Vitalwork Case Study: Paychex, Inc.

Sustaining Excellence at Paychex: Living Up to Great Expectations

by Dan Heffernan and Kimberly Kelly

published in Journal of Excellence, August 2005

Stockholders, Wall Street analysts and business publications all agree that Paychex, Inc., a leading national provider of payroll and human resource services for more than 500,000 small- to medium-sized businesses across the United States, has been and continues to be a rare model of predictable double digit earnings growth. Shareholders clearly expect sustained if not improved results, reflected by price-earnings valuations ranging between thirty and forty. But the reality of organizational life is anything but static in a 10,000 employee company with 80% of its employees located in 100 geographically dispersed offices throughout the United States and the balance in multi-functional support organizations in Rochester, New York. Paychex client demands are extensive and expanding; they pay Paychex to free themselves and their businesses from time-consuming, constantly changing administrative and compliance burdens ranging from tax regulations to human resource processes and employee benefit laws. So while small businesses can focus on their own profitable growth, Paychex races to design and deliver a growing array of complex products and services.

This article describes how officers and organizational development teams at Paychex are leveraging leadership training to ensure it lives up to the great expectations of its shareholders and clients. The focus will be on initiatives within the operations organization and its use of leadership development programs to respond to potential internal and external threats to financial growth. Since operations leaders invested significantly in compulsory leadership development programs in addition to those formerly offered as part of the standard “University of Paychex” curriculum, we will examine why and how this was done, and how it worked, so organizations can evaluate similar approaches.

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Company History & Context for Leadership Development

Chairman and CEO Tom Golisano founded Paychex in 1971 using $3,000 cash plus credit cards and loans from friends and family. He took the company public in 1983, and led the company to year-over-year earnings growth of 20% to 30% for two decades. Client base expansion, strong relationships with referring accountants, highly utilized new services and financial stewardship fueled stock splits, dividend increases and enviable debt-free cash flow. During the 1990s, the stock value increased by 700%, and since every full-time employee owned options, wealth accumulation was enjoyed by many employees. Tom, who retired as President and CEO but remains Chairman of the Board, reached billionaire status years ago, and many employees are 401(k) millionaires. Employee stock options granted in 1997 had more than tripled in value as Paychex entered the new century.

Admiration for Paychex leadership and performance abounds. Forbes recognized it as a “best managed company” based on shareholder return and CEO performance. Paychex earned a place on Fortune’s “Most Admired Companies,” Business Week’s “50 Best Performers,” The Wall Street Journal’s “Shareholder Scoreboard Honor Roll,” Fortune magazine’s “100 Best Companies to Work For”, and Training Magazine’s “Top 100 Training Organizations.” Morningstar consistently calls Paychex one of its top low risk long-term investments in its category. Standard & Poor’s added Paychex to its 500 Index in 1999. Institutional Investor Magazine recognized Paychex CFO John Morphy as one of the best CFOs in the technology sector, based on a survey administered to a diverse mix of over 1,500 analysts.

Rapid growth had formed a culture in which senior leaders had expected results simply by repeating past behavior. Senior operations managers earned credibility and promotions through execution within one function—delivering responsive, timely and accurate payroll service to small businesses in their markets. They believed the Paychex business model, ethical standards, commitment to shareholders and instinctive decision making, would always translate into sustained return on equity. Several of these senior and executive managers had moved “up the ladder” at Paychex over many years and saw this trend first hand.

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The Functional Environment

The operations function at Paychex had expanded significantly just prior to the leadership development initiatives. All non-sales departments that provided either direct service to clients or internal service to front line staff were moved into operations. Operations would now include 7,000 service personnel in 100 field locations as well as almost 2,000 in Rochester, NY providing complex product support, new product development and Information Technology support to over 500,000 clients throughout the United States. The leadership of this broad team included five Vice Presidents, 25 Directors and a management staff of about 250. This created the need for an experienced operations leader, and Mr. Golisano selected former Frontier Communications President Marty Mucci, who came to Paychex with a proven record of success in a complex service organization.

The Problem

Paychex’ long and sustained growth and expansion provided outstanding career opportunities for decades. It supported that by installing a training center in 1988 which grew into the University of Paychex, supporting all training efforts, both centralized and distributed for all disciplines, sales, operations, and management. The manager track helped sustain the supply of new managers largely by training up from within staff and also integrating about 15% of managers recruited externally. While that had been adequate in the past, the inexorable growth, expanding complexity of products, and the business environment overall demanded more from operational leaders. And in the newly consolidated Operations function, it was also clear that the disparate and geographically separated functional groups did not jointly plan or interact unless reacting to a crisis--behavior that didn’t fit with Mucci’s definition of leadership, and that signaled probable work redundancies and an organization slow to react to new challenges as a team.

