UnicornHRO has roots that stretch all the way back to the infancy of modern software. The firm, which began in 1982 as Software Plus, was founded with venture funding, but failed to achieve more than modest growth until 1996, when Frank Diassi, the lead venture investor, took control and changed the company’s name to UnicornHRO. Diassi had originally invested in the firm based on a strong belief that human resources and payroll should be handled externally. (Thousands of American and international companies agree, as the business model of ADP, Paychex and other firms demonstrate.) To indicate how expensive a misstep it can be to mishandle payroll withholding taxes, consider this: the IRS charges a penalty of 10% per day of the payroll amount on late or misfiled returns. UnicornHRO is now self-funded, debt free and growing at a double-digit rate.
Once it evolved into UnicornHRO, the company began to move its business model away from its desktop orientation. First, it developed a line of client/server versions of UnicornHRO designed to allow the company to compete with ADP and similar firms. As the ASP movement dawned in the late 1990s, UnicornHRO saw an opportunity in the on-demand model. While competing with the major payroll processors, they discovered that many potential clients wanted an alternative to the batch uploads and mainframe processing that the major payroll providers rely on.
The problems were many. The mainframe systems were slow; they placed stringent restrictions on the data they could process: they weren’t able to respond well to situations where custom processing was needed; they weren’t good at replicating datasets between the company and the payroll provider. This led to situations where what a firm knew about the current status of its employee payroll and what the payroll actually was substantially differed. In the new world of SaaS (then still called ASP), companies were more willing to take over the task of data entry in return for more flexibility in what information they could ask the payroll firm to process. They also liked receiving more up-to-date information on payroll and HR, and more customization of reporting and special services. Recognizing these developments, UnicornHRO created an on-demand system based on a web-based intranet model. Then, from 1999 to 2006, they unveiled piece by piece their first true SaaS system.
The rollout had to share center stage with the Y2K frenzy that marked the arrival of the 21st century. UnicornHRO did well with consulting assignments that focused on ensuring that payroll and HR systems transitioned to the new millennium with a minimum of fuss and bother. Time spent in clients’ offices also uncovered large numbers of pirated versions of UnicornHRO’s on-premise products, making its new SaaS offerings even more compelling.
When the Internet bubble burst in the spring of 2001, the collapse also enveloped the ASP movement. Fortunately for UnicornHRO, the company did not suffer much; they had bet that HR and payroll services were a natural fit to the on-demand model, and the gamble paid off. Regardless of what was happening to other ASP firms, few of UnicornHRO’s customers were interested in reinstalling client/server or desktop software on their systems. While most firms seek to lower their payroll and HR costs, they don’t have the option of withholding employee paychecks and ignoring state, federal and governmental compliance regulations. UnicornHRO’s SaaS product continued to attract a steady stream of new subscribers and enjoyed prolonged double-digit growth. Meanwhile, growth in the on-premise markets slowed to single digits. By 2008, the SaaS side of the company accounted for more than 70% of UnicornHRO’s overall revenues, and while the firm has not discontinued its on-premise products, it no longer actively markets them; this side of the company is in what can be called maintenance/harvest mode.
Billing and Professional Services
While subscription contracts in the HR and payroll markets are typically multi-year contracts, UnicornHRO bills its clients on a monthly basis. (This is also the approach taken by competitors such as ADP.) In the basic model, the subscriber charge is based on the number of employees for whom payroll is provided, as well as the number of checks cut and other services offered; the pre-transaction cost is typically provided at a fixed rate over the length of the subscription. This model enables UnicornHRO’s customer to pay only for the services they are consuming. It works particularly well for companies that hire seasonal workers or see significant fluctuations in employee count. Depending on the services package being provided to the subscriber, costs per employee range from $10 to $25 per month.
As is expected for a company in this market sector, UnicornHRO provides its subscribers with a suite of professional services, including:
- Process consulting, which analyzes and documents the subscriber’s HR and payroll practices.
- Implementation and training, both on-site and remote.
- System configuration.
- Data integration and conversion.
