ADP Automatic Data Processing Inc

Intuit Inc. (INTU) is positioning itself to benefit when hiring picks up.

The company, which makes software that helps small businesses keep their books, is setting its sights on payroll chores. For small businesses, handling payroll-including tax withholding and 401(k) contributions-can be a burden.

More than 20 million Americans get paid by small businesses. According to some estimates, as many as half of them receive handwritten checks.

That strikes Mountain View, Calif.-based Intuit as an opportunity. Two years ago, the company revamped its payroll software and acquired privately-held online payroll processing company PayCycle. Now, it plans to catch the next wave of expansion with Intuit Full Service Payroll, a software-as-a-service product that enables a small business to pay its staff by simply entering the hours each employee worked rather than using a bookkeeper.

"We're an online alternative to outsourcing," said Nora Denzel, general manager of employee management solutions for Intuit.

With unemployment hovering near 9.8%, now may not appear to be the time to bank on job growth. But Intuit says the companies its targeting - small businesses with around 20 employees - will likely see their work forces grow by 3% this year.

How quickly Full Service Payroll will catch on with these employers is another question. Recession and the cost of retooling software have weighed on Intuit's business. During its second quarter earnings call Chief Financial Officer Neil Williams conceded the payroll customer count was flat with a year earlier.

Still, analysts say Intuit is offering a compelling product that gives small businesses a service that was available to just the biggest corporations a few years ago.

"This is technology that a decade ago was only available to the biggest fish in the sea" said analyst Zaineb Bokhari of Standard and Poor's Equities.

Bokhari said Intuit is following its well-tested model of providing a core function, such as tax preparation, and then selling additional services for additional fees, such as electronic tax filing. Intuit will use the same approach with payroll by helping employers manage workers compensation insurance and similar costs. Employers can get started for as little at $9.99 a month.

Profit margins are attractive too. Payroll processing makes up the lion's share of revenue in the company's employee management services unit, which earned a 54.3% operating profit margin in its fiscal second quarter. That's much better than the 32.1% operating margin Intuit gets at its financial management solutions unit, which publishes QuickBooks.

On Wednesday, Intuit shares, which have risen 56% over the last year, rose 0.7% to $51.78, near a 52-week high.

Intuit is carefully targeting a "sweet spot" of companies with about 20 employees, says Denzel. The choice of potential customers helps Intuit skirt direct competition with Automatic Data Processing Inc. (ADP), Paychex Inc. (PAYX) and Ultimate Software Group Inc. (ULTI), which look for bigger clients.

Small companies offer plenty of business, Denzel said. According to the Small Business Administration, 5.4 million U.S. businesses had 20 or fewer employees last year. They employ a combined 20 million people with a payroll of about $750 billion.

A business owner must withhold taxes, pay state unemployment insurance and workers' compensation for each employee. In addition, about one-third of small businesses offer a health plan and one-in-five offers a 401(k) retirement plan. Keeping track of all of that every pay cycle is the duty of the proprietor.

The responsibilities are complex and potentially costly. About 40% of new small businesses owners get some kind of Internal Revenue Service penalty in their first year of business, said Denzel.

About a decade ago, Intuit began offering payroll accounting to complement its popular QuickBooks computer software. Intuit also offers the software though banks and accounting firms, although those companies usually brand the service as their own. Those segments make up about two-thirds of the nearly 1.2 million customers for its employee management services unit.

Online customers make up the remaining third and offer Intuit's largest opportunity for growth, Denzel said, Especially if the company can reach a business with a growing payroll.

"Our biggest competitor," said Denzel, "is the person who thinks they can do it themselves."

-By Steven D. Jones, Dow Jones Newsiwres; 360-834-1865; steve-d.jones@dowjones.com

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