External and internal events compounded the need for internal change. The national economic malaise following the events of September 11, 2001, the technology bubble burst and two major acquisitions coincided with the accumulated impact of successive product launches to rapidly introduce greater complexity and slightly slower growth to the business. While earnings continued to grow at double digit rates, they settled down from sizzling 30% quarter-over-quarter rates to about half.

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For some, all of this change was invigorating and an opportunity. To others, it was too much too fast. For all it was a challenge, one that inevitably led to performance gaps that, although rarely noticed at the client level, added internal stress and reduced efficiency. Paychex needed to upgrade its methods and people to meet new challenges and capitalize on future opportunities. Key divisions needed to work as teams instead of independently, managers needed to interact more with front lines, new ideas needed to replace limited thinking, and managers at all levels needed to be accountable for creating new norms for behavior, beginning with senior leaders.

Mucci’s observations were as simple and straight as Main Street Elmira, New York, his home town. “We were already a great service culture, but we needed to take things up a notch. We needed a clear vision and managers to integrate their ideas, look for growth opportunities and productively challenge each other.” Senior managers were specialists at managing local payroll service organizations. Now they needed to proactively lead by solving problems and collaborating with a multitude of managers and functional partners. New leadership development programs needed to augment the tried and true management courses that taught basic business planning, performance management, client service delivery and employee development.

Mucci had seen a similar need at Frontier and, at that time, used an outside partner to build and deliver a leadership development program to address this need. Mucci’s instinct was to use this same outside partner and program to attack the problem, a common practice in leadership development. However, the first attempt to deliver the program to Mucci’s senior managers was not successful. The participants, many of whom had come up from within the company, resisted the facilitator and references to outside experience. To them, it was out of their comfort zone and they felt disconnected from their current learning process and development mechanisms.

Mucci listened to their feedback and remained open and committed to making this work. He then asked the internal management development team to work with this outside partner to convert the program to fit the Paychex environment and business needs. If this program proved successful, it would cascade down to the next level of almost 250 middle managers over the following two calendar years. The management development group was then a team of five consultants with broad backgrounds in training and instructional design, military, sales, payroll, product and operations management. Together with the outside partner, the team worked with Mucci to outline expected results, and later outline learning objectives for the program.

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Expectations for short-term results

In the short-term, the team agreed upon expected behavior patterns that could be observed or measured that would lead to results. Senior managers would:

• accept the personal challenge and accountability to function at higher levels, including working together proactively to plan and consult, instead of waiting for executive direction or react to problems
• constructively and proactively challenge VP level decisions, and
• offer thoughtful strategic suggestions for growing the organization.

Long-term results expected

In two to three years, the team hoped to be able to tie behavior change to accelerated financial growth. In addition, vice presidents would be free to invest more time in strategic planning, as senior managers accepted more day-to-day operations accountability. Finally, the culture would be described as dynamic, with open dialogue the rule and employees at all levels empowered to make the right decisions for clients, employees and shareholders.

Program Learning Objectives

The team agreed upon three main learning objectives.

• Set clear expectations of leaders as being accountable for creating and role modeling an environment of open dialogue and non-defensiveness.
• Improve leader self-awareness and expose limited thinking that prevents growth.
• Teach strategies and practice skills for engaging in difficult conversations that promote strong interrelationships between functional groups.

Visible to everyone in the company, Mucci rolled the dice with the program. “We needed new growth opportunities, which could only come about with leaders who adapt well to change and take ownership of relationships with their peers.”

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The Solution: The Leadership Development Programs (Exhibit 1)

The management development team collaborated with the external partner to build a multi-phased program. The internal team would first raise self-awareness through assessment tools and peer collaboration exercises in a three-day program known by its acronym, OMLP (Operations Manager Leadership Program). The partner team would then facilitate difficult conversations in two additional three-day programs called “Vitalskills I and Vitalskills II,” designed to overtly challenge their thinking and beliefs. One external coach would function as both individual executive coach and as an intermediary between key executives and their senior managers, coaching and encouraging authenticity, vulnerability, honesty and openness within each key relationship. This coach was selected based upon her unique ability to observe and vividly describe elusive interpersonal dynamics as well as catalyze relationships at the executive level.

