Insperity company research – Moats & competitive advantages

In our previous video, we shared with you an interesting U.S.-based company with strong recurring revenue with a long run way, Insperity, which could be a long term compounder. In particular, we gave a quick introduction into Insperity’s business model, value offerings, growth strategy, competitors and operating and financial metrics.

Although Insperity is helped by a strong industry tailwind with long runway, moat and competitive advantages are crucial for Insperity to maintain its pricing power and fend off competition to maintain/improve its profit margins and returns on capital, particularly in the long run.

Today, we discuss what we see as Insperity’s moats and competitive advantages, which mainly come from:

1. Intangibles, particularly its:

   
   

   1. premium one-stop branding, due to its breadth and depth of services and level of care;

   2. good selling system and training, producing quality sales team to drive growth;

   3. people and quality culture, enabling premium service; and

   4. partnerships with other partners, generating value for Insperity;

      
      

2. Cost advantage due to economies of scale.

   
   

1A: Intangibles – Premium one-stop branding

Insperity is known for its premium one-stop services, in line with its targeted positioning, due to:

• the breadth of its services, where it serves as a one-stop provider of various products and services to cover most (instead of just some) of their clients’ needs, e.g. payroll, employee benefits, tax compliance, performance management, training and development, etc. In addition, it packages its products and services as different solution bundles (e.g. Optimisation for full service, Synchronisation for less services, and Acceleration for clients who want only the products but not the on-demand services) that could be customised for each client so as to serve the different market segments (small businesses or mid market) better.

  
  

  These result in Insperity being able to target a wide customer segment with high sales productivity for its business performance advisors (BPAs), adopt a Customer for Life Model by providing different solutions to the clients as they grow over time (resulting in high retention rates), and target the mid market segment better.

  
  

• The depth of its services, where its BPAs are HR professionals who understand businesses and would understand the client’s business deeply (instead of scratching the surface and providing generic solutions) to know the problems or best solutions to value add, resulting in great customer service and value added solutions;

  
  

• The depth of its products, where it constantly improves and upgrades the technology and value of its human capital management (HCM) software products and platforms, to provide more value to its clients;

  
  

• The high touch of service it provides, where it acts as a service company with a great technology, unlike some other competitors that are just technology companies trying to build a service organization, as shown by the various testimonials from its customers.
  

1B: Intangibles – Good selling system and training

Recognising the importance of the BPAs as the main service contact with the clients and growth driver for the company, Insperity introduced its Certified Business Performance Advisor program at C.T. Bauer College of Business/ University of Houston in 2012, to provide an 80-hour professional level program to train its BPAs as better advisors.

The program covers a rigorous curriculum of courses from finance to statistics to business ethics and management, to train the BPAs on various aspects of businesses so that they can be better business (and HR) advisers, and provide more values, to their clients.

This helps the BPAs to learn and perform better at work (leading to better staff retention), and increase their sales efficiencies and results, leading to more sales and branding (and differentiation from competitors) for Insperity.

1C: Intangibles – Quality culture, through people culture

Paul Sarvadi, the founder and CEO, is a big fan of people culture (and has written a book on it too). He knows the importance of grooming its own people and building up a good people culture in Insperity, as if he is not able to do that, he cannot expect its people to help other business to build their people strategy and culture.

This people culture results in Insperity’s employees become motivated to work and provide good quality services to their clients. This leads to Insperity earning very high gross profit and operating profit per client worksite employee (WSEE), exceeding the industry averages by 140% and 183% respectively for the 3-year period 2015-2017, and to Insperity winning top workplace awards in consecutive years (5 consecutive years of No. 1 on Houston Business Journal’s list of best places to work for), attracting great talent to further grow the company.

1D: Intangibles – Partnerships

Over the years, Insperity has been developing more partnerships with insurance providers (to procure better insurance deals for its clients) and industry organisations (e.g. Association for Corporate Growth, Vistage (providing advisory boards to companies), Institute of Management Accountants and CFO Alliance) to serve as their preferred HR services provider, generating more branding, leads and sales for Insperity. Partnerships take time to build and on this aspect Insperity has edges over competitors who do not have as wide a partnership network.

2. Cost advantage

Succeeding in the professional employer organisation (PEO) industry is partly about scale. Insperity, as one of the players in this fragmented industry with bigger scale, has economy of scale advantages over the smaller players in terms of:

1. better underwriting economics, by aggregating and spreading out the insurance underwriting risks over a larger, more well diversified risk pool;

2. complying with regulatory burdens due to the need to constantly update itself with the latest regulations and changes;

3. technology, by being able to invest more in better software and solutions for itself and its clients; and

4. bargaining powers with its suppliers (e.g. insurance providers) or partners.

   
   

As Insperity (and the other few large PEO companies) continue to grow rapidly to be even bigger, their advantages over the smaller competitors will become stronger and make them thrive even better.

How Insperity's Moats Secure Long-Term Competitive Advantages

Overall, we see Insperity as having some decent level of moat from its intangibles (premium one-stop branding, good selling system, people culture, and strong partnerships) and cost advantage, and could potentially be a strong long term compounder supported by the strong industry tailwind with a long runway. In the next few videos/articles, we will share more about the PEO industry, competition, risks, management and financials of Insperity.

If you have enjoyed this article, do like or share it with the others. In addition, do check out the full more in-depth analysis of Insperity’s moats and competitive advantages at our research platform (which have other existing and upcoming coverages on Insperity, and the other great compounders too)!

Disclaimer

This article (and associated report) is not meant to be a recommendation. The whole idea is to share with you how we evaluate businesses when we are considering becoming one of the long term owners. Now, even after putting in the work and taking the deep dive, we may come to the conclusion that this is not a suitable business to buy into or the price may not be right. Thus, we request all of you to use this purely for education/discussion purpose.

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