Unlock the Secrets to Scaling Your Payroll Business
Matt Vaadi breaks down how payroll firms scale beyond linear growth by increasing profit margins, not just revenue. He walks through a 12-point assessment covering leadership, processes, talent, and innovation, sharing Guru's actual scores and the gaps they fixed. The key: use existing low-code tools and APIs instead of building custom software.
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Welcome back, everybody, to another episode of Payrollin'. My name is Matt Baby. I'll be your host. And today we are going to talk about the 12 critical areas you need to make sure you have addressed to be able to grow your payroll company quickly and even potentially achieve scale. So we're going to start by talking about the difference between growth and scale. Then we're going to go into this scalability assessment that we completed at Guru and talk about what our grades were on the scalability assessment. I'm going to get a little raw here. I'm going to open up the kimono, talk about some of our weaknesses, some things we're doing to improve those, welcome your feedback on things you've done to improve those areas. Uh, for— from each of you, you can either reach out to me directly or we can talk at the IPPA if you'll be there. Uh, but looking forward to sharing some of this with you and helping you to think through some areas of your business that could look, uh, that you may need to improve in order for you to grow quickly and take things to the next level. Thanks for joining me. Let's go. All right. So when we think about the difference between scaling and growth, they're really— the two terms are used interchangeably and often a lot, but they are very different. Right. So when I think about growth, I'm thinking about, you know, increasing the size of the business. You know, that's typically we look at that in terms of revenue, number of employees, things like that. And usually those two things stay rather linear when I grow. So my revenue and my costs tend to stay kind of coupled when I grow. So that means that, you know, if I grow my revenue to $1 million to $2 million to $3 million, my percentage of labor may go down. The percentage of revenue as labor costs may go down a little bit, but generally not a ton over time. So this is very true of service businesses, which is what the overwhelming majority of payroll and HR companies are. We are service-based businesses unless you've built your own platform or created some IP. Whereas scaling means the ability to increase revenue and have that delta continue to get wider. So for example, using that same, you know, example as before, if my labor costs were 40% at $1 million and 39% at $2 million and 38% at $3 million, You know, we're looking more for the labor costs to drop by 5%, 10%, 15% at each of those and therefore start to create that exit velocity where over time that delta gets wider. So think SaaS businesses operate this way. Once you've got a major investment into the software, while you do have to continue to maintain, update, evolve, add new features, there is definitely less need for support, the better the platform gets. Now, that's very hard in our world. Again, if you're purely service-based, but there are some key areas that we can focus on. And if we can get some systems, processes, procedures, and maturity in place, then we can create that level of scale inside of a service-based business, especially in the year 2024, where even if you don't own your own IP, you should still be able to become what we call a tech-enabled services company. As a matter of fact, I'm seeing more and more companies raise money as tech-enabled services companies. I've seen 2 accounting companies raise money in the last 18 months that really their proprietary thing is how they leverage technology to serve the clients. So oftentimes, you know, one of these as an example, he strapped together 5 different platforms, Gusto, Bill.com, QuickBooks, and, and a couple others that I'm not as familiar with to create a unified reporting system and dashboard for their clients and a unified way of serving their clients by leveraging their APIs and some middleware. But they haven't really built anything proprietary. They're using all low-code tools, uh, with some customization to do that. So they're not a software platform company per se, but a tech-enabled services company. So I think this opens up a whole new window for us as payroll service providers to be able to do more in the tech space simply by leveraging existing technologies. But I think it's all important to understand why this matters. A, if you don't want to grow your business at all, it's probably not the episode for you because the entire topic's going to be about scaling and growth and all the things that come with that. And I do think it's important that you think through these things because as we start to talk on them, you're going to quickly see like these are just the fundamental issues of my business and I need to be able to grade and understand where I stand with these things. So I'm going to dive into what these 12 areas are and I'll, I'll share a piece of advice. When I was writing my book, I heard multiple CEOs tell me the same thing as it relates to culture. And then I've heard it about business as a whole ever since. And that's you need to get a B across the board. So a grade of a B across the board on the critical areas of your company. And so these critical areas of the company, if you can get a B across the board, and I'll tell you, spoiler alert, we did not, we're not even close to a B across the board on this, but we now have an action plan on how to get there. But if you can get a B across the board of these critical areas, then you're going to be much better set up for success as an organization. And for you, if you're the owner, if you're the CEO, founder, like for you to be able to step back and allow your team to run the company and, you know, do the more strategic things that you want to do, or pull yourself out of the business or put the business up for sale. Whatever your endgame is, this is going to help you drastically to get there. All right, so let's hit on number 1. Number 1 is strong leadership. Effective and visionary leaders who can steer the company through various phases of growth are crucial. They need to be decisive, adaptable, and able to inspire their teams. So there's 5 responses to each of these. 