Employees expected great leaders to “walk the talk,” so before 25 senior managers completed the battery of assessments, evaluations and development planning inherent in the programs, Mucci and his executive team of five vice presidents needed to do the same. Each vice president worked with the management development team to discuss behavioral profiles, distribute and debrief 360-degree management and leadership evaluations, and draft and approve Individual Development Plans (IDPs). The executive coach would challenge and guide each executive in one-on-one sessions after the IDP was drafted. While the vice presidents completed this process, their direct reports—the senior managers—started the OMLP program.

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Phase 1: Assessment & Preparation

• Complete and debrief the McQuaig Word Survey
• Complete LPI
• Complete 360º Survey

Phase 2: OMLP & IDP Sessions (Rochester)

• Priorities and Expectations
• Synthesis of Assessment Data
• Practices of Successful Leaders
• Coaching
• Individual Development Planning
• Examine current state

Phase 3: Vital Skills 1 (Rochester)

• Create new thinking
• Commit to unprecedented results
• Build solutions through open dialogue and collaboration
• Manage from the future

Phase 4: Vital Skills 2 (Rochester)

• Practice crucial conversations
• Empower the organization to create results
• Build solutions through open dialogue and collaboration

Phase One: Assessments & Pre-work

To prepare for the program, managers would complete the McQuaig behavioral assessment and ask their subordinates, peers and others to complete a custom 360-degree management evaluation as well as the Kouzes and Posner “Leadership Practices Inventory,” which was licensed in for a third party perspective. Project managers would describe the logistics of completing and distributing the surveys during conference calls with all attendees. One key aspect of this phase was making sure a sufficient number of peers and others completed the surveys. One leading indicator of future program benefits appeared at this point—several key leaders claimed to have insufficient contact with their peers to justify a fair evaluation.

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Phase Two: OMLP & Individual Development Planning

Phase two of the program brought field managers to Rochester, NY to join corporate operations managers for the first three-day program. The agenda was packed. It began with Mucci setting clear expectations for their leadership. He stated a clear vision—to be the premier provider of our services in the marketplace. He wanted them to improve results by empowering employees and aligning their work around this vision in a learning, inquiring and open atmosphere. “To make this work,” he would say, “we need leaders who are prone to healthy conflict and accountable for changing things that may be uncomfortable.” He also challenged his leaders to make sure their own leadership teams were top notch.

Mucci and his five operations vice presidents, who added their insight to his words, left together after answering a few questions from the managers. The hard work of culling through assessment reports and collaborating with peers and a management developer began.

After taking turns facilitating brief lectures on the research and methodology of each assessment, management developers paired off with participants to listen to career aspirations, frustrations with leadership and teams, mediate conflicts and draft their development plan. A part of the program not introduced in advance, the collaboration exercise, provided participants the opportunity to learn from each other:

• During the session, managers presented a composite of how they spend their time to peers. Peers were encouraged to challenge the presenting manager on how they spend their time. Common themes are:
  • Managers were doing work that, many times, could have been delegated one level down. The discussion centered around how this might undermine and de-motivate their managers.
  • Managers often were not spending sufficient time on functional or strategic work because of poor delegation.
  • Managers were not spending enough time teaching and mentoring their managers how to improve managerial skills.
  • Managers spent too much time analyzing numbers and not enough time communicating goals, gauging progress toward goals, and celebrating wins.

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Participants used classroom and evening hours to read their behavioral and leadership surveys. Then, managers completed a “reflection exercise” to assimilate the data into its most critical components by doing the following:

• First, they thoroughly reviewed each report for their strengths and natural talents and recorded their findings.
• Next, they looked for patterns or themes that emerged from all four assessments.
• They realized first hand how their communication can be interpreted, and misinterpreted, by others.
• Finally, they considered how they could best leverage their strengths to benefit clients, shareholders and other employees.
• They repeated these steps for development areas as well as potential blind spots.

They selected a critical few strengths and development areas on which to focus. Management developers consulted with them to draft the development plans. Visiting field managers then took the opportunity while at corporate to meet with their vice presidents to review and approve their development plans. The others scheduled their IDP approval sessions for later dates.

Phase Three: Vitalskills I (Exhibit 1)

In the next phase, Vitalskills I, managers participated in conversation sessions unlike anything they had experienced at the University of Paychex. On paper, the program appeared simple. After a brief monologue on inference, the external partner asked participants to reflect on questions from the agenda he selected out of order based on his diagnosis of individual and group pathologies. After individual reflection and journaling, groups would discuss their responses together, and then the outside partner would facilitate conversations with the entire group.

