Automatic Data Processing
| Automatic Data Processing, Inc. | |
|---|---|
| Type | Public company |
| Traded as | Nasdaq: ADP |
| Industry | Human capital management, business process outsourcing |
| Founded | 1949 in Paterson, New Jersey |
| Founder | Henry Taub |
| Headquarters | Roseland, New Jersey, United States |
| Key people | Maria Black (President and Chief Executive Officer) |
| Services | Payroll processing, human resources outsourcing, benefits administration, talent management |
Automatic Data Processing, Inc., trading as ADP, is an American provider of payroll, human resources and benefits administration services, headquartered in Roseland, New Jersey. It is among the largest providers of such services in the world, paying a substantial proportion of the private workforce of the United States and operating in more than a hundred and forty countries.
The company is notable for an unusually long and consistent record. It has increased its dividend every year for more than fifty consecutive years, placing it among the small group of companies with that distinction, and it held the highest credit rating available for many years, one of only a handful of American corporations ever to do so.
Its data has also acquired public significance beyond its commercial activity. Because ADP processes payroll for a very large number of American employers, it publishes the ADP National Employment Report, an estimate of private sector employment change that is followed closely by economists and markets as an early indication of the official government figures.
History
Founding
The company was founded in 1949 in Paterson, New Jersey, by Henry Taub, then twenty-two years old, under the name Automatic Payrolls, Inc. The proposition was straightforward: small businesses found calculating payroll, withholding taxes and producing pay packets tedious and error-prone, and a specialist doing it for many employers at once could do it more cheaply and more accurately than each doing it alone.
Taub was joined by his brother Joe Taub and by Frank Lautenberg, a salesman who became a principal architect of the company's growth and who later served as a United States Senator for New Jersey for nearly three decades.
The early business was performed manually and by mechanical accounting machine. The company bought its first computer in 1957 and adopted its present name in 1961, reflecting the shift to electronic processing, and listed publicly in the same year.
Growth
ADP's expansion followed the logic of the original idea applied to successively larger customers and to adjacent tasks. Having established itself with small businesses, it moved upmarket to serve large employers; having processed payroll, it took on tax filing, which requires the same data and is if anything more burdensome to the employer; and having handled tax, it extended into benefits administration, retirement plan record-keeping, time and attendance, recruitment and human resources support generally.
The company also built businesses outside its core. Its dealer services division supplied management systems to motor dealerships, and its brokerage services division handled investor communications and securities processing for financial institutions. Both were eventually judged to be unrelated to the main business and were separated: Broadridge Financial Solutions was spun off in 2007 and CDK Global in 2014, in each case distributing shares to ADP's own shareholders.
Leadership
The chief executives have been Henry Taub, Frank Lautenberg, Josh Weston, Arthur Weinbach, Gary Butler, Carlos Rodriguez from 2011 to 2022, and Maria Black, who was appointed in January 2023 and had previously run the company's employer services business.
The Pershing Square proxy contest
In 2017 the activist investor William Ackman, through Pershing Square Capital Management, disclosed a substantial stake and launched a public campaign arguing that ADP's margins were considerably below what its scale should produce, that its technology was outdated, and that management had allowed costs to accumulate during years of easy growth. He sought three board seats.
The company's defence was that the business required stability, that the comparison Pershing Square drew with a much smaller competitor was not sound, and that the transformation Ackman proposed was already under way. The contest was conducted publicly and at some length, and at the annual meeting in November 2017 shareholders rejected all three of Pershing Square's nominees by a substantial margin.
The episode is cited in governance discussion as one of the clearer defeats for an activist campaign at a large company, though the company subsequently accelerated several of the cost and technology measures the campaign had called for.
Services
ADP's offerings are organised around two segments.
Employer Services provides payroll processing, tax filing and remittance, time and attendance, benefits administration, retirement services and talent management, delivered through platforms addressed to businesses of different sizes, from very small employers to multinational corporations.
Professional Employer Organisation services, marketed as ADP TotalSource, take the arrangement considerably further. Under a co-employment model, ADP becomes the employer of record for the client's staff for administrative purposes, which allows small employers to obtain health insurance, workers' compensation cover and retirement plans on terms normally available only to large ones, because the employees of many small clients are pooled. The client retains control of the work; ADP assumes the administrative and much of the regulatory burden.
The business model
Two characteristics explain the company's financial profile.
The first is recurrence and stickiness. Payroll is not a service an employer can suspend, and changing provider requires migrating employee data, tax registrations and historical records at a moment when errors are immediately visible to every employee and to tax authorities. Client retention rates are correspondingly high and revenue is unusually predictable.
The second is client funds interest. ADP collects payroll and tax funds from employers before they are due to employees and to tax authorities, and holds them in the interval. The balances involved run into tens of billions of dollars, and the interest earned on them is a material component of profit. This makes the company's earnings sensitive to interest rates in a way that is unusual for a services business, and it benefited substantially from the rise in rates after 2022.
Assessment
ADP is an example of a business that has done one thing for seventy-five years and been consistently rewarded for it.
The original insight, that an administrative task every employer must perform and none wishes to is a service worth buying, has not required revision. What has changed is the range of tasks included, which has expanded steadily as employment regulation has become more complex, and the fact that complexity increases has been a reliable tailwind: every new requirement placed on employers makes outsourcing more attractive.
The risks are of two kinds. The technological one is that payroll software has become a crowded field, with cloud-native competitors including Workday, Paychex, Paycom and Gusto attacking different segments, and with the criticism made during the Pershing Square campaign, that ADP's platforms were a patchwork accumulated over decades, being substantially accurate at the time. The company has spent heavily on consolidating them since.
The macroeconomic one is simply that ADP's revenue depends on the number of people employed and on their wages, which makes it directly exposed to the labour market. That exposure is also what makes its employment report valuable, and the company's data has become, incidentally to its business, one of the more closely watched economic indicators in the United States.