Skip to main content

“Power For Your People” is a condensed article provided by Inc. Magazine — the original, full article was featured in the August 2016 issue of Inc. Magazine

For more on the issue of PEO’s, register for the IMA March Breakfast Briefing, March 16th, at Ditka’s in Oakbrook Terrace . . .

What if there were one simple thing you could do to boost your growth rate by seven to nine percent, reduce employee turnover by 10 to 14 percent, and cut your risk of going out of business in half? And what if, as an added bonus, that one simple thing could also free up a big chunk of your time, time that you could then devote to important strategic issues, or spend with key clients and vendors?

That may sound improbable — and maybe even magical — but more and more owners of small and midsize businesses are discovering that when they retain the services of a “professional employer organization” (PEO) they do, in fact, realize such a positive impact on their businesses that it can seem almost like magic.

The numbers cited above come from an economic analysis commissioned by the National Association of Professional Employer Organizations (NAPEO), a trade organization that represents many PEOs. One of its goals is to educate companies about the PEO model, which is a form of outsourcing but with a novel twist that provides several advantages to small and midsize companies that sign on as clients.

With roots in payroll processing and HR outsourcing services, PEOs today can provide a wide range of payroll, benefits, regulatory compliance, and other HR services including strategic consulting. And they now provide those services to about 180,000 small and midsize companies that collectively employ more than three million workers and generate $156 billion in annual revenues.

Despite that impressive footprint, many business owners remain unaware of PEOs and the advantages they can provide. “I’d been on the HR policy beat in Washington for many years, including a decade at the National Association of Manufacturers and also spent time lobbying on HR issues and I really hadn’t heard about PEOs before I took this job almost five years ago,” admits Pat Cleary, President and CEO of NAPEO. “But once I understood the concept, I was an instant convert. It was one of the best business models I’d ever seen, and I still feel that way today — more so, if anything.”

Asked his thoughts on the main factor behind the higher growth, survival, and employee-retention rates enjoyed by companies using a PEO, Cleary doesn’t hesitate: “Focus. If you’re a small business owner, and you can focus on your business and your people and provide them with a really good suite of benefits, good things are going to happen. Your turnover is going to be lower and your growth is going to be higher because you’ve got the time to focus your energies there. To me, it’s an arithmetic issue. There are 168 hours in the week, and you’ve got to spend some of them sleeping and eating. The more of the rest of them you can devote to issues strategic to your business — as opposed to administrative headaches — the greater your opportunities for growth and success are going to be.”

Understanding the model

Today, outsourcing options abound. What sets PEOs apart is a unique concept: “co-employment.” Your employees remain your employees, but they also become employees of the PEO. That allows the PEOs to aggregate their clients’ employee bases into a large group, which in turn enables the PEO to go to market and negotiate much better rates for benefits than a typical small company would be able to realize.

There’s no need to worry about loss of control, because your employees remain yours in every way that matters. A client service agreement will spell out which responsibilities and risks belong to the PEO, and which ones remain with the client company. “When you work with a PEO, it stands side-by-side with you as the owner, and you actually offload some forms of risk,” says Paul J. Sarvadi, chairman and CEO of Houston-based Insperity. That can extend from compliance issues around hiring to potential legal risks around termination. Because PEOs are experts in all aspects of human resources, having a PEO in your corner can help you with any number of workforce-management issues even as its collective buying power allows you to offer richer benefits packages than you could afford to provide on your own.

Even businesses that are currently outsourcing one or two HR functions, such as payroll, through a conventional outsourcer have a lot to gain by consolidating other HR administrative functions with a PEO. That’s been the case for Frank Klavon, who has owned the Glass Doctor of Broward County (Florida) franchise for a dozen years. After working with a payroll provider for several years in a relationship he considered difficult and unresponsive, he decided to explore other options. He was also looking for help dealing with rising workers’ compensation costs. He got that, and more, when he signed on with a Florida-based PEO, about six years ago.

The PEO now handles Klavon’s payroll quickly and efficiently and provides workers’ compensation coverage for his employees at a lower rate than he’d been paying before. Additionally, the PEO manages the employee onboarding process and handles government reporting and forms. “I’m in the customer service business myself, and I appreciate the ease of working with the PEO,” Klavon says. “I consider this a very successful relationship.”

It is not unusual for small businesses that turn to a PEO to experience a net reduction in costs. “Because a PEO aggregates many small businesses, it not only allows them to obtain better insurance rates but can also provide access to offerings that might not be available to them at all on an individual basis,” explain Jay Starkman, CEO of Engage PEO, headquartered in Hollywood, Florida. “The PEO provides better services, streamlined with the expertise that only a company focused on those things can bring. Small businesses often see a net cost savings when they look at what they were really spending on those areas separately.”

Up and running

Another major advantage of PEOs is that they can provide a company with instant HR infrastructure, which can be a huge boon to a busy entrepreneur struggling to wear many hats. “What I call ‘regularly scheduled business interruptions’ are removed from their operations,” says Insperity’s Sarvadi. “They now have Fortune 500 level employee benefits that can help them attract and retain key people, and their overall business risk is reduced since being an employer is one of the biggest areas where business owners take risks.”

While the advantages PEOs offer make sense for any SMB, they may be especially relevant to growth-oriented businesses on the hunt for equity investments or debt financing to drive continued expansion. Increasingly, Sarvadi says, venture capitalists, investors, and lenders take a more favorable view of companies that have had the foresight to sign on with a PEO. “Obviously, if you are going to invest in a business, you look for anything that would improve that business’s likelihood and degree of success. It has taken some time for VC and private equity firms to fully grasp how dramatically a PEO can boost results, but it’s becoming more widely understood now. I think they also view the risk-reduction aspects of using a PEO as an important factor.”

Elliot Geidt, a principal at Redpoint, a Silicon Valley-based venture capital firm that has funded more than 430 companies (including Justworks, a New York City-based PEO), has seen an increase in the number of his portfolio companies using PEOs. “I like this move, because it enables my management teams to focus on building their core product versus focusing on administrative tasks,” he says. “And, a startup that uses a PEO can offer ‘big company’ benefits, which is important for retaining talent. I should also mention that PEOs are often the lowest-cost option for benefits, so my investment dollars go further.”

At one time, PEOs may have qualified as a well-kept secret. But that’s changing. The benefits are too numerous to ignore. Odds are good that if you aren’t using a PEO today, other companies in your industry are. That can put you at a competitive disadvantage, which is one more reason why you should carve out a little time to see what a PEO can do for you.

From a business’s perspective, PEOs smooth out what would otherwise be a wide range of cash obligations, such as big quarterly tax payments, employee benefits costs, and workers’ compensation deposits, which can often disrupt a company’s cash flow. Having regular, predictable costs for an array of services and benefits that you’d otherwise struggle to provide — if you could provide them at all — is another major advantage of using a PEO.

The PEO market is booming, with a broad mix of both regional and national companies offering differing lists of services. The IMA has PEO resources available through their partners at MIS and AcriSource to help manufacturers navigate the PEO landscape. Contact your IMA representative today to learn more about their unique resources and capabilities.

For more information, visit www.mis-360.com or contact Manufacturers Insurance Services of Illinois at info@mis-360.com or 855-607-6190.

X