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Making the most of your PEO
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April 26, 1999: 3:56 p.m. ET
Small businesses that outsource admin. functions should clearly define their goals
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NEW YORK (CNNfn) - It's been nearly a decade since professional employer organizations (PEOs) came on the scene as the hot new trend in corporate outsourcing, providing small business owners with a low- cost way to cut personnel problems down to size.
For many, it was the solution they were looking for -- a third party administrator that would manage the company's benefits, payroll and administrative needs, while freeing up internal resources to focus on core competencies.
But for others, industry insiders acknowledge it hasn't been the panacea they had hoped for.
"What's happening is that there was some dissatisfaction [among clients of outsourcing firms] and in many cases there was revealed a lack of clarity on the part of the client," said Frank Casale, president and founder of the Outsourcing Institute. "I think that clients, though, are starting to realize that just because a PEO is an expert in the field, it doesn't mean you don't need to be specific in telling them what your company wants."
Passing the buck
For the most part, experts say, client companies that hand off their administrative functions to a PEO and then forget about them tend to be the least satisfied with the results. The same goes for those that hand the vendor what historically has been a disorganized mess.
"Across the board, the times we've seen dissatisfaction and disappointment in any outsourcing scenario typically has to do with the client organization being unclear as to what exactly they are hoping to have done and how they will measure their success," Casale said. "If you outsource any particular department within your company and it's a mess, you'll just end up with an outsourced mess."
Not surprisingly, those that define a clear set of goals for the PEO to meet, and those that appoint someone within the company to oversee the relationship [such as a Chief Resource Officer], have reported the most positive experiences.
Start with the start
If you're a small business owner thinking about hiring a PEO, experts say there are a few simple ways to make sure you are getting the most bang for your buck.
You should start by identifying the needs of your company. If all you need is some added expertise for a short period of time, or some staffers to assist on a special project, you might want to consider hiring an employee leasing firm instead, a more temporary solution.
Milan P. Yager, executive vice president of the National Association of Professional Employer Organizations, said employee leasing is often mistakenly used to describe PEOs.
The main difference between the two, he said, is that in a leasing arrangement, the client firm contractually hires a group of workers to supplement an existing workforce for a given period of time, but the workers themselves remain fully employed by the leasing firm.
In a PEO arrangement, the existing staff is essentially "co-hired" by the PEO firm. Under this long-term arrangement, the firm does the personnel work and you set the hours, oversee the work and determine salary levels.
If you decide on a PEO arrangement, you'll want to begin researching the firms that can help you reach your goals.
Some firms, for example, specialize in Fortune 500 companies. Others focus on the everyday administrative functions of small and emerging businesses.
Bernie Picchi, a business services analyst with Lehman Brothers, said many vendors on the West Coast, for example, are focusing their services on startup technology companies, since the venture capitalists who back the industry don't want their Chief Executive Officers "wasting time with paperwork."
You should always ask what level of experience senior staffers have. (Do any hold Certified Professional Employer Specialists (CPES) credentials or other relevant professional designations?)
NAPEO said you should also gain a clear understanding of how the firm's employee benefits are funded. Are they fully insured or partially self-funded?
You'd be wise, too, to check with competitors who use PEOs or trade groups that represent your industry to find out what benefits such an arrangement can provide. Some businesses, including high-tech firms, are better positioned than others to take advantage of PEO arrangements.
"We've seen a lot of satisfaction in the high-tech sector due to the industry's rapid growth and their need to focus limited resources on core business functions," Casale said. "But results differ for each industry."
Let the bidding begin
From here, you'll want to begin the bidding process. Send out requests for proposals to the firms that seem best equipped to handle your needs. Do some price shopping, and strike a deal.
Make sure the PEO you pick has met all licensing requirements. And ask for the firm's banking and credit references to check its financial background.
NAPEO recommends you ask the PEO to demonstrate that payroll taxes and insurance premiums have been paid.
(Click here for NAPEO's guideline for picking a PEO)
The contract
The contract is the most important part of the PEO partnership. You can't be too specific in spelling out your expectations.
"With everyone being in a rush these days, the tendency is just to do a quick hand-off," Casale said. "But the more successful companies, the ones that are the happiest with the results, are those that take the time to fully assess where they are, do the due diligence internally and clean-up house before they hire the service providers."
The failure to do so is one of the biggest pitfalls among client.
"I see it everyday," Casale said. "This is a critical document. If you ever had a reason to customize the heck out of something, this would be it."
Clients that sign their names on the "one-size-fits-all" contract, he said, "are the ones getting generic service."
PEOs
NAPEO defines a PEO as an organization that provides a cost effective approach to the management and administration of the human resources and employer risk of its clients. The companies contractually assume substantial employer rights, responsibilities, and risk.
Some provide employee benefits packages comparable to Fortune 500 firms, including day care centers, dental options, health insurance and 401(k) savings plans -- a big plus for small business owners trying to recruit in today's tight labor market.
The average client customer of a PEO is a small business with 16 employees, NAPEO reports.
Today, there are approximately 2,000 PEO companies that are responsible for over $18 billion in employee wages and related human resource and employee benefits. Between two and three million Americans are employed in a PEO arrangement.
The industry itself has grown between 20 percent to 30 percent a year, partly driven by the growth of small businesses and the slew of new federal, state and local regulations governing benefits plans.
Cost benefits
There's little in the way of quantified data to illustrate the cost savings of hiring a PEO. But Steve Hall, general manager of Abbey's Greater Tennessee Floor Covering in Knoxville, Tenn., said he estimates his company has saved between $5,000 and $10,000 a year since hiring Payroll Transfers Inc., a PEO in Tampa, Fla.
The 36-year old company has about 30 employees, he said.
"It's probably one of the best things we've ever done," he said. "In our industry, workman's compensation insurance is a very costly thing. What (PTI) saved us in worker's compensation more than offset the cost of administration."
Through the PEO, Hall said, the company also is able to offer workers a dramatically improved 401(k) plan.
Make the most of it
Yager noted the industry overall has enjoyed a high level of success, both in terms of its growth rates and the clients it serves. PEO firms, he said, have nearly a 90 percent retention level.
The only times that problems arise, he said, is when the client is unfamiliar with the role of the PEO, or leaves the organization in the dark as to what it hopes to achieve.
"The biggest concern, or the one bad thing I guess, is that a lot of consumers buy this product without really knowing all that's in the contract," Yager said. "They perceive they are getting rid of all their employee liabilities and headaches. They are getting rid of most of them, not all of them."
For example, the PEO is usually responsible for handling standard worker's compensation claims under state law.
But if the claim relates to negligence or safety issues, the Occupational Safety and Health Administration steps in and you become responsible. That's because federal law stipulates that the employer supervising day-to-day business operations is responsible for workplace safety.
In most cases, that's all spelled out in the PEO contract. If it's not, you'd be wise to get it in writing.
"I think once anyone's experienced a PEO, they will never go back," he said, citing a study by the Small Business Administration that found small businesses waste 20 percent to 40 percent of their time on administrative work. "This is not just about saving hard dollars. It may even cost businesses some money out-of-pocket, but the intangible benefits [like increased recruiting power and more focused resources] save you so much more." 
--by staff writer Shelly K. Schwartz
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