In accordance with the numbers documented in The Softletter SaaS Report, UnicornHRO’s professional services package normally accounts for about 30% of the first year’s deal value, then drops off over the second and third years to a range of 10% to 15% of recurring revenue. However, as a result of both the increased customer contact and the trust that the company has developed with its subscriber base, UnicornHRO entered into the service bureau business as an outsource partner for its subscribers in payroll and HR data entry, management and processing.
To provide these, it has increased its staff and administrative overhead and used the knowledge it had developed from its professional services consulting to more efficiently manage and scale these new business endeavors. These new services provided an additional level of revenue per employee, adding on average about 100% to the subscriber’s monthly fee per employee. From the subscriber’s standpoint, this is a compelling value. UnicornHRO decided to stop short of becoming a professional employer organization (PEO), such as Insperity, which creates a co-employee relationship with its clients.
UnicornHRO also added an increasing menu of ’premium services‘ to the mix. All of these were paid for by withholding money from employee paychecks. These included:
- Garnishee management.
- FSA (federal student aid).
Combined, these additional services might add at most an additional $1K of revenue per year per client, and while not a major revenue boost, adding them was easy enough to do, as UnicornHRO already had the processes in place to execute and integrate them into their expanding services framework.
New Value Services
Building on the foundation now in place, the company introduced its next level of services, which focused on insurance options. As with the premium services, program payments come from withholding deductions from employee paychecks. The new offerings included:
- Workers compensation insurance. This was the first offered with the new level of services because it was easy to calculate. Compensation numbers are calculated on a worker’s class code and there is a specific rate for the premium based on the rate times the payroll earned.
- Property and casualty insurance.
- Auto insurance.
- Medical premium insurance.
- Supplemental insurance.
- Pet insurance.
UnicornHRO recognized an attractive rate of revenue generated from these insurance products. For example, for a particular medical premium package, the total that the employee puts in per withholding is a yearly payment of $300, with Unicorn generating a commission on that amount of $24 per employee per year. As more employees purchase extra services, the commissions generated from them surpass the revenue generated by base subscription fees; this in turn enables UnicornHRO to flatten and lower its basic subscription charges.
Obviously, this is regarded as a very good deal from the perspective of both the company and the employees. UnicornHRO found itself increasingly able to aggregate potential clients and negotiate attractive discounts from insurance providers. The company also came to the realization that by controlling access to it subscriber employees, it was in position to manage a unique asset. Every time an employee logged into the system to check on an HR issue or their payroll payment status, the potential existed for them to identify additional insurance, medical or consumer goods with special discounts and offers which, in a low-pressure buying environment, would be very attractive for them to consider purchasing.
There has been pushback from some of UnicornHRO’s client base. Most companies are used to buying insurance from traditional providers and a significant percentage are not comfortable with purchasing such policies from ’technology‘ or payroll companies. UnicornHRO’s record of accomplishment in this area is new and the company realizes it will take time to build confidence in and acceptance of this new business line.
To accelerate the process, the company has added a channel strategy to its sale mix. UnicornHRO is now partnering with healthcare brokers that offer the company’s HR and payroll services to customers in return for 20% margins on system sales. (The typical agreements are three to four years.) One of the main factors leading brokers to embrace these relationships is that they have seen their own revenue margins on healthcare services drop. Whereas in a year’s time a broker might earn as much as $20 per year per policy over an agreement’s lifetime, commissions have dropped to as low as 5$ for the same agreement. The opportunity to generate incremental revenue and open up new potential customer bases is compelling.
Building new professional services is actually very cost effective and can scale quickly in the right circumstances. All of UnicornHRO’s services are billed by leveraging its expertise in employee withholding. The company has not had to learn how to manage a whole host of disparate billing processes and procedures, but simply to do more of what it already does.
The experience of UnicornHRO illustrates how SaaS companies need to thoroughly explore new opportunities provided by the on-demand model. The ability to provide access to a highly qualified base of subscribers may have tremendous value to a company beyond its own products and services. It is important to think outside the technology box and analyze carefully where new services revenues opportunities may exist. There are many pleasant surprises to be found.