HR Solutions

Does hiring a team of experts to help manage a portion of your business mean that internal staff should be terminated, or suffer a reduction in hours?  Business owners and executives often feel that it does.  This is an understandable concern, but rarely is it a justified one in the case of hiring a full-service HR firm.

Ask a group of 100 business owners, presidents or CEOs why they do what they do, and the answers will most likely be a version or combination of… “Passion to improve a product or process,”  “Passion for innovation,”  “Enjoy being the best in a particular field,”  “To generate a profit,”  “To improve the lives of employees and/or customers,” or “To be his/her own boss.”  Such aspirations are what drive the economic engine of this country, and while the routes to achieving them vary widely, every business has a few things in common.

If a business has employees, that business has problems. Why? Because employees are people, and people have problems! What types of problems accompany being an employer? To name a few: Complying with an ever-changing array of employment regulations and laws. Implementing measures to protect the business from employer liability. Identifying and rectifying profit-robbing trends like employee turnover, rising employee benefit costs, employee litigation and increasing workers’ compensation premiums. Safety training. Efficiently and properly administering the hundreds of required transactional tasks that in no way drive revenue or create organizational value.

All businesses must solve these problems to remain healthy. How efficiently these problems are solved will directly affect an organization’s ability to achieve the aspirations mentioned earlier Generating a profit, focusing on their passions, or enriching the lives of others.

What is the best way to solve the problems above? Many business owners rely on an internal staff supported in some capacity by outsourced resources. Occasionally the internal staff dedicated to all things “HR” is a team of one, perhaps a long-time employee with vast institutional knowledge of the business. It may also be a team of multiple employees, some of whom may be long-time organizational contributors, while others are recent hires. Regardless of the decided structure, all of these employees bring value to the business. If each person did not, his or her employment would be short-lived, and replacing that employee with an outsourced HR partner would be of no concern.

However, because these employees do add value to a business, the last thing a good HR partner wants is to displace them. The entire goal of a full-service HR firm is to provide a current functional HR staff with the tools necessary to do its job better, not to replace existing staff.

Before taking advantage of a PEO’s solutions, the average employer tries to solve his/her HR problems by relying on one, two or maybe three employees. Their HR staff wears “many hats,” some of which had nothing to do with HR. As a result, these 1-3 employees are familiar with many aspects of the business, but experts in none. Company policy, progressive discipline, employee benefit strategy, and other overarching business principles that create corporate culture are largely reactionary in nature. Usually, the designated HR team (or person) spends an inordinate amount of time on recurring transactional tasks that do nothing to drive revenue or better the company’s foothold in the marketplace. The business’s internal staff is responsible for managing countless vendors such as:

Suffice it to say, the “already outsourcing” list was usually a rather lengthy one. Phew, that is a lot for 1-3 people to manage!

Most business owners quickly realize that even with an internal HR component, they are already outsourcing many of their “HR” needs. Not only this, but the structure discussed above most often means internal staff is relegated to vendor management, transactional duties and implementing reactionary stop-gap measures when the need arises. A company’s existing HR team is capable of doing much more to help protect the business and increase profitability. Because this is the case, there must be better way to solve the HR challenges that all businesses face.

The better way is often to trust one professional team of subject matter experts. Rather than outsource various functions and products to multiple vendors, why not trust one team of experts that lives and breathes HR all day every day?

An existing HR employee who may have also been responsible for billing can focus on accounts receivable. Perhaps now that individual can make a few care calls to help improve client retention. Internal staff of a growing company can focus on succession planning. For one business, it may be a series of leadership development seminars, for another, it might simply be cross-training employees so that business needs are met without hiring and training new employees. Regardless, succession planning must take place in some capacity and form in order ensure the company is poised for growth should demand dictate it. Increased effort on recruiting and good hiring decisions becomes possible. With time spent on thorough applicant screening and selective hiring, turnover expense reduces.

An internal HR team can also focus on talent retention through training and leadership development. When a business owner outsources his/her human resources administrative functions, internal staff now have time to track employee satisfaction / engagement levels, long-term employee benefit strategies, and internal policies and processes that encourage efficient and compliant operations. The existing HR staff can also spend more time analyzing industry trends and benchmarking internal HR metrics to its competition.

