Netprofitgrowth.com is releasing a five part series which will cover helpful topics regarding contributing factors to the valuation of a PEO. A new section will be released weekly until the series is complete. This five part series will include:
- Gross Profit: Sales and Scale
- Efficiency: Operations and Technology
- Liability: Legality and Loss Ratios
- Execution: Talent and Value Proposition
- Results: Leadership and Financials
Execution: Talent and Value Proposition
A PEO’s talent and value proposition are key components to determining the company’s valuation. The value proposition may be defined as the results it delivers to its clientele. While the value prop is made up of varying mechanics, it is the results derived from the value prop in which a client will use to measure the validity of the relationship. Talent is equally important. Talent, to a large degree, executes the value proposition. Some may view the value prop and talent as separate aspects within the model. We would argue that the two are interwoven. Each one cannot function without the other and optimal results are only achievable together. The combination of a well-designed value prop and superior execution via the PEO’s talent bodes well for a higher valuation.
Within the PEO model, superior talent is an advantage. In a world where the trend of automation continues, talent should not be minimized. Although automation and technology can help scale efficiency for the PEO, talent is a big component in driving the value proposition. The PEO model is abundant with consultative deliverables. Effective consultation to SMBs requires knowledgeable talent. Talent doesn’t come cheap, but it pays dividends in client retention, brand equity, profitability and business development. All of which drive towards achieving a higher valuation for the PEO.
The PEO model is an outsourcing and service model. Service, absent of talent, will fall short of client expectations. When reviewing the importance of talent within a PEO, the question could be asked: “what aspect of the business isn’t touched directly or indirectly by talent?” The truth is that every aspect of the model is influenced by talent. Whether that is the internal talent within the PEO itself or external talent contained within a partner company such as a technology or insurance provider. Talent will play a vital role in the success of a PEO and therefore should be at the forefront of importance for PEO business owners.
There are three primary avenues for securing viable talent.
- The first is to hire and groom from within. This requires training and will come with a learning curve but will likely cost the PEO less in salary for the beginning years. The risk is that the person doesn’t have a verifiable track-record and could possibly never achieve their potential.
- The second avenue is to hire industry veterans. This requires a selective process as there are employees that float from PEO to PEO. Rather, the hiring manager should look to entice a top tier performer within the industry to join the PEO. This approach has a dual benefit in strengthening the hiring manager’s PEO while simultaneously weakening competition. However, this approach generally comes with a higher price tag in the salary category.
- The third approach is to identify talent outside of the industry. This has been an increasing trend in the last ten years. More and more PEOs are verticalizing their approach and therefore look for industry experts within their target verticals. The benefit to this approach is industry expertise within a client segment focus of the PEO. The downside is the learning curve for a professional outside of the PEO industry.
Beyond selection of appropriate talent, a PEO must continue to develop this talent to create future leaders of the organization. In addition to training, the PEO will benefit from creating learning, well communicative teams, to effectively drive results. Training for the workforce should not be limited to the subject matter a PEO trains its employees. If that were the case, the workforce could only regurgitate what the PEO already knows. While it is important for the PEO to conduct internal training, it should also encourage its workforce to learn from outside of the company. This enables the employees to gain a wider perspective and additional knowledge which can be applied in its consultative efforts. When a PEO fosters a team environment with superior communication, that external knowledge can be shared among peers to create a stronger team. A team that communicates and consistently learns will drive better results than a silo structure of individuals. To learn more about creating a learning organization, click here.
Wise, communicative and knowledgeable teams provide the following benefits:
- Value proposition execution
- Sound operations
- High organic growth
- Superior financials
- Business sustainability
- Risk mitigation
- Compliance assurance
- Future leaders
- Higher business acumen
- Industry vertical diversity
- Higher profitability
Ultimately, a PEO that has a bench of talent will be able to scale beyond the owner’s personal reach. In other words, the PEO isn’t limited or dependent on the founder to sustain. A PEO that can self-sustain will yield a higher valuation.
Most familiar with the industry understand the generic PEO value proposition mechanics. This would include human resources, safety, compliance, payroll, workers’ compensation insurance, health benefits insurance, EPLI, tax filing, technology, retirement plans, etc. While many view these elements as the value proposition itself, it is the results that the combination of these elements deliver that is the true value prop. An SMB will judge the relationship based on the results the PEO delivered, not based on the PEO’s internal mechanics. A PEO could possess a plethora of deliverables at its disposal but if the SMB didn’t experience the benefits of these services, the PEO will fall short on retention. However, the mechanics of the value proposition, when designed appropriately, can create a competitive advantage for the PEO.
A PEO may identify what type of results it wants to drive to its clientele and then reverse engineer into the value prop mechanics to achieve these results. Better yet, if a PEO conducts case studies with its clientele, it can tap into its existing client base for market intel to determine what would be best received by its clientele. A PEO that can effectively deliver exactly what a client wants is a PEO that can charge premium rates and maintain high client retention.
The PEO value proposition has room for growth beyond the generic model. There are many other facets of business that a PEO could effectively provide for its clientele. Over recent years, a number of PEOs have diversified their offerings to include additional services beyond the aforementioned generic deliverables. This is a trend that is likely to continue. However, prior to diversifying its offering, a PEO should ensure that it has mastered the deliverables it currently offers.
When a PEO creates a workflow for its deliverables, it is better positioned to measure the suitability of each deliverable. In other words, a PEO that maps out its work flow will understand the time and capital required to deliver appropriate results. This process will shine the light on any areas that are costly to the PEO internally and not overly important with client retention or sales. Mapping out workflows will also allow the PEO to identify where it may become more efficient internally while driving the same high standard of results.
A PEO has many moving parts that make up the framework mechanics of its value proposition. It is important that these various parts work harmoniously and not in silos. A disjointed value proposition will cause confusion and can lead to poor client retention and increased liability. A PEO that fosters open internal communication and operates with a team mentality will often achieve higher client retention and increased customer satisfaction.
Ultimately, a PEO’s value prop should be viewed as the results and affect it’s had on its clientele. That’s how the PEO’s client is judging the relationship. An investor will likely ask how and why does a PEO “win” against competition. The drivers behind the answer to that question come from the value proposition and talent the PEO selects.
The 5th part of this 5 part series will be: Results: Leadership and Financials, due out next week. Stay tuned for more on the factors that determine the valuation of a PEO. Questions or comments? Feel free to use the comment section below and we’ll make an effort to respond promptly.
Author: Rob Comeau is the CEO of Business Resource Center, Inc., a management consulting and M&A advisory firm to the PEO industry. You may find more information on Business Resource Center, Inc. by visiting their website at www.biz-rc.com.