PEO Quadrant of Benefit
When a PEO relationship is properly executed, there are 4 parties which benefit; the client company, the client’s workforce, the referral partner and the PEO. Today, we’ll take a moment to review the elements of each and outline how a successful PEO partnership should operate.
The Client Company
As a business owner, I know fist hand the complexities that surround running a business. Unfortunately many of these complexities are not associated with generating profit for the organization. The landscape of doing business in the United States has become increasingly difficult over the decades. Some of these areas directly impact the organization and some are solely about remaining in compliance with State and Federal agencies. A PEO will help streamline efficiencies on both fronts.
- Compliance: Let’s start with the obvious; compliance. A PEO is well versed and equipped to help ensure that a company remains within compliance with varying agencies. While this is not the sexy aspect of conducting business, it is quite necessary. Failure to meet these compliance objectives will result in a detraction from a company’s net profit through fines, citations and lawsuits.
- Optimization: Many PEOs predominantly pitch the compliance peace. While that is truly important, it is not advisable to partner with a PEO that solely focuses on this area. A PEO’s consulting arm is going to revolve around human capital management and workforce optimization. Beit business, HR or risk management consulting, all elements will tie into a company’s workforce with systems, protocol and behavioral change management. Keep in mind that PEOs have a macro vantage point on industry verticals. They service many companies within the same industry and are able to see with clarity common threads of efficiency and deficiency. Having a partner that can guide your organization through the evolutionary business lifecycle can pay dividends on shortening the growth curve and protecting your organization from decisions that could produce inferior results.
Some examples of this type of consulting would be: Strategic Planning, HR Consulting, Risk Management, Health Benefits, Systems and Payroll and Workers’ Compensation.
- Strategic Planning: Having a macro look on your industry and trending, a superior PEO can offer guidance and value your organization by providing insight into best practices and sharing anonymous case study information of similar types of companies whom have already succeeded through the stage of business at which your company is currently progressing through.
- HR Consulting: Let’s assume that your current HR Manager has their MBA and 20 years HR experience. A PEO is not designed to replace your HR personnel. However, let’s also assume that your PEO HR contact has the same level of experience as your internal HR professional. An HR professional at a PEO with their MBA but 20 years HR experience in a PEO HR function has been exposed to a more diverse base of knowledge than someone whom has been at only a few jobs. The rationale behind this is that an HR professional within a PEO has the ability to analyze, consult and work with roughly 50 companies at a given time. This provides them with an expanded basis for the foundation of knowledge within the HR field. They are able to communicate industry trends, discuss multiple avenues to achieve your desired goal and are able to share valuable information that can only be gained by having insight to so many companies.
- Risk Management: Risk, Safety and behavioral strategies will keep your workforce safe, keep productivity high and protect your bottom line through claims frequency and severity reduction. Accidents are generally the result of poor planning, poor training and/or an unkempt work environment. None of these areas lean towards top productivity. Safety strategy should align with productivity goals, they should not be viewed as opposing forces. A Risk Management Consultant whom knows the importance of productivity and safety will help your team design a program that achieves both and simultaneously protects the assets of your organization; your people and your profit.
- Health Benefits: A PEO affords a company the ability to more properly underwrite a business through their masterplan policies. Often this may result in cost savings and increased coverage options. The healthcare industry is complex. Having a partner to navigate your company and workforce through this ever-changing environment will pay dividends on knowledge, coverage and expense.
- Systems & Payroll: A PEO with superior systems will provide insight into business metrics that may have not been visible to the company leadership in the past. They can handle ACA compliance tracking and reporting, provide insight into your workforce cost centers and handle the backend administrative aspects of payroll tax filing and ensure that you are within compliance for new hire paperwork. Many also provide a solid HRIS system that will give insight an organization to your internal personnel management team.
