Questions to Consider When Outsourcing to a PEO
Most small business owners know the frustration of spending more time than they want or should on non-revenue generating activities and so they outsource some part of their business – IT, accounting, marketing, among others. And to get to the point - managing HR in-house is an operation that requires countless hours and dedicated employees, and it can be very costly – especially to a small business owner.
From payroll and human resource management to benefits and compensation, small business owners can spend up to 40% of their precious day on these necessary but time-sucking tasks. The answer for many growing companies may be to hire one of the more than 700 Professional Employer Organizations (PEOs) in the US.
A PEO is responsible for basically becoming a company's human resource department. This includes job recruiting, managing risk, ensuring legal compliance, managing employee benefits such as 401(k) and health insurance, and payroll and tax administration. When these important tasks are not handled by the appropriate professionals, the business can encounter major legal penalties.
When a company chooses to outsource its HR management to a trusted PEO, it can re-allocate both time and money that can be (spent smarter and) dedicated to growing and maintaining the business. But when does it make sense to do this? When considering if you should outsource to a PEO or not, ask yourself the following questions.
1. How big is your company?
There is no magic threshold number to hire or not hire a PEO. Although, a general rule of thumb is to outsource when administrative processes begin slowing down the productivity of the firm. And this point is certainly different for every company. Also consider the composition of your workforce – companies that only offer benefits to a few key executives would not benefit from a PEO relationship.
Conversely, the sweet spot for a PEO is between 10 – 75 employees. This is the size where the PEO can be the most effective and help fuel growth the most. However, we all love working with entrepreneurs and startups and will gladly accept client companies of one person; we affectionately call them "onesies."
2. How much does a PEO cost?
Well, let's pause here for a minute. Is there a cost to having an HR department? Is there a cost to NOT having an HR department? The answer is YES - but which cost is greater to you? Like all professional services, the way a PEO prices services varies depending on the company. Traditionally, administrative fees range from 2% - 11% of wages or in dollar amounts, approximately $500 - $1,500 per employee per year.
I know, I know – this may sound like a large number – especially to a small business owner, but let's look at it from the flip side. Think about how much one HR Generalist costs; around here, it's about $60k - $75k a year – and that's just for ONE HR Generalist.
For example, let's say you have 10 employees. With a PEO, for about $15,000 per year, you and your employees can have access to a payroll specialist, a benefits specialist, a 401(k) specialist, a risk/workers' comp specialist, a controller, and an HR Business Partner. All of these people know you by name – and can walk you through something as simple as adding a dependent to your health coverage to discreetly managing a sexual harassment claim.
So, for the fraction of a cost of hiring one person (who only knows what he/she knows - at no fault of his/her own), by outsourcing to a PEO you have gained access to a high-end human resource infrastructure and applications, a well-coordinated, established system for handling all aspects of HR management, as well as subject matter experts who are highly-trained and well-versed in their service area. Sign me up!
3. How much control do you want over your HR functions?
A PEO acts as a business partner to the client company. If a business owner wants to control all aspects of a business and is not open to suggestions or following through on recommendations a PEO makes, then this probably is not the best route to take.
However, if you are on the fence on this point, consider this: when human resources is no longer handled in-house, those resources become available for more productive and revenue-generating uses. Employees are able to focus on other tasks and less money is spent on HR issues. Additionally, a reputable PEO acknowledges and understands that your business is 100% yours and will work closely with you to develop a plan that you are comfortable with and that will allow your strategic business goals and initiatives to be met.
4. What services do you need?
Most PEO companies offer a wide variety of plans that are flexible enough to work with the needs of any business. Looking for only payroll and tax administration? Not a problem! A true PEO can start with you with the most basic of services and phase in additional, more complex services as you grow to help attract and retain top talent.
Choosing the right PEO is very important and is a little like dating. Think about you and your workforce – how do you interact with each other? Some PEOs specialize in an online high-tech approach while others are focused on a face-to-face approach while others still are somewhere in the middle. You want to make sure the PEO and its subject matter experts will be compatible with you and your employees.
A 2014 study commissioned by NAPEO (National Association of Professional Employer Organizations) found that businesses that use a PEO grow 7-9% faster, have 23-32% lower employee turnover, and are 50% less likely to go out of business. So whether you are looking for an all-encompassing solution to your HR needs or just a supplement to your current people and processes, PEOs are able to offer products and services that address all of an organization's employee relations and administrative needs.