The Three Market Positions – You Must Choose One

First and foremost in dealing with growth you have to align with the needs of your customer, or your customer’s customer in the HR services industry. If you are not aligned with that you are not going to be able to grow, you’ve got to know what they actually want.

Second you have to be better, faster and cheaper. That’s what customers want from a transactional perspective, it’s a commodity and they want it better, faster and cheaper every year. Important also is to really recognize that customers do leave for mistakes, so the blocking and tackling is very important. It has to be done well, but it also has to be done at a much more efficient cost point than what you are doing today.

When you are doing that right, they will stay for service. There is human error there, it’s always going to happen, but if you are able to take your resources away from those low value-added tasks while you are growing and put them into customer service and hands-on consultative tasks, you will keep those customers.

How do you deal with growth? There are essentially two ways to go in the services industry, specifically HR services:
Automate – change your technology, look for tools that are going to make you more efficient,
Look for labor arbitrage – readily available in this global economy.

But we don’t think that doing one or the other is the answer. We try to accomplish both at the same time. Technology doesn’t always fill every gap, so labor and technology together is the best solution.

For example, we have a new customer who is growing rapidly and is basically out of space. We sat down with him and told him that from the payroll perspective, he needed to build capacity because of the growth he was experiencing. He simply couldn’t keep up with it. There simply were not enough cubes. So in this case, changing technologies is the first step he has taken and we helped with that conversion because it’s double duty from this system to that system. Going forward as he grows, he is going to grow in an outsourced solution with us rather than continuing to hire low value-added task process performers.

The keys to growth in this industry are recognizing the difference between low value-added tasks and high value-added tasks. The only way you are going to grow is to focus correctly on those. For the ticket-to-play items, we like to call it “making sausage” because nobody cares if they don’t see it, they don’t know it’s there and they just expect it to happen. More importantly you don’t get paid for it, those tasks are an expectation, a bottom line expectation of the product.

I often will ask customer’s a simple question, “You want to grow, that’s great, but what happens when you double the size of the company? Are you going to double the size of your employee base or are you going to find new ways to solve the problem?”

The Product Quality Bar

The product quality bar is where you have a diverse set of products in your company sorted by company and by product type and by client type and you define exactly what the quality target you need to hit on those items is. If you took products in the HR industry, for instance payroll or workers’ comp benefits, the issue is not what clients say the quality needs to be, it’s the actions those clients take at different levels of quality. So the quality bar refers to what a client would leave for, what a client would stay for and what a client would pay for – all of which is organized by product line.

The best-of-breed clients segment their clients. It could be that you segment your clients by size, or by the type of business, or whatever makes sense in your client base to segment your clients. Then, within that client base, you take your products and define what is the quality bar you need to hit by client and by product, and then relentlessly measure what factors cause actions you desire and actions you don’t. Tracking things that way gives you exquisite focus around the current state, the desired state and what must be done to close the gap between the two. Best-of-breed companies manage to the gap in the quality bar at all times, which is why they have better client retention and why they retain revenue.

Drivers of Customer Turnover

Drivers of customer turnover are really a cornucopia of things. There are so many different moving parts in the HR services industry that any one of them in a combination and at the same time can cause turnover. Also it causes HR service providers to have the urge to expand. If you look at ADP, they just buy more product and expand more product, that will cover more bases and will bring up retention. That’s a double-edged sword though. If you are a smaller provider adding more product is great, it has a distraction or opportunity cost to it and it gives you more opportunities to screw up. You could really cause your own loss by going past what your organization can handle. Still, at the end of the day, you have to be able to deliver the low value- added tasks better, faster, and cheaper.

Let’s look at an example here in the PEO industry. What causes the complexities? If you look within the PEO space, the insurance decision drives around 70 percent of the decisions. It’s either health care insurance or workers comp when it’s appropriate. That’s the buying decision. It’s the economic decision for even looking at the product to begin with or looking at switching providers that you are currently with.

The negative, or flipside, of that is it creates more shopping opportunities. You’ve got a health renewal, you’ve got a comp renewal, and you’ve got taxes changing on an annual basis. Many different times of year that customer is getting an opportunity or reason to think about shopping. That creates its own distraction that you have to make sure that you have to manage along the way while being high value-add.

How do people in the industry reduce turnover? There are some events happening today that clarify where that’s going to go in the future. If you look at the behavior of ADP for example, they have bought and bought and broadened out product and now, not only them but Paychex as well, are starting to sell insurance. So they are infringing on a territory there. Also, big banks now own insurance brokerages or own payroll bureaus and broaden their product out and now those two are starting to bump together.

So the lines are really blurred as far as who the providers in the space are. Add to that, of course, the cloud, which is a bit overused, but it’s out there. Now you have a capability to offer all those services to any amount of customers, from 8 lives to 800 lives, and one of the biggest changes coming forward is that the sales and distribution of those products is where it’s all at. The people who are selling those products today could very easily be at the cloud. They could have a private label product, whether it’s payroll, benefits administration, insurance products, or insurance brokerage for example, and it’s very easy for them to enter the space and be providers who could provide that. I like to call it “entry without infrastructure”. I can get a distribution company into the business tomorrow of HR services in a private label setting without them even lifting a finger. That will be a huge impact to the market in the future.