Every business is different, and the most productive use of a current staff will vary. The areas in which a business needs outsourced help will also be different, as will the extent of assistance needed. The good news is that an HR firm equipped with the right personnel and expertise is not designed to replace existing employees. It is designed to provide them with the tools needed to do their jobs better.

One of the first questions on a buyer’s mind, regardless of product or service, is “How much is this going to cost me?” and business owners evaluating whether or not to utilize a PEO are no different. While there are a lot of options and differences among PEOs, it is a simple question to answer.  This article will outline some key elements of pricing that you should evaluate if you are considering using PEO services.

Breaking down the investment in terms of “per employee, per year,” using a PEO will range from about $1000 to about $1,500. So if you are a business owner with 15 full-time employees, your investment will be somewhere between $11,250 and $22,500 per year or $216 to $432 per week. While there will always be outliers on the high and low ends, the overwhelming majority of PEOs will fall within this range.

In FY 2014, PEOs’ gross profit margin was $1,295 per worksite employee; this figure represents the revenue remaining after all direct employee-related costs (salaries and wages, health/medical benefits, FICA, etc.) have been paid. Out of its gross operating margin, a PEO must pay all of its own operating expenses. So, in essence, the figure of $1,295 represents the amount PEO clients are paying for HR administration and all other services offered by their PEOs.

Although there are no strictly comparable numbers available for non-PEO clients, NAPEO has identified two different relevant statistics in recent publications, and averaged them in order to develop a comparison to the cost of HR administration for PEO clients:

• Bersin by Deloitte puts non-PEO HR spending at $2,112 per employee within companies at the lowest “maturity level”—those with just a compliance-driven focus in their human resources. Such HR departments are likely found disproportionately among small- and mid-size companies, of the sort that ultimately choose to hire PEOs. (Companies at higher levels of maturity have HR expenditures per employee that are up to twice as high as that lowest level of maturity).
• Bloomberg BNA reports that median budgeted HR expenditures per employee were $1,375 in 2015, averaged across all firms regardless of size.
• The average of the two numbers is $1,744. Given considerable economies of scale for larger companies (because they can take advantage of their larger size to spread fixed costs over their entire employee populations), this average almost certainly underestimates the cost for very small businesses which, as noted above, represent the primary clients of PEOs.

This study suggests PEO clients enjoy a 35 percent, or about $449 per-employee savings on HR administration, even as they enjoy a significantly higher level of services than tackling it on their own.

Engaging a PEO and evaluating the budget is like buying a computer: There are many options, and it may take some evaluation based on what you are looking for. A base model PC may start at only $500, but if you are into gaming or graphic design, your computer can quickly jump to a $2,000 to $3,000 purchase after adding all the bells and whistles like hard drive space, software packages, warranty protection or super speedy processing.

PEOs can be similar, with lots of options to consider.  There are companies that provide a basic service of payroll and insurance options, and that may be enough for some businesses.  There are PEOs that specialize in high-risk workers compensation verticals, and some that focus on technology companies. The real price for using a PEO will vary once you do a thorough comparison.

Do you consider your employees to be an expense, or an investment? Employers all across the U.S. are struggling with employee engagement, retaining employees and attracting talent.  According to a 2017 report from Gallup, 51 percent of the workforce is unengaged, meaning employers have a big challenge ahead. What benefits will they provide to attract them? How much time does your internal HR team have to take care of them if they are busy working on administrative tasks?

A study conducted by McBassi & Associates found that businesses that took advantage of the benefits that most small businesses do not have access to, like health benefits, perks, retirement options, training and technology, had up to 10-14% less turnover than similar size companies who did not use a PEO.  Companies that choose to invest in their employees will be the ones who grow.

Investing in your employees is critical. Investing in your business is as well.  The key revenue driver in any small business is the owner(s).  Is even one hour a week on transactional HR a good investment?  Let us do the math:  If you are a small business with $2.5MM in revenue and say a 10% profit margin, you net $250,000 a year. That means each hour of your time is worth $120.  I know this is a simplistic example, and it merely illustrates that each hour of an owner or key manager’s time should be spent driving revenue.

In conclusion, PEO services can range from about $750 to about $1,500 per employee, per year. The differences will range in the level of service provided. Consider what your time is worth and ask yourself: Is relieving yourself and your team of administrative HR duties worth the investment?