A tour through HR and payroll processing software: part 1 (Paycor, PAYC, PCTY)

(this is part 1 of a 3-part post on HCM and payroll processing software and services that will touch on a number of companies, including, but not limited to, ADP, Paychex, Paycor, Paycom, Paylocity, and Workday)

I.

Those familiar “day in the life” videos, the ones that blur professional diary and aspirational lifestyle content, with slices of rooftop yoga and poolside brainstorming sessions edging into unintentional satire, are easy enough to mock. But they hint at a deeper truth about the quasi-parental role played by employers, who are expected to, if not outright pamper their workers, at least provide career direction, training, and validation. This is a very different world than the one Henry Taub, a 28 year-old chartered public accountant, occupied in 1949 when he founded Automated Payrolls (as ADP was then known). Back then, a boss’s only duty was to pay employees accurately and on time.

Even this seemingly simple clerical task could become a critical point of failure when, for instance, the lone payroll administrator called in sick the day before checks were due. The disruptive fallout from just such an incident at a nearby company¹ spurred Henry to launch a business dedicated to making sure this essential function never skipped a beat. In the years that followed, payroll only grew more complicated. A patchwork of state-level mandates – income tax withholdings, garnishments, pay frequency laws, workers’ compensation premiums – turned what was once a clerical backwater into a legal and logistical minefield. What would otherwise be a simple process if limited to Federal-level considerations – which mostly reduces down to Social Security, income tax, and unemployment tax – is complicated by a tangle of state and county-specific quirks. Today, Oregon sets its minimum wage based on whether a job is in an “urban” or “rural” zone. Minnesota ties wage thresholds to employer revenue. Arizona and New Mexico mandate that employees be paid no less frequently than every 16 days. California requires overtime pay for hours worked over 8/day, not just over 40/week. In the decades following WW2, the modern regulatory regime was just taking root and employers began to see outsourcing as a way to shed not just paperwork, but liability.

This creeping complexity didn’t just justify outsourcing, it also laid the groundwork for digitization, with service providers themselves relying on technology to manage it. When ADP went public in 1961, a portion of the proceeds funded the purchase of an IBM 1401 mainframe. By the late ‘80s, software punched beyond paychecks, into the broader domain of personnel. Human Resource Information Systems, or HRIS (aka “core HR” software), emerged as relational databases and enterprise software offered new ways to streamline back-office work. If ERP systems handled things, managing inventory and production schedules, tracking the movement of parts, HRIS dealt with people, organizing names, salaries, start dates, and benefit enrollments.

But it would evolve to do more than just that. As low-skill jobs moved overseas and the US economy titled toward knowledge work, employees – once regarded as line items on a ledger, tracked with the cold precision of warehouse inventory – were gradually recognized as wells of innovation and productivity, more vital to business performance than any physical asset on a balance sheet. This shift was mirrored in an emerging breed of software tools aimed at aligning individual ambitions with organizational goals. HRIS, a system of record for everything an organization knows about its employees, serves as the backbone of a broader Human Capital Management (HCM) suite, powering a collection of downstream functions that govern how work gets measured, compensated, and developed.

These functions typically fall into three main categories. The first is Time and Labor Management, which tracks when people work, when they’re absent, how much vacation they’ve accrued, and whether overtime thresholds have been crossed. The second is Benefits Administration, which determines eligibility for health and retirement plans, walks employees through open enrollment decisions, updates coverage after life events, and funnels the resulting data to insurance carriers. And the third is Talent Management, which manages recruiting tasks (posting jobs, screening resumes, scheduling interviews), onboards new employees (hiring forms, training), develops their skills (training courses, certifications, identification of skill gaps), and records their performance (360 evaluations, performance reviews, goal setting).

