ADP to Not Enter Pension Check Processing Business ...

Case Type: new business.
Consulting Firm: Liberty Mutual Consulting final round job interview.
Industry Coverage: HR & business service; software, information technology (IT).

Case Interview Question #00353: The client Automatic Data Processing Inc. (NASDAQ: ADP) is a global provider of integrated computing and business outsourcing services. Headquartered in Roseland, New Jersey, United States, ADP offers a wide range of human resources (HR) management, payroll, tax and employee benefits administration services for approximately 570,000 clients.

The client ADP is very successful in the payroll processing business, allowing other companies to outsource their entire payroll function. Recently, ADP is considering an expansion into the business of processing pension checks other for banks and financial institutions. Does this service extension make sense for a low-cost producer like ADP? And how can the client ADP best penetrate this new market?

Possible Answer:

The crucial question to this ?launch a new business? type of cases is how the pension checks are currently being processed for other financial institutions (in-house by fund managers and banks or out-sourced to other service providers) and why.

It turns out that virtually all financial institutions which disburse checks on a regular basis process them in-house and are relatively cost inefficient in doing so. This however, does not necessarily present a market opportunity on the basis of cost reduction. The check processing fees are an attractive profit center for all but the smallest financial institutions because they can pass the costs (plus a huge margin) on to their clients.

Since the check processing fees are a relatively small part of the total fund management expense, the margins can be very large without customer complaints. This makes the sub-business of in-house check processing very attractive to many of the potential customers of the proposed outsourcing business.

Another factor which makes this service extension unattractive is the importance of accuracy and timelines in check disbursement. The financial institutions would lose a great deal of goodwill if their ?out-sourced check? processor screwed up, and they had to explain to thousands of upset pensioners that it was another company?s fault. Spending a little more to have it done in-house was considered prudent by many fund management institutions.

Note: The check processing business is not always cost driven (i.e., low cost might be critical to small employers but quality may be more important to fiduciary service providers) and that a cost center for some potential clients (businesses) might be a profit center for others (financial institutions).

Source: http://www.consultingcase101.com/adp-to-not-enter-pension-check-processing-business/

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