Automatic Data Processing (ADP) is an international payroll and human resource management firm. The firm was founded in 1949 as automatic payroll by Taub brothers. The company has a long history of managing the Human Resources suite of organizations and provides services to optimize the operations and increase efficiency. Since the inception company, it has evolved and utilized the technology to stay relevant in the industry. The implosion of cloud technology and its widespread adoption opened new business streams for ADP. The company provides management services as a bundle; it accumulates HR, payroll, talent management, tax management, benefits administration, and their respective compliance. ADP has a workforce of 58,000 employees, and it has a thriving and inclusive culture. Company culture promotes innovation, and a bottom-up approach for innovative ideas is used. ADP was among the top 50 employers based on employees’ choices in a list compiled by LinkedIn (ADP, 2021). Porter’s five forces model is an appropriate analytical tool to evaluate threats ADP faces and the opportunities it can potentially explore.
Competitive Rivalry in the Market
The management outsourcing industry is moderately competitive as it faces competition from within the industry and other related industries. The HR management market is expected to grow by a CAGR of 8.8% from 2017 to 2022; it is expected to be valued at $9.89 billion (Markets and Markets, 2021). The advent of cloud computing and its acceptability due to reduced cost has increased the market size. In the financial year of 2020, ADP has reported a profit of $2.5 billion and earned revenue of $14.6 billion, ADP has an excellent return on equity, and it was 44.28% (Forbes, 2021). Its other significant competitors are Paychex (PAYX), Workday (WDAY), and TriNet Group (TNET). PAYX earned revenue of $ 3.9 billion and a profit of $1.1 billion (Forbes, 2021). In the same period, WDAY reported a revenue of $4.3 billion (Forbes, 2021), and TNET reported the revenue of $4 billion (Forbes, 2021). The industry is competitive because of the potential for growth and high expected returns.
Threat of Substitutes
The threat is always high when there are better services available, offered price is less, and the offers better quality. The threat appears to be moderate to high for the HR management industry. The threat is posed by the fact the companies might elect to manage their functions in-house instead of outsourcing them; it is either because of cost-saving or the threat of critical data loss if any breach occurs. The risk of data breaches has increased by 50% from 2018 to 2019 due to more reliance on cloud warehouses (Tiwari, 2020). Another substitute is the fully integrated suite to manage management functions in-house; Oracle and SAP provide these services. Therefore, considering the facts, the threat of substitutes is moderate.
The Threat of New Entrants
The threat of new entrants is directly proportional to the industry environment, such as capital requirements, technological innovation requirements, and established incumbents. The industry has established incumbents, and there is a high switching cost associated. The high switching cost deters the newcomer because it would be difficult for the consumer to leave the existing service provider (Aydin et al., 2005). The other deterrent is the established incumbents; firms like ADP have long embedded roots and excellent business relationships in the services industry. Therefore, it makes it difficult for the newcomer to acquire new business. Another major factor is the requirement of the capital required and access to advanced technology and to keep pace with the developments. High capital is a significant barrier for aspirants. Therefore, the threat remains low.
Bargaining Power of Buyers
The bargaining power of the buyers depends upon few factors, which are size, the importance of the buyer for the business, and the concentration. Usually, the buyers are giant corporations; small and medium-sized enterprises do not afford to outsource their services. These corporations know their importance for the business and thus flex their strength to seek discounts and favorable terms. Due to the consolidation of institutes post-financial crisis in 2008, the number of customers also decreased, and they are concentrated. The concentration of buyers in the market increases buyers’ bargaining power (Dowlatshahi, 1999). The increased competitor in the services sector has also given buyers more options to choose from. Therefore, buyers have moderate to higher bargaining power.
Bargaining Power of Supplier
Suppliers’ can exercise higher bargaining power when they are concentrated; they pose a risk of forward integration and are essential part of the business (Dälken, 2014). The suppliers bargaining power is perceived to be low to moderate. The major suppliers are human resources, the software developers, financial experts and legal compliance specialists. Suppliers’ power is directly related to their importance. Even though many software developers are available, the importance of core developers will be more as they developed the system or any core component. Financial experts and compliance specialists are also necessary but can be replaced, and there are usually in more supply than the available vacancies. Therefore, suppliers have moderate to low bargaining power.
References
ADP. (2021). About ADP. Available at: https://www.adp.com/about-adp/success-factors.aspx
Aydin, S., Özer, G., & Arasil, Ö. (2005). Customer loyalty and the effect of switching costs as a moderator variable: A case in the Turkish mobile phone market. Marketing intelligence & planning.
Dälken, F. (2014). Are Porter’s five competitive forces still applicable? A critical examination concerning the relevance for today’s business (Bachelor’s thesis, University of Twente).
Dowlatshahi, S. (1999). Bargaining power in buyer-supplier relationships. Production and Inventory Management Journal, 40(1), 27.
Forbes. (2021). Automatic Data Processing (ADP). Available at: https://www.forbes.com/companies/automatic-data-processing/?sh=76824a421b83
Forbes. (2021). Paychex (PAYX). Available at: https://www.forbes.com/companies/paychex/?sh=612106f44826
Forbes. (2021). TriNet Group (TNET). Available at: https://www.forbes.com/companies/trinet-group/?sh=6ac161411357
Forbes. (2021). Workday (WDAY). Available at: https://www.forbes.com/companies/workday/?sh=6d1e15953133
Markets and Markets. (2021). Core HR Software Market by Software (Learning Management, Payroll and Compensation Management), Service, Deployment Type (On-Premises and Cloud), Organization Size (SMEs and Large Enterprises), Vertical, and Region – Global forecast to 2022. Available at: https://www.marketsandmarkets.com/Market-Reports/core-human-resource-hr-software-market-81186018.html
Tiwari, P. (2020). Anatomy of data breach in cloud generation. Security Magazine. Available at: https://www.securitymagazine.com/articles/94036-anatomy-of-data-breach-in-cloud-generation#:~:text=Data%20breaches%20targeting%20cloud%2Dbased,Verizon%20Data%20Breach%20Investigations%20Report.