1 through 5, and I'll just kind of hit out where we landed. I'm not going to read all 5, but we landed at a 3. So we have adequate leadership with a reasonable vision and some effective decision-making. So those things that I like, that doesn't sound very compelling when you read it out loud. And obviously it's hard to give yourself a really high grade in leadership when you have the leadership team is the one taking the assessment. But we do have adequate leadership. We've got a really strong leadership team of 4 people who are, are good, solid individual leaders. We have a clear vision, so reasonable vision, and we do have some effective decision-making protocols in place. We use EOS, Entrepreneurial Operating System. We also use several other frameworks for decision-making, which I'm going to actually create some further episodes on. One of the most effective decision-making tools I use that I highly recommend to anybody is Charlie Munger's theory of inversion. I always suggest seeking that out. He always says invert everything. And that simple mental model and framework has helped me to make some major decisions in the course of my career that have been very, very helpful. And I can't suggest it enough. I think having frameworks and mental models for decision-making is a cheat code. And if you're just using your gut all the time, then that's not going to be a very very effective at it. So I'd say strong leadership, we put ourselves at about a B here. That 3 and above, I would say it's probably a B. Um, they don't use a letter grading system with this, it's 1 through 5. In my world, 5s are things that— rare achievement. You're sort of the Michael Jordan of what you're doing if you're hitting a 5. Uh, so we would never get a 5 in any of these. All right, so number 1 was strong leadership. Number 2 is clear vision and strategy. Companies that scale successfully have a clear long-term vision and strategic plan to achieve it, understanding your market, defining unique value propositions, and setting achievable goals. So for us, we again add a 3 here because we do have a defined vision and strategy, but we have some gaps in planning or execution. We oftentimes, you know, while we will see every quarter when we get together and review our vision and our strategy, team and any changes that may have to occur there. We see the progress we're making. We see all of the, you know, all the people are rowing in the right direction, but we definitely have some gaps from time to time. We've again made bad decisions. Sometimes we don't execute as well as we'd like. And so there's a good opportunity to improve there, but not a high area of concern compared to some of these others. The next up is adaptable business model. So You need to be able to adapt to changes in the market, scale up operations without significant disruptions. Now, this was a key area for us because last year we started growing even quicker than normal, and we did notice some struggles with adapting our operations, our team, you know, really just our infrastructure started to feel some, some breaks. We had some issues that we have not experienced before as a result. And so we gave ourselves a 2 here on adaptable business model. You have some flexibility but struggle to adapt to new situations or demands. Again, when it became like, okay, hey, we've got multiple sales reps out in the field, which we haven't had before. We've got a lot more implementations going. We've got, you know, things started to break, fractures started to occur. We have, and as we get down to its bottom, like started to put some things in place here where, you know, hey, infrastructure is everything to be able to adapt. And so whether that's as simple as having better defined processes in Trello, our project management system, implementation is a huge focus for us right now. The, you know, this Q1 and Q2 of 2024, the expectation is that every one of our services has a completely documented and ideally automation-based workflow inside of Trello to help to make sure nothing falls through the cracks and that we have more dedicated project management over each implementation. You know, as we've grown, the implementation process has changed and evolved. It used to be done by the actual specialists, the payroll specialists, the HR specialists. We added an implementation person at the beginning of last year. We gave that person a little too much autonomy and then no processes got created and/or, followed for that matter. And so we've had to kind of take a step back and say, all right, hey, here are the two people accountable to make sure that the process is created first and foremost, not just get the work done, to make sure that the process is created. And so, you know, one of the many learnings that we've had over the years is that the person doing the work is very rarely the right person to create the process, which kind of stinks in some ways. But if you go back to the Paul Abel episode from early PayrollIn days, you know, he talks about automating his business. It's a really fascinating episode if you haven't listened to it. I want to say he went from 50 employees to 13 employees through automation, outsourcing, you know, process improvement, etc. And one of the big takeaways from that was, hey, these people that are doing the work can't be the ones to automate, define, set up project management, etc. So we've got 2 people on the leader's leadership team distinctly tied to the multiple products and services we have. For those of you that aren't as familiar, we do payroll. We call it Simple Payroll, which is just basically payroll. Payroll Plus, which adds in the