- Workers’ Compensation: This does not have to be a cost of doing business or line item expense for your company. Historically you have likely looked at this way and justifiably so. What return on investment have you ever experienced aside from coverage. The rub is that when you utilize your investment by having claims, your future investment increases due to your company’s experience rating. A top tier PEO has the ability to provide you with first dollar coverage but also give your company the opportunity to achieve a safety incentive rebate based on good loss performance. This loss performance is solely based on your company’s track record, not as part of a pool as in a captive. In addition, the benefits may outweigh those of a high deductible program since the PEO will take the claims first dollar but still give you the opportunity to save on the backend based on your good performance. If you are not risk adverse, some PEOs are now offering different deductible levels to lessen your upfront premium while still maintaining a back-end safety incentive rebate. The beauty of partnering with a top PEO is that their profitability strongly hinges on their client’s success in mitigating risk. This equates to a partner with aligned motives to keep your company’s costs down as their profitability depends on it.
The Client Company’s Workforce
Statistically a company that has been with a PEO for 1 year is 50% less likely to go out of business. Additionally, a company’s workforce attrition is reduced by 9% and 35% when partnered with a PEO. Simply put, a PEO’s model directly and indirectly revolves around human capital management. This means that a workforce will benefit from a company whom receives insight and best practices through their PEO partner. Depending on the PEO offering, the workforce can receive guidance in organizational development, safe practices, hiring, management, workforce analytics, safety bonus, compliance expertise and guidance, case studies, organizational alignment, policy guidance and insurance protection.
More often than not, the primary referral partner to a PEO is an Insurance Broker. Since a PEO has insurance vehicles within their model, this type of partnership makes sense. What is great about the relationship between the PEO and its referral partners is that it truly is a relationship of mutual gain. A PEO may utilize the referral partner channel to strategically take it to market and cast a wider net for new clients while maintaining a lower overhead. Conversely, an insurance brokerage, when representing a PEO, is able to differentiate its company offering with everything the PEO brings to the table at a zero cost proposition. This means that with all things being equal between two insurance brokerages, the one that represents the PEO has a leg up on its competition. The beauty is that the brokerage is able to now tout all of the services a PEO and by extension the brokerage can offer and it doesn’t detract from the net profit of the brokerage. If a brokerage were to offer these services on their own, there is a major cost associated with overhead expense either on salaries and/or retainers. In addition, to the offering differential, a PEO protects the brokerage’s net profit in other ways as well. Assuming a brokerage had $5MM in agency revenue that was derived from a workers’ compensation book, there is an overhead cost associated with servicing that book. Since a PEO handles all certs, waivers, renewals, etc. a brokerage could conceivably mirror their workers’ compensation book with a PEO without adding one internal headcount. With the average PEO retention rate nationwide of 90%+, a brokerage can rest assured that their book of business with the PEO is protected and can expect a longevity with the revenue stream.
The PEO offers solutions to the aforementioned three parties and when these relationships work properly, the PEO drives residual and sustainable net profit. When a PEO utilized a successful go-to-market strategy, they are able to tap into the referral partner network and expand their revenue while protecting their overhead, thus equating to increased net profit. When a PEO partners with good companies, they drive beneficial solutions to their clientele. When this partnership works well, the client not only helps brand the PEO through referrals but they also protect the PEO’s bottom line by outperforming their industry peers. The workforce, when safe and productive, will protect the PEO’s insurance vehicle and their increased productivity will grow the client organization which increased company payroll. Since a PEO’s charges are a percentage applied to payroll, increase payroll equates to increased profit for the PEO and when they are not leaking profit through increased insurance claims, they are able to offer future pricing considerations to their top performing clientele. A PEO’s profitability and sustainability are directly related to their ability to drive positive results with their clients, the client’s workforce and their referral partners. Likewise, all three of the PEO’s partners benefit greatly when a PEO is successful in achieving these goals.
A PEO isn’t an alternative insurance market, it is an experienced partner to guide an organization. A partner who shares the same benefits and liabilities as an organization to make the partnership work. A PEO is evaluating a company as much as a company is evaluating a PEO. Only when the partnership is equally weighted and both parties have aligned motives will this relationship sore. When it does, the future is bright and both companies will benefit from a lasting relationship of mutual success.
Article written by Rob Comeau, CEO of Business Resource Center, Inc. BRCI is a management consulting company to the PEO industry. Their full offering may be viewed at www.biz-rc.com.