Automatic Data Processing is a global company one of the ...



Innovation at

ADP Small Business Services

Jim Lavelle

BU-647 Effective Innovation

Dr. Donald J. Noone

November 28, 2006

Automatic Data Processing (ADP) is one of the world’s largest providers of computerized transaction processing and information-based business solutions. The company is made up of three divisions: Dealer Services Division, which provides services and solutions to the automotive industry, Brokerage Services Division, which provides back office services to the investment industry and Employer Services Division which supplies payroll and Human Resources services to employers of all sizes. ADP is the business behind the business.

Through our Employer Services Division (ES) we pay 1-in-6 private sector workers in the United States. This division is divided into three strategic business units (SBUs) based on the number of employees paid. In ADP speak these are known as “pays”. Each SBU faces unique challenges due to the diversity of their client base and target markets; for example, your local bakery has very different needs from NABISCO. By the same token, your neighborhood used car dealer’s requirements are vastly different from those of General Motors’ headquarters. The division of these clients along size lines allows ADP to develop solutions uniquely tailored to their requirements. Sales, marketing, information technology (IT) and development are all handled individually within each SBU.

← National Accounts (Nationals) provides payroll and tax filing services to businesses that pay more than 1,000 employees.

← Major Accounts (Majors) provides similar services to businesses with between 51 and 999 pays.

← Small Business Solutions (SBS) provides payroll and tax filing services to businesses with between 1 and 50 pays.

Automatic Data Processing S.W.O.T. Analysis

Strengths

← Industry knowledge – ADP has been in the payroll business since 1949.

← Broad range of services.

← Substantial scale advantage across its offerings gives ADP the ability to offer specialized products across a wide customer base.

← Very strong client retention with average tenure of more than eight years in the ES division, which is critical to ADP’s recurring revenue model.

← Strong top line performance.

← Globally respected brand – ADP is one of only 7 companies to be rated AAA by both Standard & Poor and Moody.

Weaknesses

← Declining margins in recent years.

← Business unit funding can be an issue, there is only so much funding to go around and with three distinct divisions vying for funding some critical projects may not get funded.

← Certain offerings in the Dealer and Claims divisions are not expected to generate revenues in the long term.

← Weak long term performance in Brokerage division may affect the company’s overall performance. A spin off was recently announced.

← Security and privacy breaches can hurt our business.

Opportunities

← Expansion of services through acquisitions.

← Introduction of several new products such as the VISA branded TotalPay Card® have opened totally new markets.

← Business Process Outsourcing (BPO) is a new area with great potential.

← An increase in IT spending in Western Europe means more funds will be available to purchase ADP’s products.

Threats

← Sarbanes-Oxley Act presents a significant test of information systems and capabilities, the heart of ADP’s business.

← Competition from companies that derive revenue from outsourcing contracts is becoming fierce.

← Price has become more critical as more players enter the field.

← Client consolidation presents real challenges. When two companies become one ADP loses the base charges from one of the companies (significant dollar value).

Small Business Services Overview

SBS employs approximately 5,300 people in 36 major regions (where payroll is actually processed) as well as scores of local sales offices nationwide. SBS offers a complete line of payroll and business solutions for businesses with 50 or fewer employees. Today, we pay the employees of approximately 350,000 American businesses. Additional services include tax and compliance products, time and labor management products, Worker’s Compensation, employee screening and selection services and benefits management. These products can be implemented to interface with most General Ledger systems allowing easier bookkeeping for our clients. Approximately 35% of SBS associates are directly involved in sales and the average sales associate handles about 70 clients. SBS also employs Implementation Specialists which accounts for about 10% of the SBS workforce. These people spend time with the clients during the implementation process actually installing the products and designing any interfaces to existing systems (G/L, etc.). A full 45% of the workforce interacts in a face-to-face manner with the clients. Customer service reps, who work exclusively on the telephone, are not counted in this number. The IT group is made up of approximately 100 associates which includes programmers, analysts and Quality Assurance.