HRIS, uh, PEO and ASO. And so we've got 4 kind of core services and then our white label models. And we've got to have really well-defined implementation processes for each, especially those core areas. Our PEO is growing like wildfire, and that's an area that we need to definitely improve the processes because it's a little less mature of a business line for us. All right. So we've talked on strong leadership, adaptive business model. I missed one, I think here. Is that it? And then efficient processes and systems. Yeah. So efficient processes and systems. We've got a 2 here as well. So this is streamlined processes that can be replicated and scaled. Involves automation, efficient use of technology, and develops systems that support growth. We have some efficient processes, but overall lack of cohesion and consistency. Yeah, that's— those were the two words, were cohesion and consistency. Is why is this thing being done this way when one person handles it, and this way when another person handles it? Kind of goes back to the adaptable business model, in my opinion. So I'm not going to keep on that path because I gave that example with the implementations. Customer-centric approach. Now this one, you know, hits you square between the eyes because of course we're a customer-centric approach. Without our clients, we're nothing. But a focus on understanding and meeting customers' needs, you know, companies that scale effectively are often those that are deeply attuned to their customers and adapt to changing needs. We gave ourselves a 3 here because we do adequately meet customer needs, but we lack proactive engagement. And so that's been a big theme, uh, particularly of 2024, is like getting out in front of things. Stop playing defense. Last year we got a little bit on defense as we grew and some things started to break. This year we're getting back out on offense. We're being more proactive and, oh hey, I hear this client's got an issue. Let's escalate that immediately. Get some leadership team members involved, make them feel better, get them to a place of success instead of waiting for things to continue to crumble because everybody's too busy. We feel like we're at an adequate staffing level right now and people getting more comfortable in their roles and more things beginning to be automated. Now, not only does that approach, which, you know, the mindset has always been there, but sometimes it was just a bandwidth thing. So, you know, and I think the biggest thing there is still goes back to can we adequately automate things and give our clients access to self-resource, self-resources where they can handle the things they want and perform customer service at scale. So a lot of you are really good at this, better than us, where, you know, group trainings, webinars that are focused on, you know, alleviating potential questions before they come up, just doing things at scale so we can scale. You know, we noticed at one point I was like, look, did y'all just do 6 payroll trainings this week that were basically the same payroll training for 6 different clients? Why? Why were they not on a call together? We can address their one-off needs on a one-off call, but the core of that, 80% of it is the same. Why are we doing it 6 times when we could do it one time? And then over time, some of those can even be short videos, things like that. And so sounds very basic, but it's just stuff over time when your systems change, your services change. Like we had some of this years ago as things changed, it kind of fell off. And so we're coming back to that and saying, how do we train at scale? How do we improve the customer experience by being more flexible with how they receive the training, the onboarding, the ongoing education and validation of why they work with us in the first place? All right. So that was customer-centric approach. Strong financial management. Oof, this one is like, you know, since we started this thing, my least favorite area of the business, I must admit, is dealing with finance. I often joke, you know, QuickBooks almost got me divorced because I'll never forget sitting in the bonus room of my house working on a computer with my wife, who is like, like many small businesses, your spouse becomes involved in the company. She's trying to learn how to become an accountant. We don't know what the heck we're doing. We're trying to figure out, well, does a credit card, you know, do we post that to the books when we pay it off or when we charge it? Like, what do we even do? And so, you know, all these questions that we were trying to figure out answers to, and there was no ChatGPT 10 years ago, so it was a little harder to Google. But, you know, over time we've now got a finance team in place. We've got in-house accounting, out-of-house accounting and bookkeeping, and then, you know, CPA. But we still, I would say, are a 2 here because, you know, it kind of— when it gets into this, this involves strong— excuse me, this involves strategic investment and often creative financing solutions. And we just aren't there. So we have basic financial management, but struggle with strategic financial planning, which is interesting because I'm leaving the office here in about an hour to go sit down with a local accountant and CPA and just work through, you know, hey, here's what we have for our forecasting. I want a tighter rolling 13-week forecast. You know, here's how we're, you know, here's a look back at what we've been doing. The one piece I can't seem to get from any of my financial professionals is like, hey, how do these, you know, what are the areas of opportunities when you look at our books, when you look at our numbers to improve it? And they have been a little muddy. Again, we're a company that's raised money. We're a company that's, you know, we invested that money and operated at a pretty substantial loss last year as a result. And that was the plan. But it does get it muddy when you go to look at comparing it to a service-based business or even a SaaS company. What those metrics