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RBJ 75: Under Mucci, Paychex has regained its old form

Rochester Business Journal
July 27, 2012

In just two years as CEO, Martin Mucci has helped bring Paychex Inc. from one of the worst periods in its history to a year of record revenues.
 
For fiscal 2012, which ended May 31, Paychex reported total sales of $2.2 billion, an increase of 7 percent from the previous year and a record high in annual revenue for the company. Net income increased 5 percent to $548 million. That follows a 4.2 percent sales increase and 8 percent earnings jump in fiscal 2011.
 
Those numbers are a far cry from where Paychex was when Mucci took over in September 2010.
 
For fiscal 2010, the firm reported total revenue of $2 billion, down 4 percent from the previous year. Net income of $477 million was down 11 percent from the year before.
 
"The competitive position and the operations of the company were still running fine, but certain factors were driving the company's demand down at the time," said Timothy McHugh, analyst for William Blair & Co. LLC. "There were some weakening trends in Paychex's sales force metrics, and they had not yet made changes in the strategy and technology. There were things they could certainly improve."
 
Mucci joined Paychex in 2002 as senior vice president of operations after 20 years in the telecommunications industry. He had been CEO of Frontier Telephone of Rochester Inc. and president of telephone operations for Frontier Communications.
 
At Paychex, he succeeded CEO Jonathan Judge, who resigned in July 2010. After being named CEO in September 2010, Mucci began putting together an executive team to develop a strategy focused on improving sales.
 
Mucci and his team started by reconfiguring the company's sales department. The changes included a new compensation plan and support tools, which Mucci said improved sales representative turnover last year.
 
"When I got into the role, I was really brought in to be a long-term builder," Mucci said. "What we did is assemble a team of executives (from) inside and outside the company, create a strategic plan and target where we're going to take this company in the next five years."
 
The turnaround in sales laid the groundwork for the company to reach several key benchmarks last year. After three years of declines, Paychex's client base was flat in 2012. Checks per payroll have improved for nine consecutive quarters. And payroll client retention reached 80 percent, nearly a record high.
 
Several factors-including acquisitions, new services and investment in new technology-also helped produce the strong year at Paychex.
 
In February 2011, the company completed the acquisition of SurePayroll Inc., a software payroll processor, for $115 million in cash.
 
Mucci said the acquisition has helped Paychex reach smaller businesses that prefer a do-it-yourself, Web-based payroll service. SurePayroll has grown in the double digits since Paychex acquired it, he said.
 
In May 2011, Paychex acquired Denver-based ePlan Services Inc., a provider of recordkeeping and administrative services for defined-contribution retirement plans. Mucci said the acquisition has helped increase sales by providing clients with a Web-based tool to keep track of their 401(k) plans.
 
Most recently, Paychex in January acquired Icon Time Systems Inc., a company Paychex worked with in 2011 to launch the Paychex PST100 time and attendance product for small businesses.
 
Mucci said each of the acquisitions has allowed Paychex to provide alternatives for clients.
 
As part of its aggressive technology push, Paychex launched a single sign-on and landing page on its website in October 2011. Then, in November, the company released its iPad app.
 
The technology advances continued in 2012 with the release of an Android app and a smartphone app, giving clients and their employees mobile access to Paychex's products and services.
 
The technology push was so strong that expenses related to information technology increased at a faster pace than overall expenses in fiscal 2012, company officials said.
 
Paychex also has launched a number of new services, including the Business Insurance Payment Service and BuildMyBiz.com, a site that provides tools and resources for developing a business.
 
Through it all, Mucci said, the company has maintained high levels of operations and customer service. He said Paychex recently received the highest client satisfaction scores in its history.
 
"I think technology does play an important role," Mucci said. "It's matched by the importance in service. Paychex has always been known as a service leader. What we're doing now is taking technology innovation and combining that with our service."
 
Paychex has managed to turn things around despite the sluggish economy. However, Mucci said the country's unstable financial climate remains a factor.
 
"The economy continues to gradually improve, and our existing business continues to improve," he said. "Our biggest challenge is new business. Fifty percent of sales come from new businesses starting up. The economic environment for new business formation remains challenged."
 
For fiscal 2013, Paychex has forecast net income growth of 5 percent to 7 percent. The company said it expects total service revenue to increase 5 percent to 6 percent.
 
Paychex expects human resource services to grow 9 percent to 11 percent and payroll services to grow 3 percent to 4 percent. Those numbers are slightly below the growth rates of fiscal 2012.
 
In June, Barclays Capital Inc. downgraded its rating for Paychex, saying the company's stock had a small downside risk due primarily to its conservative growth outlook and the weak job market. The stock has been trading near its 52-week high.
 
McHugh said Paychex's reputation and history of success should help the company remain solid as the economy moves at a slow pace.
 
"I'm operating under the basic thesis that we're going to be in a slow, grinding recovery," McHugh said. "In a slow economy, a high-quality, steady grower that pays a significant dividend like Paychex can be a pretty good."
 
Mucci said Paychex is not waiting around for the economy to pick up. The company has relied on its relationship with CPA firms for new-business referrals and will focus on developing new services and programs for existing clients to increase business, he said.
 
He also expects that the Patient Protection and Affordable Care Act, which requires many small businesses to offer health insurance to employees, will create new growth opportunities for Paychex. The company's insurance business grew 8 percent in 2011, while its health and benefit services revenue increased 24 percent to $52 million, with a 23 percent increase in the number of applicants.
 
"In a very short period of time we've made some changes and done some significant additions to help us grow," Mucci said. "The economy remains one of the biggest challenges, but our goal as a leadership team is to continue to grow and take it to the next level."

7/27/12 (c) 2012 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email service@rbj.net.


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