on a PC. Typesetters went the way of telephone
switchboard operators, telegraph agents and carnival barkers.

Which brings me to the subject of accountants who offer payroll services.
I’ve done a number of payroll reviews over the past few years, sifting
through the software, the services, the online sites and the growing trend of
these vendors partnering with accountants. I know that payroll is a booming
service area, that the software makes it easy to do, and that most business
owners would rather chew off an arm than have to suffer through another cycle
of payroll checks and taxes. I know that payroll services can be high-value
and high-margin services for an accounting firm. I understand. I just don’t
believe it will stay that way.

Payroll isn’t rocket science. And somewhere in the convergence of better
software, dropping prices and the emergence of do-it-anywhere online services,
I have a sense that this is a category that will ultimately go the way of stand-alone
accounts payable software … or the dinosaurs. I believe it will just be
another feature of the accounting system, done at the click of a button. Where
this might leave accountants is hard to calculate. After all, the payroll vendors
are pushing hard to sign up accountants as partners, offering them lucrative
deals (some of them for completely free services for an introductory period).
But is this a real opportunity or simply a short-term balloon in the marketplace
until the payroll industry goes through an inevitable shakeout and consolidation?

For accounting firms that have taken the plunge, or are planning to, the cautious
approach calls for three measures:

  • Don’t bet the farm on payroll. The future is uncertain
    for most ventures, and for this one in particular. I see the future falling
    to several strong companies (think ADP, Intuit, Thomson Tax & Accounting,
    Paychex and PayCycle) that will make their money from dominant market share
    and low costs. There just isn’t room for a middleman, or for a niche
  • Keep your costs in line. Sure you can bill $100 for $10
    worth of a clerk’s time and pocket the profit. But when your client
    does the math, how much damage will that do to your credibility as a trusted
    business advisor? If it is an inexpensive service, make it so for your clients,
    as well.
  • Look at the bigger picture. While I am very cautious about
    payroll services in and of themselves, there is a larger play to be made in
    the human resources management area. Long a distant cousin of accounting services,
    this could be the next big thing for accounting firms.

For companies that are doing well with payroll services, there is no indication
that this will stop in the near term. Likewise for companies contemplating a
move into this area. But the long term is another matter altogether, and it
will likely require a different strategy.

Executive Editor Note:
While I agree with many of columnist McClure’s assertions, I think
it appropriate to explain the market landscape in small and medium-sized
tax and accounting firms. Thousands and thousands of firms across the country
have re-entered the payroll preparation market over the last dozen or so
years. These firms realize that payroll is a “sticky” service
and one that their clients want them to provide. Vendors are moving rapidly
to capitalize on the collaborative nature on the Internet and have delivered
products and services that are transforming the traditional payroll preparation
process. Portals, specialized client and employee “views,” and
individually segmented workflow processes have made payroll profitable again.
I believe smart firms will continue to be attracted to this niche. Time
will tell.
~~ Gregory L. LaFollette, CPA.CITP