should be versus what they are when we're in a substantial burn mode. But the biggest thing for me where we need to improve and we're getting there is the strategic financial planning. So just knowing what's next, you know, we're not— I don't necessarily want a budget, but I do need a forecast that is accurate and up to date and can be updated when things change. So do we have a big customer payment coming in that we weren't expecting? You know, ERTC was kind of one of the main things that did that to us. Same, did we have a big expense pop up we weren't expecting? You need to be able to add that in. People turn over, etc., etc. So, all right, financial management, definitely some work to do, but a lot has been done since we— so, so filled this out in December, and I will say, you know, the plan itself, we've made substantial strides since we've done it. So I'm really excited about that. But next up is talent management, and boy oh boy, if you want to talk about one that hurts, being an HR company to give yourself a 2 on, man, this one stings, but you got to be real with yourself or you can't improve. So this is, you know, for us, number, the answer 2 was some talent management but struggles with retention and development. You know, the retention and development pieces just jumped out to me. Last year we made some bad hires, which, you know, created retention issues. Development is something, you know, one of those hires was supposed to be somebody who is going to be a trainer for our internal people. It was going to take on the develop— the talent development role internally. And so interestingly enough, that was a compounding mistake. We made a bad hire. So not only did that affect that role and we did not get that role fulfilled the way we had hoped, but then that individual was supposed to be pouring into others on our team and therefore we kind of fell behind on our internal talent management as well. And so we've made great strides there again, have kind of shuffled the deck recently out where people sit internally. I've started to take on a more proactive role in the talent management development and getting us back to some of the fundamentals when we were really good at this. And yeah, we've, we've already, I would say we're already pushing up to a 3, which is adequate talent management, reasonable retention and development opportunities. And I could see us being a 4 in no time just because we've got the playbook. We just, you know, this, this is a little bit of a snapshot in time moment. And, and again, if you think about when I filled this out, I filled this out in December of 2023, which was probably one of the lowest points of our company history. We were, from a morale perspective, we were struggling. Um, CS was struggling to keep up with the new clients. The, the, um, you know, sales team was still learning what they were doing. It was, uh, it was just a very, very quirky time in our history. And so, but you know, those are the times when you need to identify what you can and should be improving. And we really tested the infrastructure, which leads into the next one, scalable infrastructure. So the ability to scale up, whether it's IT systems, logistics, production, is essential. And we gave ourselves a 2, infrastructure with limited scalability struggles under increased demand. We just saw it firsthand. I've kind of hit on it ad nauseam, you know, these are the, these are the things that we struggled with, were meeting the increased demand of our customers. And again, since then, we're at a point now where we've settled into that is we sit here in March of 2024, 4 months later. But, you know, do I think the infrastructure has been fixed entirely? No, I just think that things have settled down a little bit. And so therefore we're we're handling sort of normal growth, if you will. So it's still a lot of work to do there. I don't think that we're quite at that 3, but we will be at a 3, if not a 4, which is strongly scalable in the structure in the next couple of months. Culture of innovation and continuous improvement is the next area of 12 things that make your business scalable. So that's what we're going through here are the 12 areas that could potentially make your business scalable. Help you to grow faster. You've got to have these things locked up. The next one is culture of innovation and continuous improvement. Now, this one is near and dear to my heart. This has been one of our sort of core focal points since starting the business. It's just making sure that we are— if you come here, you're— if you're uncomfortable in change, you're going to be wildly uncomfortable here because change reigns supreme. For better or worse, we are always trying to get better. And if getting better means changing a system, changing a process, changing a person, we're going to make that change. There's just no two ways around it. And so we had 3 on this, a moderate focus on innovation and improvement, but not consistently applied. I think the application part and the consistency were just the only thing holding us back here from being a 4, which is strong culture of innovation and continuous improvement. We're bordering on that. We've got people that embrace it. When we don't, we coach them out of the organization or they just quickly realize it's not the place for them. All right, next up on the 12 things that make a business scalable and ready for growth is robust marketing and sales. And, you know, this is really having effective marketing and sales strategies. This is one of our strengths. We have adequate marketing and sales. We have a— we are effective in our current scope but not aggressively scalable. Uh, and I, I think that, you know, if I'm to look at this and be self-diagnostic and where those areas are that take us to 4, we're probably bordering on a 4 right now. Our lead, everything from lead generation to how we're following up with those leads to the quality of the process that we're running our clients through has, has been consistently improving. We just have the right