This week’s podcast is a deep dive into Automatic Data Processing (ADP), a leading provider of software and services for human resources. ADP is a company that is surprisingly well positioned to use AI to better manage human capital and build non-human workforces.
Here is the link to the TechMoat Consulting.
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From the Concept Library, concepts for this article are:
- Economies of Scale: Purchasing Economies
- Economies of Scale: Best Practices?
- Economies of Scale: Data advantages?
- AI: AI Non-Human Agents
- Capabilities resources assets: Intangible Assets:
- Human Capital Management
From the Company Library, companies for this article are:
- Automatic Data Processing (ADP)
Welcome, welcome everybody. My name is Jeff Towson and this is the Tech Strategy Podcast from Techmoat Consulting. And the topic for today, will ADP win big in both human capital and non human workforces? Okay, not my best title. Let me explain. ADP, which is not as well known as Automatic Data Processing, publicly traded company, trades under ADP on the New York Stock Exchange, um, major human resources services company that has moved into software, arguably the leader globally, uh, very well positioned, um, to go from software plus software Services to A.
- Created services specifically. I mean, depending on how daring you want to be, um, you know, making humans more effective. That’s your human capital management, which they do to non human employees. A. I. Basically, which is kind of where the future is going. So anyways, I’m gonna look in there. I think they’re very well established, very successful company that is well positioned.
I think they’re Um, for the next big sort of tech trend, which would be AI anyways, that is going to be the topic for today. Hopefully this will be a fun one. And let’s see, da da da da da da. Only thing on the list for today is we’re doing the Beijing Tech Tour, which is May 22nd, May 26th. This is what we’re calling our Economy Tech Tour of China.
We do these a couple every year. This one is sort of designed to be a lot, basically a lot lower priced. That’s what we’re doing. We’re going to do that in May. We’re going to stick to one city, visit four plus companies. Um, a lot of luxury and then a lot of fun as well. Anyways, we’ve been signing up for that for the last week or so.
It’s going well. We still have some spots, but it is sort of, there is a limit. So we’re running out of spots. If that’s something you’re interested in, let us know. You can email me, go over to TechMoat Consulting. com, all the information, including the prices there. Um, take a look. Uh, yeah, but it’s going to be a couple of days of company visits, a couple of days of hanging out and, uh, not hanging out, doing fun stuff as well.
Uh, I’ve been told on these tours that I, that I’m too into the tech and too into the companies and not enough into having fun and going out to breweries and stuff like that. So we’ve got it more well balanced now. Anyways, that’s that for today. A standard disclaimer, nothing in this podcast or my writing or website is investment advice.
The numbers and information for me and any guests may be incorrect. The views and opinions expressed may no longer be relevant or accurate. Overall, investing is risky. This is not investment legal or tax advice. Do your own research. And with that, let’s get into the content. Now I’m going to skip the tech news stuff this week, just because this is, I mean, this is a deep dive in a company and it’s a new company.
So there’s going to be a bit of a con bit of content today. Uh, so let me just jump right into the company. Um, now for those of you who are subscribers, I’m going to sound at a couple articles about ADP. Um, It’s gonna be quite a bit. It’s it’s a really interesting company. Um, if you’re an investor, I think it’s one you should probably take a peek at just because in terms of tech companies that people don’t know our tech companies, this would be on the list.
Like it’s really a services, but it’s closer to a tech company now, but it kind of isn’t on the radar as much smaller 18 billion in revenue. So significant 63, 000 employees more or less. Big company. All right. So let me sort of go through the basics. I’ll break this into, I’ll do, um, an introduction to the company, go through the basics, and then we’ll jump right to the strategy points, which is obviously my area.
Okay, so ADP, Automatic Data Processing, which is a funny name, I mean, founded in 1949. So this company has been around forever, and it was founded by two brothers, Joe and Henry Taub. Um, As automatic payrolls, Inc. So it was founded as a payroll processing business. So enterprise services, right? B2B enterprise services.
You go up to businesses, big ones are usually the first targets, medium. Sometimes you can go for the small companies and you basically say, look, we’ll do your payroll processing for you. Uh, you can focus on doing your business, outsource that to us, or we’ll provide services, or you can outsource the whole thing and we’ll take it.
So they begin in payroll processing. Uh, they eventually sort of changed their name in 1961 to automatic data processing when this, and this is very common. I’ll talk about this in the strategy bit. Service intensive businesses, whether it’s accounting services, legal services, in this case, payroll processing, which really became human resources services.
