Understanding ADP's WorkMarket acquisition

Den Howlett Profile picture for user gonzodaddy January 22, 2018
Summary:
Eyebrows were raised when ADP acquired WorkMarket, one of the leading SaaS-based contingent workforce management solutions. We assess what this means.

workforce contingent job
ADP, arguably the grandfather of cloud payroll services has acquired WorkMarket, number five in the contingent workforce management (CWM) space according to analyst estimates. In doing so, ADP dodges a shareholder activist bullet but also paves the way for rapid expansion of the CWM market.

Terms of the deal were not disclosed. We'll have to await ADP's next regulatory filing for clues on this aspect. Prior to the acquisition, WorkMarket raised some $66 million in venture funding, including a later stage investment from Accenture.

According to Albert Pang, CEO Apps Run The World, WorkMarket's ARR is $30 million, making it a very small but potentially important part of the ADP portfolio.

I'll leave the peanut gallery to guess about the acquisition cost optics.

What happened?

Late last year, ADP found itself in the crosshairs of activist investor Bill Ackman who dubbed parts of ADP as 'inefficient' when compared with the much smaller Paychex. Ackman lost that proxy fight. Even so, the back channel rumor mill suggests that the public airing of perceived weakness was something of a wake-up call for the ADP management, which has been shepherding the company through its own digital transformation.

Regular readers may recall the ADP v Zenefits spat which exposed market weakness at ADP, but which ultimately went away as Zenefits imploded following the stupidity of its former CEO. Even so, such publicly aired issues are a management distraction.

In the meantime, WorkMarket was aglow with plaudits as it appeared at a succession of 'cool' events, proselytizing the CWM concept, while garnering attention with analysts as an up and coming player in the compex HCM market. Work Market became an attractive target for ADP which, according to the press release accompanying the acquisition said:

ADP data shows that approximately 80% of U.S. businesses already rely on independent contractors and the number of contingent workers as part of the overall workforce is growing.

Whether that figure is right or wrong is open to some interpretation since different industries have different demands at different times of the year. However, there is little denying that managements are warming to the idea that business services are better viewed as a series of projects that require different skillsets and so, therefore, are better staffed through contractor arrangements rather than through a permanent (and, by this definition, less flexible) workforce.

My view is that CWM is a far from mature market, which, while touting flexibility and agility is really a smokescreen for unsustainable cost-cutting.

What about Workmarket?

On his personal blog, Fred Wilson, one of the most high profile Silicon Valley VCs and early investor in WorkMarket had this to say:

This is a bittersweet moment for me...

...The idea was to create a cloud based SAAS application to allow enterprises to manage their contingent workforces which were growing in size and complexity. It seemed like a timely opportunity at the time and it was. Eight years later the SAAS contingent workforce management market is in the hundreds of millions of dollars annually and WorkMarket is the creator and leader of it.

But like all startups, the WorkMarket story has a number of twists and turns. The market was a bit slower to develop than we had initially hoped and it wasn’t until the last few years that big companies started to include contingent workforce management in their SAAS budgets...

...And the contingent workforce market really exploded in 2016 and 2017.

But like all exploding markets, the expanding opportunity brought a lot of new entrants and buyers interested in getting into it. And one of those big companies, ADP, made us an offer we could not refuse, both in terms of the financial opportunity and the fit with their business. ADP has been helping enterprises, large and small, with human capital management solutions for decades and has the customer base, market knowledge, and capital to lean into this opportunity in a way that a venture backed startup never could.

(My emphasis added)

Overall then, a good result for investors.

What do analysts think?

I consulted Albert Pang and Naomi Bloom, both experts in the HCM market to get their assessment of what they believe this deal achieves. Pang is enthusiastic:

The purchase by ADP will help Work Market expand its reach in the $380M market growing at 5% a year through 2021. With ADP's considerable resources, WorkMarket will give SAP Fieldglass, Upwork and Beeline/IQNavigator a run for their money. Similar to its recent purchase of Global Cash Card, the Work Market deal fits into ADP's strategy of extending itself into the payment processing space. In the contingent labor market space, paying contractors promptly for their work is as important as the task of finding them in the first place.

For her part, Ms Bloom said:

I don't see how ADP does more than some reasonably robust interfaces, behind the scenes, and some UX harmonization over time given how different their object model and architectures are likely to be. I assume they'll focus on Vantage first as it's used by their larger (in ADP terms),  customers who are the most likely to need what WorkMarket does. I also assume they'll continue to offer WorkMarket on its own merits like they do many other acquired/built capabilities, e.g. background checking, tax filing, and benefits admin, which are offered to customers who aren't running on an ADP core HRMS or even payroll.

My take

Historically low rates of unemployment suggest that CWM might not be as attractive as it seems. But then recent figures suggest that job creation in the U.S. is declining. Savvy management will use CWM as a no-risk way of testing candidate suitability in key areas and, in the short-term, that might represent a better opportunity for the combined business than the pure 'agile/flexible' argument.

On its face, there isn't a great deal of overlap between the companies or, where there is, the impact is minimal in the context of the CWM opportunity.

Given WorkMarket's relatively small size, ADP will likely have its work cut out introducing the solution to its sales teams as the route to accelerating growth. But, as Wilson points out, ADP ticks all the right market and size boxes for this to be a success.

Pang's point about getting paid is well-made at a time when large organizations can and do dictate sometimes onerous terms to freelancers. ADP's long history and trusted status as a payroll provider should help it attract many more freelancers than the 300,000 WorkMarket current claims are on its books. From that perspective, ADP can act as a flywheel growth opportunity.

WorkMarket brings ADP a halo glow of adding cool services that are in demand but which also have enough development runway to be attractive as a market opportunity, but without being so large as to have anything more than a rounding error effect on the next few forthcoming financial results. In other words, it's a relatively low-risk investment on the P&L account.

I am less certain this combination provides the kind of market disruption implied in Pang's analysis. Why?

On the one hand, both ADP and WorkMarket have long-standing relationships with Workday, the runaway core cloud-based HR leader. That will continue. ADP also has a relationship with Salesforce and, in turn, a deal with FinancialForce. Taken together, those relationships provide ADP with an attractive story across multiple market segments. That's a powerful combination for a vendor that can claim 'Switzerland' status in one of the most sensitive elements of the HR market.

On the other hand, while SAP has its own challenges with SuccessFactors, its Fieldglass solution provides SAP with a 'single throat to choke' argument that large customers often prefer.

Finally, it will be interesting to see the extent to which the combination responds to continuing uncertainties around the status of U.S. migrant workers, a natural market for CWM providers.

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