Have a plan with metrics to understand when to scale and overlay that with growth trending to create predictability with your model.
When to scale a PEO
Plan, Grow, Flex, Scale, Repeat…
Overview: Scaling a PEO
For this article we will solely be looking at scaling a PEO in order to meet organic growth demand. We will not be covering acquisition growth and the scaling, rightsizing or synergies that can result from M&A activity. Scaling your PEO for growth will depend on a multitude of preexisting factors. These factors will include your infrastructure modeling of the staff to WSE ratio, the ability for your tech platform to be nimble, the geographic radius of your insurance vehicle and your service team’s required geographical presence.
This article will focus on strategic methodology to act as the precursor for scaling your PEO to meet growth objectives. This methodology will help protect your overhead from becoming too fat thus detracting from net profit. It will also assist with keeping your teams from running to thin and the problems that coincide with an understaffed PEO.
Step 1: Establish a Range
It is important to first identify your ideal service employee to WSE ratio. This of course will vary depending on your offering model. PEOs with a higher touch consultative model will generally have a lower employee to WSE ratio than those that operate a more high-tech remote service model. That being said, you should establish a range for this ratio that will act as an indicator for your ability to scale upon growth. This model should provide a range from 50% capacity to an ideal range to a +20% flex capacity. We’ll cover more what these numbers equate to later in the article but establishing a range will provide clarity as to when it is appropriate to scale and it will also provide insight into which of your business units are operating optimally and which business units you need to watch. For guidance on average employee to WSE ratios, you may find valuable information in NAPEO’s annual Financial Ratio and Operating Statistics Survey, which is available to NAPEO members.
Step 2: Growth Trending Provides Timing Clarity
Once you’re leadership team has established an appropriate range from which to base your metrics to scale, you will need to look at your sales forecasts in conjunction with your client attrition numbers. This information will provide your team with insight to help predict when to scale and ensure that you are ahead of the curve with new talent acquisition. Keep in mind that in the future, when your organization is appropriately rightsized, you may see a reduction in client attrition which will need to be factored into future trending analysis. Once your team has established an expected growth model, taking into account client attrition, you will better understand when your team will need to expand to meet your client demand. Variables to consider with this process should include the timing of geographic expansion, training and ramp up time and the potential for a rapid increase in sales. For instance, a rapid increase in sales could result from a regulatory change such as the ACA where employers north of 50 employees will need to provide an acceptable health benefits option to their workforce. If your PEO has a solid benefits play coupled with a payroll system that will track employee hours to keep your client in compliance, you may see an uptick that is greater than your year over year growth due to this employer deadline.
Step 3: Talent Acquisition and Employee Turnover
If your PEO is decimated because of an untimely resignation, odds are that you are not currently scaled appropriately. Your PEO should have teams of varying business unit life cycles. If every team is at capacity, you cannot afford to lose an employee. Plus your client retention will suffer due to the inability for your service teams to remain proactive with their delivery approach. If every team is at 60% capacity, your PEO is running heavy and your out of proportion overhead to GM$ is detracting from your ability to maximize your company’s net profit. Your business units (or departments) should have the majority of your teams sitting at the ideal capacity range with some emerging business units growing from your 60% of capacity range. This allows your emerging teams to pick up the burden of another business unit if a key employee turns over and provides capacity for a major uptick in sales. Assuming that your PEO has a steady growth curve, when 85% of your business units are at the ideal capacity with 15% of your business units operating within the 60% to 85% of ideal capacity range, it is time to start sourcing future talent. While I’m a firm believer that you should always be on the lookout for top tier talent, for the sake of argument, we’ll use the above scenario for modeling purposes. It is recommended that you utilize your existing staff within the positions you are looking to fill as part of the interview process. This will help identify any red flags on potential candidates, create peer buy in with a new hire and help paint a realistic picture of the day to day duties with potential new hires.
Step 4: Modeling Example
Now that we’ve established some modeling ground rules, we are able to get into the numbers and metrics of a proper scalable model. Please keep in mind that this modeling assumes that your insurance vehicle is not prohibitive of your expansion and that your tech platform will scale in accordance with your growth. For this exercise, we will be tackling the infrastructure and service team aspect of scaling your PEO.
For modeling purposes, we’ll assume that your business unit’s ideal client capacity is 50 clients. If your PEO had 10 business units servicing 485 clients you would be averaging 48.5 clients per business unit. However, by having business units at various stages in their lifecycle it provides clarity on how to scale your service team. In the below example, 60% of the business units are operating in ideal range, with two business units in the emerging stages and two business units at capacity.