I mean, that’s really what they do today. They do human resources management, which one of the services that they do is payroll processing, but they extended much of More beyond payroll. Okay, that quickly becomes from going a labor intensive business where, you know, it’s based on people doing services like consulting, like lawyering, whatever to much more of a software business over time.
That’s sort of a natural progression. So that’s what they did. And then today they know they’re a 63, 000 employee Global company, 18 billion in revenue that do human resources management services, which is their core plus software and the software is getting really interesting, uh, has been, and they’ve been sort of going into the software side since the eighties.
In many ways, they look like an ERP company. Where, you know, they take that portion of the business, the human resources office, and they built the databases and the software and the services and all of that. And then usually that’s going to sit on top of a Microsoft ERP system or an Oracle database or some like, so they’re in that enterprise software game, but unlike, let’s say Microsoft or salesforce.
com, they’ve also got a huge number of people that do. You know, manual labor intensive services, more like lawyering, accounting, lawyer, uh, consulting that. So that’s where they are today. Um, let me sort of go through the basics here a bit. Um, so again, founded 1949, you know, to solve the payroll challenges of businesses.
And, you know, the pitch to a business is, look, let us take care of all that stuff. You know, why are you dealing with this? Focus on growing your business. I mean, you’re not going to be successful as a company because your human resources office is awesome. No, this is a necessary function. But for most businesses, the more attention you can shift, uh, you know, making laptops or whatever you do, the better.
Okay, so now they’re kind of a global tech company. They went into software, 80s, 90s, and then big surprise, they go into cloud based services. So they’re providing on premise software plus cloud. Like all the companies did. And now they kind of call themselves human capital management and their core suite of products services is human capital management.
HCM is what they listed under. What would that include? Human resources, payroll, talent management, time management, tax administration, benefit administration, regulatory compliance with all labor issues, things like, it’s a fairly long list of services that they would do under the HCM, Human Capital Management umbrella.
Globally, they have about 1 million clients. Um, they are handling the payroll. For about 41 million workers in 140 countries. Uh, so I mean that payroll processing, it turns out is an re, I mean, you can do a lot of services for businesses. Most of them don’t get you monthly recurring business payroll does.
So payroll turns out to be a pretty good place to build on. other services they do are going to be more sporadic. Strategy, which is what I do, tends to be more sporadic and episodic. People don’t need strategy every month, but at certain points in their existence, it becomes incredibly important. Uh, so it’s more episodic, let’s say.
Okay, so we look at, you know, The suite of services they do the other so that would be sort of one bucket of service would be HCM human capital Management the other big bucket of service they do would be HRO, which is HR outsourcing That’s when you just hand it to us and we’ll do everything that’s mostly a U.
- business for them. That’s payroll, talent management, employee benefits, benefit administration, employer liability management. I’ll give you the list, but it’s a pretty long list. So, on first pass, we can look at this as a services business. Not unlike a McKinsey or a, I don’t know. Arthur Anderson, I guess they’re gone now.
I mean, any of these businesses that were very labor intensive services, what those businesses tend to do over time over decades usually is they grow and scale by adding client after client and hiring more people and hiring more people to do the services, labor intensive services. And then they tend to go global.
Most of them tend to get based in the U. S. or the U. K. or Europe because that’s kind of the most profitable. And then they add smaller markets. Middle East, uh, you know, Vietnam, things like that. Australia. Over time, they tend to expand internationally. But the other thing that tends to happen as they grow is they tend to increase the list of services that they offer.
Now one of the nice things about being a service business is you can bundle and cross sell. Right. If you’re bundling shampoo, yeah, you can wrap it with conditioner or make one bottle that’s shampoo and conditioner, but your ability to bundle is fairly limited. In digital, we talk about bundling all the time because you can bundle huge numbers of digital products.
You know, Netflix is just a big digital content bundle. Subscription models are usually bundles. But that’s kind of a new thing. But really, bundling since the 40s, it’s been services. Those are the people that were really good at bundling services. They might pair one service that’s very easy to do and they’ll almost give it away for free and then they’ll make money on a second service.
So you can do all these pricing games with bundling of services and cross selling. Okay, so big surprise. If we look at their HCM solutions, their human capital management solutions. Um, usually when companies sell services like payroll services, when they start to offer more software, software plus services, people usually call that solutions.
