There are 4 Key Elements that Determine a PEO’s Value Proposition

A value proposition is your company’s proposed value to your clients. This value is measured to determine the strength and longevity of the client relationship. It determines if a PEO’s price is commensurate with, you guessed it; its value.

It seems simple enough, but often a company’s scope of service is mistakenly presented as the organization’s value proposition. A company’s value proposition can readily be defined as the results and benefits it provides to its customer. Therefore, the value proposition cannot be limited to the scope of offering.

The PEO model is a hybrid of outsourcing and consulting. This model utilizes an internal offering coupled with third party partnerships. The internal and third-party offering is then administered by internal and external talent. It is the combination of these four elements: 1) internal scope of offering, 2) third-party scope of offering, 3) internal talent, and 4) external talent that determine the PEO’s value proposition.

Growth, profitability, and sustainability hinge on the PEO’s value proposition. This article will discuss how all four elements require design, harmony, and execution to create a viable PEO. Beyond the value proposition, a PEO requires controls to ensure compliance and profitability. We will take a look at controls in a later article, but the emphasis of this post will be on the importance of a solid value proposition.

PEO Scope of Offering

The traditional PEO offering includes:

• Human Resource Services and Consulting
• Safety and Risk Management Services and Consulting
• Workforce Management Technology
• Payroll Processing
• Retirement Plans
• Compliance Assistance
• Workers’ Compensation Insurance
• Health Benefits Insurance
• EPLI Insurance
• Claims Management

While PEOs may offer additional services beyond the aforementioned items, this list is sufficient to illustrate the importance of the value proposition. The above scope of services is provided by the PEO internally and via third party relationships. The list is repeated below in figure 1 to illustrate this point.

Figure 1

As we review figure 1, it becomes glaringly apparent that the combination of internal/external offerings delivered by internal/external talent is essential for an appropriate value proposition within the PEO model. These four elements largely determine a PEO’s propensity for growth, profit, sustainability and viability within the marketplace.

Internal Elements

It is recommended that a PEO first focus on items within its direct control. This would include the design of the internal scope of services and the internal talent.

The PEO must design an internal offering that aligns with its chosen client segmentation. All facets of the PEO model are applicable to all PEO clientele. However, the emphasis will largely be determined by which industry verticals the PEO most often services. High level, a blue-collar focus will require adequate safety and risk management services, whereas a white-collar focus may have a greater demand on human resources consulting. Both HR and safety are important to every company, but the level of importance may be skewed based on the client segmentation. Payroll and reporting capabilities may be of greater emphasis for a contractor that requires certified payroll and job costing whereas a technology company where all the employees are salaried may not deem it as important.

Beyond the design and framework of the scope of services, internal talent is vitally important. A PEO’s internal talent is the executing agent of its value proposition. In a model where consulting is a pivotal part of the value driven, lack of talent will destroy the value prop. Hiring the right talent to execute the PEO’s value proposition is essential. The internal talent will often work with the PEO’s third-party relationship’s talent to provide a cohesive solution to the PEO’s clientele. Ultimately, the PEO’s internal talent must be adept at working together internally, working with the PEO’s clientele, and working with third-party talent to ensure that appropriate value is provided to the PEO clientele.

Third Party Elements

Third party elements that are common in the PEO model include: workforce technology, workers’ compensation insurance, health benefits, employment practices and liability insurance, and retirement plans.

Each of these elements come with agreements, price points, and external talent to support the internal PEO talent and its clientele. These third-party relationships become part of the value chain within the PEO model. The capabilities and limitations of these third-party offerings, become the capabilities and limitations of the PEO in these areas offered to its clientele. It is of great importance that the PEO choose the appropriate third-party products to add value to its clientele. Likewise, a third-party provider that lacks internal talent puts the PEO at risk. If a PEO and its clientele are not able to receive appropriate support, the PEO’s value proposition suffers.

A PEO’s profitability is also partially tied into third-party relationships. PEOs that have achieved certain economies of scale have greater purchasing power with third-party relationships. This allows the PEO, in many cases, to procure third-party products/services in a more cost-effective manner. The result is a greater throughput from gross to net profit due to lowered costs of doing business.

Moreover, a PEO may enter into third-party relationships with the agreement to work more intimately with the third-party talent. For example, a PEO with a high deductible workers’ compensation policy or a minimum premium health insurance policy may employ an internal claims liaison team to work closely with the claims management talent and underwriters of the insurance companies. These teams, both internal and external, have common focus to ensure appropriate care and cost efficiencies. Superior results equate to increased profitability for both parties and drive value to the end user, the PEO client and its workforce.

Quick Synopsis

It is the combination of a PEO’s internal scope of offering and talent coupled with its third-party scope of offering and talent which make up the engine to drive value to its clientele. A PEO that recognizes this will be better positioned for growth, profitability and client retention. Remember, sales should only promise what the organization can consistently deliver. A PEO’s sales engine is vitally important, but results will be short lived if the PEO’s value proposition isn’t up to par.

If a PEO is not winning in the marketplace, has poor client retention, or thin margins, it is likely that the issues can be traced back to some area(s) within the elements that drive the PEO’s value proposition.

Author: Rob Comeau is the CEO of Business Resource Center, Inc. BRCI is a business consulting and M&A advisory firm with an emphasis on the PEO and private equity sectors. To learn more about Business Resource Center, Inc., you may visit them at www.biz-rc.com or call us at (949) 888-6627.