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Favoring reflection over instruction and journals over training manuals, the outside partner applied the philosophies of Peter Senge and Chris Argyris and, with nonchalant empathy, took aim at his participants at just the right time during their conversations. He challenged individuals when he witnessed self-imposed powerlessness, lack of interpersonal communication skills, conflict avoidance or complacency.

The organizational development team saw their role as getting people to believe that past success did not translate into predictable future success. By the end of the first program, our managers made definitive commitments to each other to achieve unprecedented results, and to engage in important, difficult conversations they had been avoiding.

Phase Four: Vitalskills II (Exhibit 2)

Vitalskills II offered concrete skills from the book, Crucial Conversations, by Patterson, Grenny, McMillan, and Switzler, to help with the challenges our managers faced after attempting to break out of their functional isolation and into more genuine relationships with those around them. Managers pinpointed their fight or flight tendencies and practiced tough conversations during the session. The internal and external facilitators drew upon over 50 years of facilitation, business, training and subject matter expertise to offer a profound learning experience. As one participant explained, “Having an internal senior trainer and an independent outsider was crucial. They kept us on track and focused on the real issues.” Another described this rare talent combination as key to enabling managers to have difficult conversations with a clear view of their own motives and limitations. “(The outside partner) helps you understand your own style, how you view things, how this may color your actions, and helps you identify the ‘stories’ you tell yourself.”

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Results

A key measurement of results is improved operational and financial performance. Over the last two years, Paychex has reached and maintained record levels of client satisfaction and retention, driven by Operations team initiatives. Financial performance directly related to this leadership development program is elusive to confidently measure given the nature of the intervention, especially in the short term. However, Paychex has continued to achieve record levels of revenue and income.

Since the goal was to change leadership culture, the team decided to measure results using a comprehensive participant survey and their own observations of senior manager behavior. It was fairly clear even before the survey was deployed that the program was having an impact. Just after the program started cascading to middle managers in all operations functions, our operations vice presidents asked us to complete the project in one year instead of two. They felt it would be easier to set and enforce expectations across the organization by ensuring everyone got the same message. Executives agreed unanimously to accelerate the program. The team would need to train 250 middle managers in one year without losing the collaboration and safety created in smaller groups.

The Survey

The survey measured whether the program achieved its objectives, leadership skills were developed and IDPs were effective. Open-ended questions were also asked to prompt verbatim responses. Fifty-six of sixty eight senior and middle managers surveyed (82%) in all operations functional areas responded. The team used two five-point Likert-type scale, one for the skill development questions (Strongly Agree, Agree, It is Too Soon to Tell, Disagree and Strongly Disagree) and another for overall program objectives (Definitely True, True to a Large Extent, It is Too Soon to Tell, True to a Small Extent, Definitely Untrue).

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Leadership Skill Development

Overall, 88% of managers strongly agree or agree that their leadership capability improved as a direct result of the program. The vast majority of managers (88%) believe the program accomplished its objectives for developing leaders. A staggering 51 of 56 managers (91%) say that, as a direct result of the program, they now have more frequent difficult conversations about important business issues. This section consisted of twelve questions relating to leadership skills. A few examples include:

• I am more motivated to address critical business issues “head on” that I avoided in the past.
• Because of the program, I work more closely with my peers and company leaders to improve results.
• The program had a significant impact on my personal growth.

Verbatim Comments

The most revealing segment of the report was the responses to our open-ended questions:

• If you could change anything about the leadership programs, what would you change?
• What was the most effective experience that helped you become a better leader?
• What leadership or management topic or activity would you like to see offered?
• What additional comments or suggestions would you like to make?

Based on verbatim comments, about a third of respondents credit the self-awareness assessments and development planning (OMLP) activities as most critical to their growth. Another third directly credit our outside partner, and the final third credit the Crucial Conversations curriculum and (directly or indirectly) its facilitators.

Observations of Leadership Behavior Change

Almost one year after the senior managers completed the OMLP and Vitalskills programs, Mucci has seen a renewed energy and level of accountability for results. “The senior managers are working as a team to drive results. Field operations, centralized product support, and information technology are working as a unit to align themselves to make things happen. They are communicating up more, challenging the status quo and accepted practices, and taking risks to try new ways to achieve a higher level of performance for our clients and shareholders. It is an exciting time for us.”