I don’t know. They changed the terminology. Okay, so here’s the list for HCM. Um, payroll and tax management software. Also tax compliance. That’s a suite called the run suite. What do they do? They give you Um, Uh, some software that you can install, but they also have people you can call people who do the installation.
They have 24 seven support. So it’s a combination. That one’s more software with less people. Um, A. D. P. Workflow now, which is sort of, a similar suite of services that’s a lot more flexible. So it’s a little bit better for medium sized companies as opposed to really large. That’s kind of ADP, which is their name, Workforce Now.
That’s kind of number one in North America. Um, They have ADP Vantage, which is when they start breaking up the bundle and offering you single solutions that you can buy sort of a la carte in let’s say HR management, benefits administration, payroll services, attendance management, talent management. So you get sort of these suites which are bundles of services and then you can, some of them are bigger bundles, some are smaller.
But then we can get to individual services. So we get to payroll services, which they still do since 1949, uh, 25 million workers in the U. S. Um, they basically handle their payroll every month. So the checks go out. Um, that can be checks. It could be flexible cards. They handle the wages. They might handle the preparations of the checks, creating the pay statements, filing with the government.
You know, your W 2s and all of that, putting it into the ERP database. Here’s the payroll in order to plug right into your Oracle or whatever database. Now, continuing on, we’re still in the HCM bucket. We can get to benefits administration, which would be, you know, doing their health and welfare administration, administrative leave, insurance coverage, uh, dependent coverage, you know, all of that benefits administration, which is a pretty big business.
Usually that’s They’re going to have limited involvement in health care, which tends to be its own bucket. Um, that gets you into the HMO territory. Uh, talent management. So, what would be the difference there? Well, acquisition of talent. What about finding people? What about getting them activated? Getting them put into this system?
What about getting their compensation set up? What about, uh, training? Performance management? So, I mean, you can get into some interesting areas. That would be different than, let’s say, workforce management, which they also do. That’s when you’re basically, let’s say, following the time and attendance of your, you know, hundreds of thousands of people that work at the McDonald’s.
Uh, I don’t think McDonald’s is a client. Timesheet, uh, biometric check in, check out, uh, scheduling, uh, shift swapping, things like that. We can get to compliance solutions, that’s payment, taxes. Um, they prepare about 79 million year end tax statements, your W 2s, uh, smart compliance, employee tax, uh, they interact with that business with about 8, 000 government agencies, that’s mostly the U.
S., filing all that stuff, uh, insurance services, so all of that bucket is basically HCM, Human Capital Management, though when we get to their other big bucket, which is HRO, uh, HR outsourcing solutions, basically. So you can get to things like retirement services. You can get to payroll. It’s pretty much the same list.
Um, but there’s stuff that you might do in house by installing their software or accessing their cloud services. Or if you’re a small business, you might just hand it off. Um, I’ve done some of that in the past, like when I had a corporation in China. You know, I didn’t do handle a lot of the HR issues. I just had a firm do all of it, including visas and stuff, which was a real pain.
So anyways, that’s, um, they do a little bit of other stuff by, um, what they call PEO, where they’re sort of doing co employment situations with government agencies. I’m not going to get into that. Uh, recruitment, process, housing, general. Anyway, so I think you’re hearing the same list over and over and over, but it’s a fairly long list of services.
And they’ve got a pretty impressive suite of, you know, services plus software, which is now what people generally call, for their companies. They can also do a lot of different technical solutions. It was that’s not that’s a pretty decent summary of what they do. It’s a pretty easy business to understand people who do value investing who like moats.
You’ll find this company in some of their portfolios because it has a lot of attractive aspects, and it’s fairly easy to understand for a company that has a lot of an increasing amount of tech. Okay, so how do they do that? Well, they have a massive. group of people who do the services like any consultancy or accounting firm or whatever.
They’ve got a lot of software and they have a very big sales force. Most of their business is done by direct sales. Now as a global business, that means they’ve got a huge direct sales force all over the world. And a lot of these companies on the enterprise size like Microsoft salesforce. com They all have this in common.
You will always see a very big direct sales force. That’s always working with these companies to sell their latest solution, to upsell them, to cross sell them, to do implementation, to handle their problems. There’s a big relationship aspect to this business, which makes it pretty, it gives it a pretty good barrier to entry.
Especially when you have a global direct sales force, which they do. Uh, their competition. Um, there’s other HCM companies. There’s other outsourcing companies, business process outsourcing companies, definitely a lot of those. But you also have to consider the ERP companies, the Microsofts, um, not Salesforce, but there’s other companies that sort of come at it not from a labor aspect, but more from the software ERP aspect.