people in the right seats on the marketing and sales team. And I can comfortably say this is a strength of the 12 things in here. Same with the next area, networking and partnerships. So building networks, forming strategic partnerships, We gave ourselves a 3 here. Again, good network and partnerships, but not fully leveraged for growth. You know, when we look at partnerships and how those shake out, you really want to make sure that you're investing the right amount of time and energy into the right partnerships. So not all partnerships, which is one of the areas where we kind of tend to, you know, maybe we're spending too much time prospecting for new partnerships instead of actively nurturing and growing the ones we have, which is a mistake you could make. Partners, you know, we believe firmly, as I've discussed in this podcast over the years, in the 1 1 11 model. So if we can sell one partner, they might sell us 10 clients and, you know, we can either, you know, refer business back, we give them commissions, we give them rev share, whatever they're comfortable with, or just the goodwill of knowing that their clients are being well served and vice versa. But this is an area that You know, we're not fully leveraged for growth, but we're damn close. It's something where we excel and our team is awesome at building networks and partnerships. All right. So we are at, let's see, culture of innovation and robust marketing network. So we only have one more left here. And legal and compliance awareness, understanding and adhering to legal and regulatory requirements in all operational areas. And so, you know, again, we're at a point with the the PDO where we've got a lot of different requirements in a lot of different states. And those, man, for those of you that don't do a PDO, just don't do it. It was a, it's a massive investment of time, money, energy, resources. It's like you're already subject to MTL, which has been a hot topic in payroll lately because the amount of, you know, the amount of licensing fees, the amount of attorney fees, the amount of the time and energy we spent. I mean, we had to hire a part-time compliance specialist just to focus on the PEO licensing to keep up to date with this. And that's got us to adequate legal and compliance management, meeting the basic requirements, certainly with a lot of room to grow there. And so I think, you know, obviously you want to always be as proactive as you can. As most of you know, the PEO operates very similarly to how a payroll company does in that,, you know, when you go to book a new client, they're not just in one state anymore, they're in 5, 10 states when you go to book a 25-life group. And so now we have to look into the licensing requirements on each individual state every time we add a new client, it feels like. And so definitely is something where we put the right people and systems in place to make sure that we've covered the basics and we need to get more advanced with some of our certifications and licensing to get out in front of that and be an industry leader. So for us, we, you know, we scored, you know, somewhere in the middle of the road. We're not a B just yet across the board, but we're working towards it. We have action plans for each of these. But I thought it'd be interesting to share this. And I did actually turn this into a scalability assessment you could take if any of this was interested to you. It's not a sales tool or anything for us. There's not a lot of meat on that bone, but it was just something that I thought was interesting. So we put it into a form. So those 12 areas again are strong leadership, clear vision and strategy, adaptable business model, efficient processes and systems, customer-centric approach, strong financial management, talent management, scalable infrastructure, culture of innovation, continuous improvement, robust marketing and sales, network and partnerships, and lead client experience. So if you can get a B across the board in all these things, you're going to be well positioned to grow. I mean, think about that, that touches everything you need be concerned about with your business. And, you know, as payroll bureaus, this is a great opportunity for us to kind of look at the company like a, like a real business, like maybe some of our peers from outside the business would look at it and to have that focus of, you know, let me operate this like a SaaS company, like a tech-enabled service company so that I can achieve some of those outcomes we talked on the front end. It's not just about growing, it's about creating that delta in that growth so that the business can be more profitable. To either reinvest those profits into more growth, to bring more home, to pay your people better, whatever your thing is you can do if you can nail these 12 things down. And so I hope this was helpful to somebody out there. If you want that assessment, just drop me a note. It's matt@guru.co, G-U-H-R-U-O.co. We'll probably put it in the show notes and email it out to those that are on the list. And again, it's time. I should not bury this till the end of the episode, but this— I put together all this content for you for free. It's costing me my time, my energy, but to you it's free. So all I ask from you is that you abide by the gentleman's agreement or the lady's understanding, and you go to our YouTube channel. Just search out Guru on YouTube, G-U-H-R-O-O, subscribe to our YouTube channel. That's it. That's all you have to do. It'll take you 2 seconds. You can do it right now. And it just lets us know that, hey, there's goodwill behind this. When we create something of value to you, you provide us with just that little bit to help us know that we should keep continuing to create. And also bonus points if you can just smash the 5-star on your Apple Podcast player or on Spotify or however they have it on there now. Just to let them know as well that this is a podcast worth listening to. Thank you so much for joining me today. I hope this helps you to grow your business. I appreciate your time.
