Buried deep within Paycor's recent earnings call lies a tantalizing hint of a strategy that could reshape the HCM landscape. While analysts have focused on the company's robust sales growth and consistent margin expansion, a subtle shift in their embedded HCM strategy suggests a far more ambitious play: capturing the enterprise market through stealthy partnerships.

On the surface, Paycor's embedded HCM solution appears to be playing a supporting role, contributing a modest 2 points of employee growth in the second quarter. But CEO Raul Villar’s emphasis on “robust new sales among existing partners” and an “expanded pipeline of interested partners” hints at a far more significant development. It's not just about onboarding new clients; it's about tapping into the vast ecosystems of established software players and leveraging their reach to penetrate the enterprise market, a domain traditionally dominated by giants like ADP and Workday.

The real kicker? Paycor is quietly pulling this off while maintaining impressive margins. The embedded HCM solution boasts significantly lower sales and marketing costs compared to traditional direct sales, resulting in a margin profile that will only become more favorable as partnerships mature. Imagine: capturing high-value enterprise clients without the costly overhead associated with direct sales. It’s a game-changer, and Paycor seems to be mastering it.

But the implications extend far beyond margins. By embedding their HCM solutions within partner platforms, Paycor is forging a seamless and sticky user experience, making it difficult for clients to switch providers. It’s a classic case of winning through integration, a strategy that has proven successful in various tech sectors.

This subtle shift in Paycor’s approach also speaks to their agility and adaptability. While others focus on head-on competition, Paycor is taking a more strategic, collaborative route, recognizing that the future of HCM lies in integration and ecosystem plays. They’re not just building a product; they’re building a network, a powerful force that could reshape the industry power dynamics.

And the numbers back up this hypothesis. The average size of customers acquired through embedded partnerships is more than double Paycor’s overall average customer size, indicating their success in attracting larger, more lucrative enterprise clients. While the revenue impact remains muted in the current fiscal year, Villar’s anticipation of “more meaningful contributions” in fiscal 2025 suggests that Paycor is laying the groundwork for explosive growth driven by this embedded strategy.

Here’s where the hypothesis gets even more intriguing. Consider this: Paycor’s current list PEPM stands at $51, a 16% year-over-year increase, fueled by their relentless product innovation and focus on delivering value to clients. Imagine this PEPM applied to a rapidly expanding base of enterprise clients acquired through embedded partnerships. The potential revenue upside is staggering.

This is not just a story of steady, incremental growth. This is about a company poised to disrupt the market through a strategic shift that others seem to be overlooking. Paycor’s quiet embedded HCM revolution could be the catalyst that propels them from a mid-market leader to an enterprise powerhouse.

Hypotheses to Investigate

Embedded HCM will drive accelerated enterprise client acquisition and outpace overall employee growth. Track the contribution of embedded HCM to employee growth in subsequent quarters. If it consistently exceeds overall growth and the average customer size acquired through partnerships remains significantly higher, the hypothesis gains credibility.

Embedded HCM will drive sustained margin expansion, exceeding Paycor's overall margin growth. Analyze the gross margins and adjusted operating margins of the embedded HCM segment compared to the overall business. If the embedded segment consistently delivers higher margins, it validates the hypothesis.

Employee Growth Breakdown

Based on the Q3 2024 earnings call transcript, here's a breakdown of Paycor's employee growth:

Hypothetical Employee Growth Chart

The following chart illustrates a hypothetical scenario where embedded HCM drives accelerated employee growth for Paycor.

Paycor's story is one of quiet ambition and strategic foresight. While the market buzzes about AI and other flashy trends, Paycor is quietly building a network of partnerships that could redefine the HCM landscape. It’s a strategy that deserves close attention, for it may well be the key to unlocking a new era of growth and dominance.

"Fun Fact: Paycor's name is a combination of "pay" and "core," representing their focus on payroll and core HR solutions, which form the foundation of their comprehensive HCM suite."