Um, so obviously then cloud based HCM solutions solutions. Some clever players have emerged there and then financial institutions as well. Okay, so that’s, that’s a basic intro to the company. I think that’s pretty solid. Um, they do have a significant regulatory compliance aspect, which let’s say salesforce.
com, which is more software than people. They don’t have as many regulatory issues. But if you’re doing all this payroll and compliance country by country, yeah, you got some pretty good government regulatory compliance issues. Uh, that makes it an interesting sort of, uh, look. Uh, clients, 1 million clients worldwide.
Uh, none of their clients are over 2 percent of their revenue. So really nice on the demand side. Um, A lot of implementation work. This is kind of how it’s changed from like the 60s till now is as they became more of a tech company, suddenly you start, it’s almost like an ERP business where you’re installing software, you’re integrating with the database.
So, you know, implementation for a medium sized client, you’re talking six to eight months of work to do implementation. Converting clients, um, takes a long time. You know, people don’t decide to put in this sort of major system quickly. So that’s a lot about the big sales force. When you’re talking about, let’s say a multinational where you want to put in their HR system for 10, 20 countries, well, that can be a couple of years to implement it.
Now, obviously that gets you longterm contracts, which is awesome. You get you recurring revenue, which is awesome. And it gets you switching costs. which is pretty fantastic. Their average client, I believe 13 years is about their average client engagement, right? That’s pretty awesome. So long term relationships with recurring revenue, always a great business if you can get it.
Anyways, that’s a, let’s leave it at that. Oh, I’ll give you a little bit of financials. Sorry, I didn’t give you the financials. Financials. I mean, they look like a combination of software and services, which makes them pretty easy to understand. You can go through their income and balance. I mean, there’s nothing on the balance sheet, really.
But let’s say the income statement is 18 billion in revenue in 2023. That was up about 9 percent year over year. Operating expenses, 48%. So there’s the labor aspect, right? Software companies get gross products of 60, 70%. But once you’ve got a big labor aspect, the services, you know, you’re, I’m surprised it’s 50%.
I would have thought it would have been less. Then you have systems development. That’s all your software. But, you know, net net, when you get to your operating profit, you’re talking about 25%. So we’re not seeing software levels of profits, you know, there’s a lot of labor going on here. Now, I kind of like this type of business model because I think it’s more predictable.
Uh, and you’re not as dependent on, if you’re a pure software company, you’re going to get great economics, but you are far more dependent on having a strong moat and, uh, disruption can be a problem. When you have these massive sales forces that have been built up over 50 years, very hard to disrupt those quickly with just tech.
The labor side is kind of a nice protection that I like. Okay, the balance sheet, nothing really interesting on the balance sheet. Very little PP& E. We see long term contracts, so we’re going to see deferred revenue, which I love seeing deferred revenue on the, on the balance sheet. And the net net of that is you get an asset life business.
With a negative working capital because you’re signing contracts that you know are projected years into the future So anyways, I love that kind of that’s kind of like my favorite income statement and balance sheet asset light Good health and operating profits negative working capital a lot of deferred revenue long term contracts Fantastic.
Okay, so that’s kind of the financials All right, let’s get into the tech strategy part. I’m about 20 minutes into this, so I’ll finish up in about 10 to 15 minutes. And this is kind of the so what for me, obviously, this is what I do. All right, there’s really, let’s say, three tech strategy lessons here that I think are worth paying attention to.
Number one, when you see these sort of enterprise labor intensive service businesses, which this is. What that really ends up being is a long, slow march to global scale, right? Businesses like this. accounting firms, whatever. You see the same pattern. You see them started in the U. S. Like B. C. G. Was founded in what?
The sixties, you know, McKinsey in the fifties. Somebody they’re always like in the 1940s, fifties, sixties and over 30 40 years, they had this sort of long march to global scale. They added, you know, very labor intensive. Uh, they add more and more clients one by one. That means you got to hire more people.
You’ve got to train up your consultants. You got to train up your payroll staff, you know, depending how sophisticated the service business is. You need more highly trained people. Okay. I come out of management consulting, you know. They hire out of business schools. There’s just a feeder out of business schools.
They hire them. They get about two to three years out of your average Columbia business school grad. That makes up the bulk of their labor forces, the associate levels. And then they know 80, 90 percent of them jump over to be executives at companies and then, you know, a small number go up and become partners.