The evolution of HCM loosely mirrors Maslow’s Hierarchy of Needs. At the base are basic “survival” systems – HRS and TLM – designed to ensure that employees are paid correctly, taxes are filed, and labor laws are observed. Employers adopted these systems first, not out of ambition but necessity. As the economy transitioned toward knowledge work and competition for talent intensified, companies began to think beyond compliance. Talent management systems emerged to address higher-order “self-actualization” concerns, like identifying high performers and cultivating potential. These days, HCM suites include modules to recognize birthdays and work anniversaries, gather employee feedback, benchmark salaries against local market data, and welcome new hires with curated icebreakers and community groups. The expanding role of HCM both mirrored and enabled a transformation in the role of HR itself. Once the enforcer of rules and keeper of files, HR became a kind of internal brand manager. As Paylocity’s former CEO Steve Beauchamp once put it, “Their jobs almost become a marketer. Their employees are just like customers”.

So by the early 2000s, HCM had expanded well beyond storing personnel records in databases and making them accessible through software applications. PeopleSoft’s HR suite – first released in 1988 – had grown into a sprawling system that reached well beyond payroll and benefits, encompassing recruiting, training, promotions, and compensation. Around the same time, SuccessFactors and Taleo appeared on the scene, offering more targeted, “best-of-breed” tools designed to manage the emerging complexities of talent (SuccessFactors was acquired by SAP for $3.4bn in 2011; a year later, Taleo was acquired by Oracle for $1.9bn)

For some, HR software was but one node in a broader constellation of ERP solutions. SAP released its first HR module in 1986. PeopleSoft expanded into supply chain and financial management throughout the ‘90s, its ERP ambitions culminating in the $1.7bn acquisition of JD Edwards in July 2003. Oracle, which began pushing into enterprise applications in the late ‘80s, perhaps felt threatened by the JD Edwards deal and launched a hostile tender offer for PeopleSoft just one week after it was announced. Following more than a year of legal battles, Oracle finally prevailed and in December ‘04, acquired PeopleSoft in a $10.4bn deal, inheriting J.D. Edwards in the process.

II.

Payroll processing and HCM differ in scope and intent. Payroll systems are transactional engines, designed to calculate wages, withhold taxes, and push money out the door. HCM systems combine a system of record for employee data with higher-order functions like employee engagement and performance, playing a broader and more strategic role.

But it doesn’t take much imagination to see the two as parts of a single, interlocking process. After all, the information housed in a HR system – what department someone belongs to, when they started, which projects they’re assigned to, the milestones they’ve surpassed, the praise or penalties they’ve accrued – directly determines how much they get paid and when. SAP and PeopleSoft offered payroll processing alongside HCM from the very early days. Still, their systems were tailored to large enterprises with sophisticated IT departments who had the expertise to configure and maintain on-premises software. And even sophisticated organizations running SAP or PeopleSoft often outsourced payroll to ADP or Paychex, in part because these vendors indemnified clients against payroll errors. So, even as HR software began to subsume payroll administration, enabling clients to manage in-house what may have otherwise been outsourced to a service bureau, ADP and Paychex remained largely insulated from competitive pressure.

Beginning in the late 1990s and accelerating into the mid-2000s, a new wave of online native service providers emerged, coincident with the growing ubiquity of the internet, posing the first real disruptive threat to ADP and Paychex.

The two incumbents had long operated as service bureaus, handling payroll behind the scenes using batch-processing systems and often relying on client-server or desktop-based software. In contrast, a new generation of upstarts – Paycor, Paycom, and Paylocity, often lumped together as the “three P’s” – introduced user-friendly, web-native experiences tailored to the needs of the overlooked SMB segment, employers with ~50 to 1,000 employees who were drawn to the promise of a streamlined, all-in-one platform for handling both payroll and HR. Their founders had come up through the old guard – ADP, Paychex, and regional bureaus – where they’d grown disillusioned with legacy systems and high touch service models that no longer scaled, and reimagined how payroll and HR functions could be delivered more efficiently, just as the internet was coming of age. Paylocity and Paycom, launched in 1997 and 1998, were online from day one. Paycor, a slightly earlier entrant founded in 1990, began with a more hands-on approach but rolled out its first internet-based service by 1995. From their origins as online payroll processors, all three companies evolved into full-suite HCM providers, expanding beyond paychecks into time tracking, benefits administration, and performance management, each iteration drawing them further away from their clerical roots and closer to the center of the modern workplace.