In the above scenario, you have the ability to right size your two business units which are at capacity and bring up the two business units that are under capacity. By doing so, you would put the two units at capacity back into normal range and increase the emerging units to 40 and 45 clients, respectively. This examples provides the leadership team with valuable information. For instance, if we assume that the “flex capacity” is 120% of the ideal range, then we can conclude that these 10 business units, in total, can handle an additional 115 new clients before the whole group is at max flex capacity.
While it is true that a business unit could increase their client count above maximum flex capacity, keep in mind the cost associated with doing so. Maintaining business units at or above maximum flex capacity can equate to the following results:
- Increase client attrition
- Create a reactive servicing model
- Create employee burnout thus increasing your internal employee attrition
- Negatively brand your PEO due to poor client satisfaction
- Increase loss ratios due to under servicing teams
All of which will detract from your PEO’s net profit more so than having an appropriate overhead model that may cost more in the short term.
Let’s go ahead and take each stage (Emerging, Ideal and Flex) one by one to get a better understanding to their importance in your ability to service and scale.
Emerging
Having emerging business units is essential to growth, retention an excellence in service. When a business unit is in the emerging stage, it gives capacity for new employees to get up to speed and provides additional bandwidth for them to service an account. This is necessary when they are not as finely tuned as a more experienced business unit with systems, procedures and product/platform knowledge. Think about any time you started a new job. My hope is that you were much better and more efficient at that job when you left it than when you began it. Knowledge and experience create efficiency that will enable your business unit to operate at optimal levels. Give your emerging teams the time to develop so that they have sustainable production in the future.
Ideal
Having the bulk of your business units in the ideal range is, well, ideal. This range will allow your teams to operate efficiently, remain proactive, stimulate higher retention numbers and still allow for the capacity to flex during high growth times or as a result of internal turnover.
Having business units at ideal capacity allows for time for the more experienced business units to mentor the emerging business units. When your business units are over capacity, it does not allot time for this important factor. If your teams do not have the capacity to mentor the developing talent, the result you are creating is future weaker business units. This will detract from your ability to obtain and retain profitable business.
While the ideal range may vary slightly from business unit to business unit depending on the team’s ability and the number of WSEs per client, there should be an element of predictability within the ideal range. Identifying an ideal range will also provide clarity on those business units which may be underperforming and help a PEO head off a potential client attrition issue due to an underperforming team. When the bulk of your business units are operating within an ideal range, this will provide leadership with the ability to analyze and contrast results amongst these business units. This information will help provide insight into future modeling for the organization. You may also find that the ideal capacity may vary from State to State depending on regulatory compliance and/or differing insurance models.
Flex
The flex capacitor, I mean flex capacity allows for an influx of new business to be maintained in the short term without adverse results. This flex period will keep a PEO nimble enough for growth spurts and unforeseen internal employee attrition. This flex range is the cushion a PEO needs when predictive modeling doesn’t necessarily coincide with actual results. Having the ability to flex your staff gives you opportunity grow without impeding service and quality of results. However, it is recommended that even though with flex stages the PEO is dropping more to the bottom line, don’t remain in a perpetual stage of flex. By doing so, over time, it will result in the issues previously bullet pointed in this article.
STEP 5: Ratios
It is important, based on your growth curve, to know how many business units should be operating in the emerging, ideal and flex stages at any given time. This information will allow your PEO to remain ahead of the growth curve, yet not get top heavy with overhead and leave profit on the table.
Using the same example as before, this PEO has the flex capacity to jump from 485 clients to 600 clients before all units are maxed out at the 120% of ideal capacity. Knowing this information in conjunction with your estimated year over year growth will allow for insight into the timing of establishing additional business units. You should consider the ramp up time of new units before they are able to function at an appropriate capacity when factoring your growth cycle.
The beauty of the PEO model is that not all of your clients for the year come at once. They are spread throughout the year and normally you have indications of your new business through the sales process which provides some lead-time to start ramping up your recruiting process.
Conclusion
Operating your business units on a 3 tiered system allows for professional development at the emerging stage and the ability to offload a business unit at flex capacity. The ideal range optimizes your service offering and pays dividend in employee and client retention as well as towards the profitability of your PEO long-term. The flex range gives your PEO the ability to handle unforeseen growth spurts and internal attrition without negatively impacting your clientele. While there can be variances and different alterations applied to this type of model, hopefully this article has been thought provoking and provided you with some insight and conversation points at your next leadership meeting. With increases in the complexity of running a business for business owners, growth within the outsourcing sector should continue to increase. Make sure your organization is prepared for the growth.
Business Resource Center, Inc. works with PEOs of varying sizes and life cycles to develop customized metrics in order to quantify productivity and ensure the ability to appropriately scale the organization. There are many factors that impact how a model to scale is designed and therefore the article above uses a general format to scale a PEO. For a customized look for your organization and for more detailed information, you may visit us on the web at www.biz-rc.com or contact us at info@biz-rc.com.