Okay, same thing. This company started with payroll fine, not as much training required, but you know, it grows and it grows over time. And you see this long march to global scale. Now, some businesses that’s easier than others. If you’re doing accounting, that’s probably a better analogy. It kind of accounting firm.
Um, it’s similar to the payroll. You know, there’s going to be a lot of recurring business when you get a client, you’re probably going to stay with them year after year. Um, as the revenue gets more predictable because it’s recurring month after month, you can hire a little easier. Uh, other firms like, you know, law firms, it’s, it’s a bit harder to predict demand.
So it’s harder to scale up your staff as aggressively. Um, no. There’s there’s some interest these labor businesses, but there’s a couple of weaknesses in this sort of business model. Number one, uh, it takes a long time, you know, you have to grow over decades. It doesn’t have the easy scalability of products of things that come out of factories.
If you’re making soda, you can scale up much faster. Uh, so it’s never had that sort of And, you know, every country you can’t put things on boats and then when you compare it to software, it doesn’t scale up anything like software. So, you know, it’s the weakness of this model has always been its scalability.
And you could say the same thing with dentists and doctors, you know, this just doesn’t services don’t scale as well. Oh, well, um, one of the strengths of it is you can do bundling and cross selling much easier. So most of these companies, you know, you, you get a client, you work with them for a while, depending on what you’re doing, it’s, it’s pretty natural to step them up to other products and services and software.
Like this is the business Microsoft has been in forever. Get a basic system installed at a fortune 500 company, and then upsell them services for the next 20 years. And that’s almost easier with software because the technology keeps advancing. So there’s always new stuff. They can argue you need. Okay.
But you can do that with services as well. Bundling and cross selling is pretty good. Um, How do you build an advantage? Well, that’s why I call it the long march to global scale. As you get bigger than your competitors, you start to get certain advantages. And you can get competitive advantages. And the big one is economies of scale.
That’s it. Um, now I. T. Spending turns out to be one of them. Usually when we think about economies of scale, that’s like because I’m a bigger software company or not a bigger because I’m a bigger table manufacturer, I can buy a bigger factory outspend you and I can have a lower per unit cost or I can have greater specialization, things like that.
Okay. And services, your main production unit is people. Well, you can’t really outspend people there. Uh, because if they aren’t tasked on clients, you kind of lose money. But what you can do is you can outspend them in it. And that’s what ADP has been doing since the eighties, because they were the largest player or one of the largest players, they could spend a lot of money building software that smaller niche companies could not do.
Uh, and so they did a lot of it spending going back to the eighties, building out software. Um, and they’re still doing that today. I’ll get into the software. They have a ton of software products. Now, um, the other thing you can do, which is a bit of a niche thing. They do is when you do outsourcing, this is kind of the difference between let’s say consulting and outsourcing.
When you do payroll outsourcing, you become the entity doing the business. So let’s say I’m ADP and I pitched to someone and I say, you should outsource your benefits to me. I’ll take your benefits management and I will, I will be the buyer of those. I will go to the life insurance companies and I will be the negotiator.
Well, if I’m the largest healthcare management company, not healthcare, human capital management company in the US, I have tremendous purchasing economies of scale when I go to buy those benefits. So as you shift things to more of an outsourced, you become the buyer and you can get economies of scale based on purchasing.
Um, that’s actually pretty good. And they do do this in their benefits business. They could get, they can get deals for benefits to offer employees that a small to medium business could never get. They can get better prices. So that’s an economies of scale aspect. And the other one you get, which I’m not sure how to think about this one.
They get best practices. I don’t really think this is a competitive advantage, but one of the things, when you come in and you say, look, I’m going to look at your human resources system in your company, and I’m going to assess how well you do. I’m going to help you improve. How do I know what’s better?
Well, I have a database of a million clients where the data is coming in every month or every couple of months. I can tell you how well you’re doing against peers for lots of KPIs, and I can tell you how well you’re doing against peers. So they kind of, and this used to be called data best practices. I can tell you how you’re doing in terms of best practices because I have so many other clients.
I’m not going to give you the names, but I’ll show you the general numbers for what is good performance in this KPI that used to be called best practices. Now it’s sort of being called like a data product where I have a big database. So of clients, and I can tell you how well you’re doing in managing your costs of your human resources, or how exposed you are to risk because you’re not in compliance and how much that database, that best practice tends to be an advantage that the big companies have.
