PEO: EBITDA Increase

With multiples higher than ever, how is your PEO strategically growing its EBITDA margin?
With multiples higher than ever, how is your PEO strategically growing its EBITDA margin?

 

In an industry where there is active consolidation in the marketplace, and high multiples with M&A activity, is your PEO driving high EBITDA margins or falling flat?   While there are many factors within running a successful PEO, we will focus on four critical drivers that can positively impact your company’s EBITDA; top-line growth, retention, pricing and service platform.

Top-Line Growth

Effective growth is a combination of a superior service platform coupled with an effective go-to-market strategy.  You cannot sell what you cannot deliver, so start there.  Once you have your service platform and insurance offering in line, it is time to focus your energies on an appropriate go-to-market strategy.  The key to an effective go-to-market strategy in the PEO space is to create maximum opportunity with minimal expense while yielding a high close ratio with prospective business.

Channel sales is the recommended approach within the PEO space.  With an estimated 5% to 7% penetration rate within the United States, there is a lot of white space to attack.  Utilizing an effective channel sales strategy will increase your opportunities exponentially without detracting from your bottom-line.

Hypothetically, let’s assume that your PEO has a sales team of 10 professionals and these professionals yield an average of 20 deals annually.  In order for your PEO to double productivity, without using a channel sales strategy, your sales reps will either have to double their production or you will have to hire twice as many sales people.  While there is always room for organic increase per sales rep, doubling productivity is unlikely.   Adding additional sales professionals to meet your goals will increase your overhead.  Additionally, it will take time for your new sales reps to become productive and there will be a certain amount of attrition during the new hire process that will delay result.

Now let’s assume that your company is going to utilize a channel sales approach.  By reallocating a portion of your sales reps time to driving new channel partners in lieu of direct hunting, you will increase your referral network for future business opportunities.   If each of your sales reps partnered with 2 new referral partners monthly and each referral partner brought 2 leads per month, your production will soar.  See the following example for the numbers:  10 sales reps X 2 referral partners monthly X 2 prospects per referral partner monthly = 576 opportunities on an annual run rate basis.  Assuming even a low close ratio of 10%, your reps would drive 57 new clients annually.  This production increase would come with zero overhead increase until a deal was closed, at which point you would be looking at roughly 10% of your margin or insurance being reallocated to the referral partner.   Channel sales is a low risk, low cost approach.

Retention

Client retention is pivotal to sustainable EBITDA margin increase.  If your company has high client attrition, increase from new sales are diluted through the backfilling of lost clients.  Add to that the cost and labor allocation to onboard and implement new clients and it is a losing proposition.  The two key drivers in a PEO business are sales and retention.  The lack in either of these areas is an indication of a systemic issue within the model and/or its personnel.

Client retention, and for that matter, pricing efficiency is dependent on successfully executing a meaningful business platform to your PEO customers.   A high attrition rate is generally an indicator for infrequent or poor service and consultation, a poor technology suite, insurance platforms that are not competitive and/or the lack of ability to drive positive results.

It is important to identify which space your PEO will play.  The model to successfully service a white collar book of business varies from that of a model to appropriate service a predominantly blue collar book.  Once your POE’s identify and vision are clear, build your talent and offering around the areas of importance to your clientele and your bottom-line.  Commanding a solid pricing point with your clientele is generally not an issue until service falters.    If your PEO is having attrition issues, have your staff create case studies with your top clientele, conduct exit interviews when a customer leaves, poll your staff on areas that can be adjusted and incentivize internal personnel on retention.  When you put the focus on retention and reward your talent for reduced attrition, you will start to move the needle in the right direction.  Take a look at your service model and talent distribution and make sure that it is positioned efficiently and has the ability to scale for future organic growth.

Pricing

Price correlates with value.  We have all heard the saying “don’t sell on price.”  This is absolutely true as you do not want a commodity sales professional setting poor expectations for the foundation of your client relationship.  Add to that the fact that if you sell on price, you are only as good as your last price.  However, don’t BS yourself either.  If your PEO is drastically out of market with price, without service that is head and shoulders above the competition, your retention and new sales will be substantially hindered.   If you are within 20% of the market competition, you can still grow your PEO successfully and drive an increase to EBITDA.

Depending on how your PEO is set up and which client verticals you service as a PEO, your pricing will be based on your efficiency and size.  Efficiency can be driven by optimizing your service approach with a scalable infrastructure and the right talent.  Competitive pricing with insurance will be dependent on how your PEO mitigates risk through the underwriting process and service of your clientele.  If your PEO’s underwriting and risk mitigation strategies are superior, taking an element of risk for yourself through a high deductible program is recommended.  Whether your risk is on the workers’ compensation side, health benefits side, or both, successful PEOs have better than industry average results.  This equates to better than industry average rates, which when appropriately applied to pricing, provide a competitive advantage on desired business.

Service Platform

The number one element of client retention in a PEO relationship is service.  Superior service trumps superior price (providing you are not drastically overcharging your clientele).   When a PEO has a honed and well-oiled service platform and team, retention increases, sales is provided a superior product to sell and the ability to price business at an appropriate higher level is achieved.  All 3 of the aforementioned benefits of a superior service platform will drive increase to your PEO’s EBITDA.

While many different service platforms have been successful in the PEO space, I recommend the following guiding thought when building or revamping your offering: maximize the usage and efficiency of your talent.  This means align your talent in positions and scope of duty that will maximize their efficiency and minimize their inefficiency.  An example of this would be in HR.  If you employ higher level HR professionals and tout a consultative proactive and reactive model to your clientele, having your HR Consultant focused and available is key.  Therefore, consider hiring Implementation Managers and/or Account Managers to help offload some of the tactical and account management duties from your HR team.  If your HR Consultant is spread too thin or is frequently unavailable to assist your clientele, it will not go unnoticed.  Consider a model that aligns talent with scope of work appropriately and provides your PEO with the ability to scale and not diminish in service if you lose a key internal player.

M&A

If your PEO implements the right framework and changes to drive an increased EBITDA margin, you will have positioned your PEO to reap the benefits of higher multiples paid for desired PEO acquisitions.

 

Rob Comeau is the CEO of Business Resource Center, Inc. a management consulting company that frequently works within the PEO space.  Business Resource Center provides industry expertise during PEO Due Diligence projects and also provides consulting to National and regional PEOs in the capacity of sales consulting, channel strategies, talent acquisition, platform review, insurance review, compensation design and review and more.   For more information on Business Resource Center’s offering and/or to learn more about how your PEO can increase its EBITDA effectively, visit us at www.biz-rc.com or you may email us at info@biz-rc.com.