Key Takeaways

• The US payroll software industry enjoys a unique mix of scale and growth, as a $9.9 billion market that has outpaced the nation's larger economy as well as the US technology sector amid its "revolutionary" transition to cloud-based systems.
• This market expansion is largely forecast to continue, bolstered by the pandemic's influence on remote work models, a rebounding US economy, growth in US government spending and a general shift in investment towards software and SaaS business models.
• However, America's payroll software market also remains challenged by its highly consolidated competitive landscape, which may not only result in less innovation/agility moving forward, but is expected to drive potentially disruptive and costly merger and acquisition activity in coming years.

Introduction

Strengths

• Perhaps the greatest strength of the payroll software market in the United States is its robustness, both in terms of industry size and business participation.
• As of 2021, the payroll software industry in the country was value at approximately $9.9 billion, bolstered by the diversity of between 517 and 599 independent operators, according to market researcher IBISWorld.
• Notably, the industry's current scale is the reflection of relatively rapid growth, with a revenue CAGR of 5.3% from 2016 through the present, as well as a 16.4% annual growth rate in the number of participating businesses during the same period.
• This expansion has outpaced the nation's larger economy as well as the US technology sector, making the industry an attractive one for investment and development.
• Underpinning this growth is the success of the industry in evolving to cloud-based systems, per IBISWorld and ResearchAndMarkets.
• This transition to the cloud has "revolutionized the industry" over the past half-decade, increasing the affordability and general attractiveness of its products.
• In particular, the expansion of market offerings to cloud-based software has (1) introduced a more lucrative and easy pay-as-you-go subscription model, (2) enabled the seamless interface of payroll software products with related data (e.g., tax, employee details) and complementary systems and (3) supported customers in migrating all software products to the cloud, thereby further "bolstering demand."

Weaknesses

• Despite this recent industry renaissance, however, the payroll software market in the country is fundamentally constrained by the fact that its offerings are "predominantly used by businesses," which represent a large but inherently limited consumer base compared with products that can cross over to the wider mass consumer market.
• Additionally, despite its diversity in industry participants, America's payroll software industry is dominated by a very small subset of key players.
• As noted by IBISWorld, Credible Markets and other industry researchers, four companies (i.e., Workday, Ultimate Software Group, Automatic Data Processing and Intuit) represented 65.7% of the industry's revenue last year.
• Not only does a highly consolidated competitive landscape come with a variety of disadvantages (e.g., less innovation/agility), but in the case of the US payroll software market, it is expected to drive an increase in merger and acquisition activity, which can be both disruptive and costly.
• Separately, the industry is challenged by the fact that its businesses are largely located in California and New York, two states which are known to adopt new and sometimes unforeseen regulatory changes faster than many other US domiciles.
• Additionally, the sector is more "labor-intensive" than many other industries, with wages representing almost half (46.1%) of business revenue.

Opportunities

• Despite these intrinsic weaknesses, America's payroll software industry is anticipated to continue its growth trajectory for the foreseeable future, bolstered by the pandemic, a rebounding US economy, growth in government spending and a general shift in investment towards software and SaaS business models.
• Although market pundits originally forecast that COVID-19 would suppress demand for payroll software in the country amid falling corporate profits, IBISWorld is among the industry experts who quickly noted how the coronavirus outbreak accelerated the shift to remote work, thereby increasing "industry participation."
• Moreover, America's economic recovery in the wake of the pandemic is anticipated to fuel growth in the adoption of payroll software services, both as corporate earnings rise and new business starts increase.
• In tandem, the election of the Biden Administration is anticipated to fuel new sales, given that the "government is a significant market for HR and payroll software," and an "increase in government expenditures typically benefits this industry," according to IBISWorld.
• Lastly, the US payroll software market is also expected to "benefit from increasing investment in software and widespread adoption of the SaaS business model," per IBISWorld.

Threats

• In comparison, there appear to be very few environmental obstacles or threats that will impede the expansion of America's payroll software industry in the coming years.
• Some industry participants have been challenged by the pandemic, given that the shifting economic conditions exacerbated the relative scale of labor expenses compared to revenue.
• More significantly moving forward, however, is the strain that industry participants may face amid the current geopolitical uncertainty, particularly between the US and China.
• Although technically a factor that is outside of America, the majority of major payroll software providers in the country are multinational conglomerates, according to IBISWorld, MarketResearchFuture, ResearchAndMarkets and other industry experts.
• Although the US and larger North America region are forecast to "maintain the dominant position in the global payroll software market," shifts in trade dynamics and international relations could have a meaningful impact on how the industry's US-based businesses operate on a global, corporate-wide basis as well as their general profitability.

Research Strategy