I’m not quite sure what to call that in terms, I don’t think it’s a competitive advantage. I’d put that in more of sort of a soft advantage. Okay, so that’s kind of point number one is The services business do this long march to global scale, and you can develop some reasonable competitive advantages. Um, but it’s getting much more interesting as things become less laborish and more tech ish.
And that’s point number two. All right. Point number two of three. ADP has evolved into a software plus services. business, as I kind of said, which the latest version of that is really cloud based software and services and increasingly data products, right? So we’ve seen most of these businesses go from services to services plus software, but then they’ve gone to cloud.
Most all of them. Now they’re really starting to become data rich. and data products because things are more connected. It’s not like in the past where you sold a HR software on CDs and people installed it in their servers. No, everything’s connected now. Everything’s running up to their cloud. And all of that data from all of those clients, they can see it.
Now, there’s privacy concerns, obviously, but that data repository for millions of clients around the world in what they’re doing in HR. That was the best practices becomes data. That piece is getting really interesting. Um, now a couple things happen in this point. Number one, we start to see the business look a lot more like software economics, not just labor based services.
Um, That’s awesome. It’s just good. There’s no way around it. The more your business looks like soft. I’ve kind of been saying this for years. Software has the best economics we’ve ever seen because you’re doing things based on ones and zeros on a screen, not based on physical products and not based on people.
The danger of software economics is you have very little competitive protection. So most people who do pure software make no money. But if it’s a combination of services plus software, you get the best of both worlds. You get some degree of software economics, but your big labor force, which is very hard to replicate.
It took decades to build that client list, that global label for us. You’re not exposed to the competition, so you get basically the best of both. So software economics, which used to be in house, on prem, and now on premise, now it’s cloud based more and more. Your economics get better. Your switching costs start to emerge.
Suddenly, you start to look a lot more like an ERP player. As I mentioned, six to nine months to implement one of these systems. If it’s a multinational, it can take two years to implement. You know, your average client’s with you 10, 13, 15 years. So you get those, I mean, this is the greatest of all businesses.
Like there’s a couple of businesses I just love like Google search. I still think it’s unbelievable, but Microsoft ERP system, man, if you can become the digital architecture up that basically people use to build their businesses, you’re in there forever. Okay. Now, HR as an ERP system is easier to switch out.
Right. It’s not the foundational system. It’s not Oracle. It’s not Microsoft. Um, it’s not as risky. You know, I’ve talked about this before. I put B to B services in three buckets necessary, strategic and critical. Um, if you are a critical system, like if you are the data architecture, the ERP system for Citibank that handles all of their global transfers, that is critical architecture.
And if you actually look at a company like IBM, which is IBM is actually kind of a similar business. They’re in a software plus services business, but they are very specifically in software plus services in critical workflows. That’s the word you’ll see in their annual report, critical workflows, because that’s the one no company will ever switch you out to save 10%.
It’s too risky. Critical is better. Strategic spending is also quite good. That’s salesforce. com. You’re not trying to save every dollar you’re spending on sales and marketing because that is strategic spending. In fact, if you can outspend people in that area and it pays off, it’s good. Let’s spend more because we’ll make more strategic spending tends to be good.
Sales and marketing is a good example. Okay. ADP is not in either of those. It is in that first bucket necessary spending. Look, we got to spend money on our HR system, our HCM system. We have to spend money on our payroll. But if we can find a way to save 10 to 15%, we’ll switch vendors. Because we can save the money.
That’s good. And it’s not like the business is going to break. It’s not strategic. It’s not critical. So you can be a lot more aggressive in cutting costs in these areas as a buyer. That’s a hard place to live. Now ERP system takes a lot of that away. Okay. So you can kind of make comparisons between salesforce.
com, which I talked about a couple weeks ago, and I did some podcasts on. I like salesforce. com as well. You can compare ADP and salesforce. com. One is a lot more labor intensive, but one is much more strategic spending. So that’s an interesting comparison. Okay. Now, let’s get to sort of, I guess we’ll call this the main point of today.
Um, here, here’s what I think really matters. Because that whole story I told you, I don’t think that’s anything new. Data is becoming a lot more important because AI is becoming very powerful. We’re in the very first years. Of the idea that organizations, businesses, entities are not going to be based on people entirely anymore.
They’re going to be based on human agents and they’re going to be based on AI agents. The future workforce is going to be a combination of people and robots. And the first business we’ll probably see is a company like DD or Uber. You can get a DD driver where someone shows up in a car and you get in the car or you can get a robo taxi.