INNOVATION STRATEGY

Radical and disruptive innovation is possible in the payroll business but extreme caution must be exercised because of the nature of our business. Making mistakes with clients’ payroll, taxes, or employee benefits can land you on the front page of the Wall Street Journal, and not in a good way. Government regulations play a significant role in our business so our strategy is to “Play-Not-To-Lose”. The combination of risks and government regulation makes incremental innovation the right path for us although radical innovation will not be rejected out of hand.

Several areas that I will focus on are innovation in products and features as well as security. Payroll is one product that ADP sells. A feature is something that enhances a product and is sold at an extra cost. One example of a payroll feature is check signing. ADP signs the payroll checks before delivery to the customer, saving their management the time needed for this task. Another payroll feature is envelope stuffing. Clients who purchase this feature have their payroll checks delivered in individual sealed envelopes, ready for distribution to their employees. There are a great number of dependencies involved with the hundreds of payroll features and making sure these dependencies are met is a critical task. To better understand the critical nature of these interdependencies, imagine what would happen if we allowed a customer to purchase envelope stuffing without check signing. That client’s employees would get an unsigned paycheck in their pay envelope. The employees would be unhappy to an extreme, the customer’s management team would be inconvenienced and ADP would get a black eye. In today’s world teams of people examine new features and try to discover these potential “gotchas” before the customer is ever impacted. Because this is a manual process we do sometimes miss a dependency. A better way has to be found to identify these dependencies before they impact the client. Technology brokering can help us exploit existing networks of people and technology to find faster, more efficient ways of identifying these dependencies.

It is an unfortunate fact of life that unscrupulous people will try to profit from weaknesses in any system where they see the potential to make a fast buck. Although ADP employs teams and processes to try and anticipate these weaknesses before they can be exploited, even one successful attack can have devastating results on our reputation and credibility; after all we are dealing with clients’ bank accounts and employee morale.

To address these areas I would institute a number of changes. These will include the implementation of new teams, processes and procedures. Innovation without buy-in and active support from senior management is impossible; therefore the first change I would make is to create a new executive role, the Chief Innovation Officer. This is a presidential level position that spans all divisions and will place the person on par with SBU presidents while securing a position on the executive board. The successful candidate will have a proven track record of building and motivating teams that bridge internal and external networks.

To address the need to constantly have new and innovative products to sell to our clients I will implement a new SBS Innovation Team to monitor new developments across all business areas (technological, legal and functional) to explore new networks and recombination opportunities. Rather than looking inward, this team will scan broad business spectrums looking for developments that might not seem to impact our business but could if combined with other technologies in new and innovative ways. An example of how this team would work can be found by looking at the development of the ADP TotalPay Card product.

Not long ago a government study showed Americans rely on credit and debit cards in ever increasing numbers. A product development team took notice of this heavier reliance on plastic and began to look at how this cultural shift could impact the payroll industry. By mapping the end customer’s consumption chain the team came up with the concept of issuing something other than a paycheck to a particular customer segment. This internal group, working with our marketing group found that a substantial number of SBS payees do not have bank accounts. Traditionally these people are issued a pay check which they then take to a check cashing service where for a fee (sometimes substantial) their check is cashed. There are several problems with this from the customer’s perspective. First, they lose a portion of each check to the check cashing service. Once cashed, they have no safe way to pay bills by mail except to purchase money orders. This is an additional drain on their resources. The team came up with the idea that this customer segment would benefit from being issued an ADP TotalPay Card instead. This would be a branded debit card that the customer can use like any other debit card but the funds are deposited directly into the debit card account. This mimics the direct deposit feature many people use but applies it to people without a bank account. This network of internal developers and marketing coupled with an external network that included banks and government organizations was able to invent a radical innovation that gave ADP a product that no other competitor had. An additional benefit to ADP is that the debit card is issued against an ADP owned bank which allows ADP to collect interest on deposited funds until they are spent.

The SBS Innovation Team would be comprised of ADP associates. Team membership will be viewed as a career enhancing step but membership is of a limited duration so as to not create a static community which would be self defeating in the long run. Terms can run from as little as several months to several years before the person must be rotated back to one of the regions or another SBU. This rotation of associates will also serve to spread the innovation message among SBUs when they return.