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Conclusion

Companies enjoying predictable, long-term financial success generate high expectations from stakeholders for ongoing performance. But success and growth introduces greater complexity and the need for collaboration and proactive problem solving between new and growing functions—new leadership capabilities. Carefully structured leadership development programs can ensure performance is sustained by clearly communicating changed expectations and teaching strategies and skills for adopting new behaviors. Using multiple behavioral, personality, management and leadership assessments offers the best opportunity to isolate the right development themes. Effective programs need to attack beliefs and attitudes, not just capabilities. Executive behavior either drives or undermines efforts to improve leadership culture, so their development planning should precede programs aimed at senior managers, and coaches should be selected for their interpersonal savvy and ability to establish rapport and deliver poignant feedback. Program results can be monitored by observing behavior changes and surveying participants several months after the program about its usefulness and impact.

But, above and beyond building these recommended components to your organization’s leadership development program, keep in mind that leadership development programs are not one-size-fits-all. Transplanting a program from one organization to another takes collaboration internally and externally as well as customization to the organization’s culture and values to ensure the message is not rejected by the receivers.

The process of changing a leadership culture is arduous. In the end, setting clear expectations about desired behaviors, getting interdependent teams together and ensuring genuine participation, exposing and unraveling inference and limited thinking, and holding leaders accountable for their development can accomplish the objective. Paychex operations and organizational development teams are betting that shaping these cultural dynamics—proactive problem solving, open dialogue and accountability within interdependent senior management teams—will sustain operational performance and exemplary financial results.

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Exhibit 1: Vitalskills 1 Agenda

Topic - “Examining How Our Thinking Limits Our Performance”

• Consider the information from your McQuaig profile. When does “doing it your way:”
  • get in your way?
  • create problems or challenges for others?
  • limit what you might otherwise take on?
• What might you need to “see” about “your way” that would open up new ways of getting things done? (Inference Exercise).
• What are the “stories” you tell yourself when “your way” is not effective?
• Do you believe that the environment at Paychex allows you to be yourself, or do you find that you adapt to fit in to be successful?

Topic - “Creating A New Way of Thinking That Can Lead to Unprecedented Positive Results”

• Examine several ways of “seeing” that limit our interactions and constrain our relationships (Missing Distinctions that Limit Possibility Exercise).

Topic - “Committing to Unprecedented Positive Business Results”

• What conversations will you promise to have before VS2?
• What requests do you need to make?

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Exhibit 2: Vitalskills 2 Agenda

Topic - “Managing From the Future You are Committed to Being Clear about: What is Important to You, What You Truly Want, and What is Really Wanted”

• From last session,
  1. What did you take action on?
  2. Who did you speak with and what did you talk about?
  3. Has it made a difference?
• In the context of accountability, where is a breakthrough needed related to the strength of a working relationship? Describe the situation and behaviors you see that you may need to develop or demonstrate.
• What crucial relationships are currently marginal or unacceptable which, if they became acceptable, would drastically change your view of what is possible? Think in terms of miracles.
• The “eye of the beholder,” the house of “what is important…to you” – revisiting the Path of Inference. Where is it that you cannot be trusted to do the “right thing?”
• When does “what’s important to you” get in the way of “what you truly want?”
• When does “what’s important to you” get in the way of “what is wanted?”
• What are you willing to let go of, in order to deliver “what is wanted?”

Topic - “Crucial Conversations” – Setting the Table

• Creating safety, developing mutual purpose, maintaining mutual respect, and arriving at mutual understanding.

Topic - “Crucial Conversations” – Defining the Opportunity

• Building or reviving a network of support. Who can you partner with where it requires an expansion of the relationship? Who could be a resource if you built the relationship? Which critical relationships are in need of repair and why?
• What are the conversations you avoid or cannot have effectively now, in which you need to develop proficiency? Identify which “crucial conversations” skills will need to be mastered.

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Required Biographical Sketches

Dan Heffernan is a Director of Sales, and formerly Manager of Management Development at Paychex, Inc. He has over 20 years experience working for and consulting with Fortune 500 and mid-sized companies in the areas of leadership development, integrating strategy and business process, and sales management.

Kimberly Kelly, Director of Corporate Training at Paychex, Inc., heads the company’s award-winning Training and Development Center. With over 15 years of training and development experience, Kimberly provides leadership in organizational analysis and performance gap identification, and acts as an internal management consultant for more than 500 Paychex managers and supervisors. Together with her team of 68 training professionals, Kim provides a wide range of training resources including classroom instruction, development planning, online learning and performance support.

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