And the, the taxis, basically the AI robot that, you know, very soon Uber will be a workforce made up of probably 70 percent robo taxis and 30 percent humans driving cars. Well, I think a lot of businesses, that’s the future workforce. Okay. So AI is a big deal. AI agents, very, very big deal. AI is incredibly dependent on data.
It requires an enormous amount of data. It also requires a tremendous amount of computing power. Um, who has the data, right? Suddenly you start looking at a company like ADP and saying they have data on how people work at companies. You know, their attendance, when they clock in and out, how many people, how much they cost, what kind of talent is required, what kind of learning is required.
They have a database that is unbelievable in this area. And as we start to replace humans with AI robots, they’re very well positioned right there. Like one, they have the data, but two, they could move in to a workforce that is non human. Human plus nonhuman workforce. So that’s kind of why they got my attention.
Okay, so here’s the so what for today? And I think this is my thinking. I haven’t read anyone talking about. I’ve been looking at what people say about them. I haven’t heard this. I think ADP here’s point number three. ADP is particularly well positioned in three ways. Tech wise. Number one, they already have data products.
With tremendous scale, they have global databases about HCM. Um, that’s really kind of cool. Um, because you can start to get, well one, here’s a question, when people talk about data products and having data as a company, you will often hear the word data network effects, the phrase data network effects. I don’t really think those exist.
I think that’s a half baked concept. I think you see one of two things. I think you see real network effects, which we’ve talked about, um, that can follow from a business where data is moving back and forth between various user groups, but you need the user groups, or I think you can see it. data advantage in scale.
I think you can get scale advantages in factories. I think you can scale effects advantages in tech spending. I think you can get scale advantages in data. So I think most of what we’re talking about is an economies of scale, a scale advantage based on data. Proprietary data really, um, But then you have to take it apart.
Is it real time? Does it become obsolete quickly? Is it cumulative, where if you’re generating data for a decade, it gets more and more valuable? Or is all the data from if you’re a mapping company like Google Maps or Waze, the traffic data from yesterday is not worth anything. It has to be real time and it becomes obsolete quickly.
So you have to take apart the data advantages of scale. But generally speaking, we can look at it. What they’re doing in their products. And here’s kind of what ADP talks about. Their goal is to be best in class leader in HCM tech. Um, they have global scale. They have a tremendous footprint. They’re in cloud.
They have apps. They’re very data driven because of these workflows. They have these data products, which are basically, they went from being a best practices database to being KPIs that, you know, that you can look at. They offer, uh, data as a service, which they call Data Cloud. Here’s some of the numbers for what they have in their data cloud.
43 million employee records, 95 million job resumes, 9 million job postings for 20 industries in 500 geographic areas. Uh, they have tremendous amounts of non structured data. Right. Data is not just what’s in a spreadsheet. A lot of employee data and people data is very unstructured. It’s qualitative. It’s soft.
Well, AI is really good at unstructured data. That’s what AI does. That’s why it can look at photos and tell it’s a cat and not a cat. Um, Excel databases don’t do that. So other things they do. They have all these tools. They have the candidate profile relevancy tool where they can use a I to assess profiles of people for one for being hired for two being placed within jobs within companies or doing certain tasks.
They have organizing benchmarking dashboards that they give to companies where you look at head count. You look at your labor cost metrics. You look at your turnover. They have U. S. versions of that, but they also have global versions of that, which they call ADP GlobalView, so you can see your whole headcount everywhere.
Um, they have increasing numbers of what they call HR self service tools. Um, where basically this is anything, if you’re a business, you don’t have to call HR to handle it. Um, employees can basically join, log in, get onboarded automatically. They can look up policies. They can do chat bots and find things out automatically.
They can do learning. They can do training. They can change their shifts. Things like that. All of that. This is basically anything you can do by opening an app instead of calling HR. Which obviously saves you money. Anyways, they have a tremendous tech suite that they’re building. Okay. So, Why do I think they’re well positioned?
One, they’re already well down the path in terms of turning these data products and services into compelling solutions that very few have, and they’re usually based on that data advantage I talked about. Number two, they actually have kind of a marketplace. Which is interesting. They have what they call ADP marketplace.
If you’re hiring people and you’re outsourcing or working with them on hiring and recruiting, assessing job candidates, placement, onboarding, all of that, well, it was very easy for them to open up a marketplace business model for people looking for jobs and people hiring for jobs. So they’ve got one of those.