Within SBS, all management will stress the need to capitalize on the fact that 45% of the SBS workforce has face-to-face interactions with the client. This is a rich source of data on what customers want and need as well as what competitors are offering. SBS has clients in every conceivable industry and SBS associates should be aware that knowledge they gain regarding products, inventions or technologies their customers are using could be directed back to the SBS Innovation Team. In essence, our clients become a vital part of our network. The goal of all innovation efforts within SBS and ADP is to provide our clients with the broadest array of products and services allowing them to concentrate on their business while ADP handles their payroll and HR functions for them.

The new team is made up of people with established networks that span ADP, SBS and outside organizations. They are known as creative problem solvers. Their area of expertise (development, sales, engineering, etc) is not a criterion; the more diverse the team members backgrounds the greater the potential for recombinant innovation. To remain on the team, members must continue to contribute significantly to the team’s effort. Having a fluid membership will help to counteract the natural tendency to develop communities which can lead to the “Not Invented Here” effect.

Management systems would be put into place to allow associates to collaborate despite where they are located geographically. In this same vein, a simple process that allows sales and implementation staff to forward customer requests directly to both the SBS Innovation Team and the product development team for evaluation and possible inclusion in future releases is needed. A link on the division portal will be created to carry a personal message from the group president outlining the balance to be struck between innovation and ongoing business operations. A quarterly newsletter will be distributed to all associates outlining what the task force has been up to, introducing new members and the innovations they suggested to land them on the taskforce. Success stories will be stressed. Along with mention in the quarterly newsletter, task force members are given a significant plaque to signify their service.

It is the job of each manager to impress upon each of their subordinates that while innovation is part of each associate’s job there must be a balance with day to day operations and job responsibilities. To reinforce innovation as a core competency for all associates, it will be added as an element to each person’s annual goals and performance appraisal. During the annual review cycle each associate will have a conversation with his or her manager that outlines the goals for the coming year. Periodic informal reviews can be requested by either the manager or the associate to assure the plan is being met. At the end of the annual cycle a formal evaluation will determine the extent to which the associate met, exceeded or fell short of goals. Merit increases are given based on overall results to ensure balance.

There is a natural tension between creativity and value capture but bureaucracy does not need to stifle innovation. Everyone must keep their eye on the business because that is what pays the bills, but at the same time, without innovation competitors will eventually steal any competitive advantage you have so innovation is also critical to survival. Setting expectations during annual reviews will help associates to maintain the needed balance.

In an environment that is as conservative as ours, there is a natural tendency to stick with what works. This is a survival mechanism, learned over the years, that tells you “if it isn’t broke, don’t fix it”. When dealing with large sums of other people’s money this is not a bad thing, but it can impede your progress. The key to future success in SBS is incremental innovation to gradually and continually introduce new products and features to customers. Radical innovation is possible but the most rigorous of testing must be employed before the first customer ever sees a Beta version. Ideally, selected customers should be involved in each step of the development process to ensure the functionality we develop is what is needed and that once developed, works the way the customer envisioned it. Prototyping should be employed whenever possible to help speed the development cycle.

ADP is blessed with a number of networks many other companies do not have. Because our business is highly regulated there are multiple governmental networks pre-established for us. In addition to the obvious Internal Revenue Service connection, we deal with taxation departments in every state and have connections to thousands of municipal government agencies as well. On the technology front we have exceptionally strong relationships with all the major players such as IBM (mainframe computers), Dell (personal computers) and CISCO (networking equipment). We have partnered with Microsoft on a number of occasions giving us access to the most widely used operating systems and office product suites. In some cases, representatives from these companies have permanent offices within ADP offices.

I believe that by creating the office of Chief Innovation Officer and a new group whose membership changes over time but always focuses on technology brokering we can accelerate the rate and quality of the products and features we deliver. Changing any corporate culture takes time and effort but making innovation a measurable core competency of all associates will speed the transition. Innovation in the rank and file will be rewarded with letters of commendation and depending on the type and scope of innovation, a possible cash bonus. Innovation is a measured deliverable on each associate’s annual review. A percentage of their merit increase is pegged directly to innovation.

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