Grow revenues in price competitive markets

Growing revenues in this market is probably harder than it’s ever been. You’ve got several factors working against you. You’ve got an industry that is over-commoditized and over-heating right now. On top of that you’ve got an economy that is still not in recovery. You’ve got merger and acquisition activity going on that is making vendors larger and they are driving prices down because of their size. You have ADP and Paychex who are now selling insurance products. So even within the broader industry, the lines are being merged between who is a broker, who is a payroll provider, who is a PEO, who is an HRO, so there is client confusion at the same time.

A small business has to have exquisite focus on what their market position is and how they are going to win. They have to be bolder about it. They have to be persistent about it. If you have chosen to be customer intimate or you have chosen to be someone who is going to have product innovation, you have to drive all activities towards those and really drive the value back to your customers to grow revenue, because all the other factors are working against you. The economy, commoditization in the industry and merger and acquisition getting bigger are all problems, so that exquisite focus on spending every dollar available on high value work that drives revenue is critical to your success.

What Makes CogNet Different?

CogNet is different in many ways. First off it is a global company. We do business around the world, but we are U.S.-owned and operated. Second, we have personal experience in the industry, both the PEO and the broader HR space, so we are very familiar with the key issues that are facing most of the people that are looking to solve problems in this space. Third, we have a culture and proof of flexibility. We have an appreciation of doing things the clients’ way and the reasons they need to do them in that way. This attitude is unique in small business because that entrepreneurial spirit, what they have done to create differentiation for themselves, often requires that you think of things a little differently in the small business space. We have a keen appreciation of that. Fourth, we have no contract minimums and no contract terms. We earn your business each and every day, and if we are not earning it, you should, and can, walk away. That is very unique.

In today’s space there are very few options that are new that are innovative and can really move the needle. I believe that CogNet, in the small business space, can really do that. We will help you move that needle.

The Three Market Positions – You Must Choose One

Market position is important because it’s the perception that you want the buying community to have about your company. In this industry you absolutely have to choose, because the focus is so important. There are only three choices when choosing market position: low cost provider, customer intimate, or product innovation. Let me say a little bit about each of those.

The low cost provider is a very enviable position and not something to be thought less of. Wal-Mart is a good example for the low cost provider.

Customer intimate means that a customer sees something unique in you that they are willing to pay extra for and that’s the critical point. Don’t mix up customer intimate with customer service, because everybody has to have good customer service. To be customer intimate you are providing something unique that that customer is willing to pay for. Again, good example is Nordstrom’s as customer intimate. You will pay a little more for that blouse because what they are going to allow you to do is return it with no questions asked.

Product innovation means that you are relentless about constantly changing product and a good example of that one is Apple. People want to be part of that innovative product community, but they are not the low cost provider and they are not customer intimate because they don’t provide something unique to each customer, and they are certainly not the low cost provider.

There are conditions that favor each one of those. Being the low cost provider means that you are that because customers all look pretty much alike, they use the products the same way and there is intense price competition against those like services. If those are the conditions that you are playing in, then you would strive to be a low cost provider.

In customer intimacy, clients don’t use the product the same way. That can be nuanced. It doesn’t have to be huge differences, but they use it differently. Because they use it differently, you have to know the client a little better and because the client knows they are different they are willing to pay for it. Those are the conditions that if they came up that you would say, my product position is customer intimacy.

Product innovation comes up where there is a group of customers who are willing to be early adapters, who view themselves as a like group – whether it be tech geeks or whether it be fast car drivers or whether it be rich people – who view themselves as a cohesive group that likes this product. It is not mass market.

Those are the conditions that favor the three market positions and it’s critical that you know which one you are, because you have to drive all your activities towards being the best at the one you picked and being good enough at the other two.

Keeping an Eye on Low-Value Work

The distinction between low-value work and high-value work is important. Low-value work is necessary work that has to be done. High-value work is work that gives your client a competitive advantage.

Low-value work is ticket-to-play, you must not do it wrong. Some examples of low-value work are getting payrolls out correctly the first time, making sure everything is in line when you are doing benefits administration, and that the deductions coming out of payroll are correct. That is work that clients expect and it’s in your back office. They don’t really care that it gets done better, they just want it done right. There’s a “Don’t get it wrong” mentality with low-value work, but doing it better isn’t going to get you anything either. For low-value work, good enough is good enough.

High-value work, on the other hand, is work that gives your customer a competitive advantage. They define that value and you get paid for that value – that’s work that you should be spending time on making sure you are meeting the clients’ expectations. Some examples of high-value work are giving them recommendations on what their benefit should be or presenting options of how to retain and attract the best possible workforce. If competitive advantage is a lower cost for them because they can spend the money, you can use that as high-value as well.

So high-value work gives your client an advantage and low-value work is a ticket to play. You’ve got to make sure that you are spending your money on the things that give high-value to your clients while still making sure you are providing that lower value work in the most efficient, cost effective way you can.

Role model companies have a relentless push toward these two things. They do everything they can to make sure that low-value work is being done at the quality that’s required, which means not overdoing it, but rather doing it at the lowest cost possible while still being done right. Then, they spend every dollar they can making sure the high-value work is being done to standards that meet or exceed clients’ expectations. That translates to into revenue retention and growth, no doubt about it. A company must understand the difference or die.