So they leverage their services and software into a platform business model. Now, I don’t know how big it is, but that was quite clever. And that would handle the marketplace that would be external to a company. But more and more, when you look at human capital inside of companies, it’s starting to look like a marketplace.
You’re starting to move people around where they’re applying for jobs internally, or they’re applying to do certain projects internally. We’re seeing people move around in companies the same way they used to move around between companies in the external marketplace. So people talk a lot about internal marketplaces of businesses now.
Well, they’re set up for that. So that’s number two. Number one, we have data products that are really well positioned. Number two, we have external and internal marketplace. They’ve already launched one of them. And number three, and here’s the last one, and this is the so what for today. Obviously, they’re incredibly well positioned for AI.
They’ve got the data. They’re already down the path in software, and it turns out Um, AI is going to have tremendous impact on how people work and how organizations are structured. And that’s where I came up with the title for this talk. Are they going to win big in human capital management and non human workforces?
So think about the first one. What does it mean? I mean, When you look at a company, everyone understands that you have factories and buildings and stores, the tangible assets. Businesses increasingly are about the intangible aspects, which are people. It’s software, but it’s also people. How people have been managed has been very crudely done forever.
You know, you need 2, 000 employees in your business. How do you manage those people to get performance out of them? And it’s been total chaos. You put five dudes in a garage run by Steve Jobs and you get Apple. You put thousands of engineers in IBM and they don’t win. Like, how you organize, manage, inspire, uh, people.
It’s very crudely done. We’ve never really had any good systems for doing that like we can run a factory. When I asked sort of like the head. Uh, digital guy at McKinsey, like five years ago about AI, I said, where are you most excited about AI? And he said, the idea that we can transform how people work in management and in companies human capital, because it’s the biggest, what if every group of five people could perform at the same level, Steve jobs could make people perform because AI is very good at taking apart the soft factors.
The random correlations, the qualitative aspects, it’s able to see that and come up with recommendations. What if we’re all able to perform like that? Human capital management is like, it’s kind of the great wasteland of, of performance. Okay. So that’s one it’s, could they win really big by kind of revolutionizing human capital management?
within companies, which is going to increasingly be their biggest asset is people. There’ll be other assets, but that’s especially in a digital business. The more digital the business, the more important humans and intangible assets are. Well, this is how you manage one of them. So can they win big there?
I’m pretty optimistic. They seem to be really ahead of the curve. Number two. What about when you start to put AI agents and suddenly we’re talking about a nonhuman workforce where your average business, Sam Altman, the open AI guy, he talked about this last week, he kind of said, look, you’re going to be able to build a business with a couple people, a billion dollar business with a couple people, because most of your workforce will be AI agents that are doing things maybe on the streets, like driving taxis, maybe in your company.
You’re going to be able to build a massive business with just a handful of people because your workforce is going to be mostly AI agents. Okay. How do you manage an AI agent? There’ll be companies that you could go to. I mean, this will happen pretty soon. I think there’ll be companies you could go to, to recruit, train and access AI agents.
Most people are not going to hire them. Well. Isn’t this exactly the kind of company you would call up when you want to hire 50 AI agents? Are you going to build them internally? No, you’re going to call a company like ADP. Can you, can I hire, you know, 50 of these agents from you and they’ll say, sure, we can deploy them immediately.
Just like they’ve been doing that for payroll processing, everything else for what, 70 years. So anyways, that’s, that was kind of my takeaway from that one. I think I’m a little bit, Oh, I went way over today, didn’t I? Yep. I’m way over. Anyway, sorry about that. I blew the, I’m trying to keep these to 30 to 40 minutes.
That was a good 50 minutes. Oh, well, but I don’t think I can cover this company in 30 minutes to tell you the truth. So I’m going to give myself an exception on that. We’ll get back to 30 minutes next week. Anyways, that was a lot. But for those of you who are subs, I will, I’ll send you a lot of detail on this, but I think it’s, I think it’s really interesting.
I’ve been thinking about this one a lot. Anyways, that is it for the content for today. I kind of blew that one out. Oh, well Anyways, I hope that is helpful and I’ll skip any last comments. Hope that’s great. I’ll talk to you next week. Bye. Bye
I write, speak and consult about how to win (and not lose) in digital strategy and transformation.
I am the founder of TechMoat Consulting, a boutique consulting firm that helps retailers, brands, and technology companies exploit digital change to grow faster, innovate better and build digital moats. Get in touch here.
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