What’s a PEO – and Who Needs to Know?
In the world of business, some changes get all the attention. A new law, a new technology, a fundamental change in the economy or in the marketplace will quickly command the attention of boardrooms and the business press alike – and understandably so. The ripple effects of such changes usually create significant effects that are still felt months or years later. Even more significant changes, though, often happen almost completely “under the radar,” even though they may upend whole industries or the entire business landscape.
One such example is the ascendance of the Professional Employer Organization or PEO.
In recent years, PEOs have staked out a claim to a growing portion of the HR field, supplementing or eclipsing in-house Human Resources departments in many small to mid-sized companies. Nonetheless, they remain dimly understood by many of the business owners best positioned to benefit from their services, even as they are fundamentally changing the way American business manages interactions between employers and employees.
In essence, a PEO exists as a separate, stand-alone organization focused exclusively on managing its’ clients’ human resource-related functions, including benefits administration, regulatory compliance, workers’ compensation, payroll, taxes and similar practice areas. A PEO will assume the role of “employer of record” for a company’s employees, taking on the responsibility of administering most or all of the administrative tasks – as well as a fair measure of the risk – associated with maintaining a workforce.
In doing so, client businesses gain a number of significant operational and competitive advantages:
- The ability to reallocate both attention and resources from HR functions to core areas of interest and expertise – the making and selling of the company’s product or service;
- A measure of insulation and/or indemnification;
- The streamlining of human resource functions placed under professional administration;
- The ability to leverage economies of scale in securing necessary benefit and insurance programs;
- Improved adoption of HR best practices under professional administration
The growing popularity of the PEO model is driven to a great degree by the increasing challenges and stressors facing small to medium-sized businesses. An increasingly technology-driven, global marketplace heightens competition and shrinks margins, even as increased regulatory and legal risks impose additional complexity and costs upon HR departments and practitioners. A PEO can deflect risk, contain costs, ensure consistency and predictability in practices, and effectively address complex taxation, insurance, and regulatory issues becomes increasingly valuable to companies operating within this challenging environment.
Few expect the business climate to become less complex or challenging in the years to come. As the burdens of regulation, competition, and costs continue to exert pressure on businesses, the ability of PEOs to buffer their clients from their effects will likely come to be perceived as a distinct competitive advantage – and not only knowing what a PEO is, but having one in hand, may make a critical difference in business success.
OUTSOURCING’S EXPENSIVE ALTERNATIVES: Why The PEO Model Is Gaining Ground
Throughout the last half of the 20th century and the first part of this one, we had the opportunity to learn the same lesson over and over: For business, “business as usual” wasn’t working – at least not as well as it needed to or should. Traditional models of ownership, management, investment, employment, marketing and distribution all underwent repeated phases of major disruption as technology, demographics, wealth distribution and market demand experienced major change. With each upheaval, the choice was stark: Adapt or perish.
Sure, you could try to stick with the way you’d always done things – but chances were that there would be a new, aggressive upstart ready and waiting to eat your lunch. The rise of the Japanese auto industry, Chinese consumer goods, and Silicon Valley tech startups were all made possible by seismic changes in old-guard industries. Smarter companies adapted, evolved, and survived; those who didn’t disappeared. RIP, Packard. RIP, Howard Johnson’s. RIP Union Carbide.
One upheaval that hasn’t been broadly addressed: The slow, steady decline of the old employment model. American business still maintains hundreds of thousands of atomized individual HR departments, doing what HR departments have always done: reviewing resumes, managing paperwork, negotiating contracts, and administering benefits. While practices have remained largely the same, though, costs have not: Estimates have shown that the average company now spends $5,000 per year per employee on HR administration expense alone. In an era of narrow margins and savage competition, such nonproductive capital expenses seem not only unjustifiable, but unsustainable.
Many companies have tried to blunt the impact of this inefficiency and expense by turning to temp agencies. Companies that once were called on to provide only short-term or ad hoc personnel now are called on to handle a significant portion, if not all, of many businesses’ staffing needs. While this can be a valuable short-term solution, it probably isn’t the best way to address all long-term needs..
Over time, cost and consistency can emerge as issues. Temp agencies depend upon the availability of a steady supply of skilled personnel willing to work in a temporary capacity. In an economic downturn, that doesn’t pose a tremendous challenge as the labor supply rises; in a tightening labor market, though, it becomes a bigger problem as temp workers find long term or permanent employment, or create their own businesses or individual consultancies. The continuing need for new recruits, and to handle the associated paperwork, adds to infrastructure costs which are passed on to clients.
Traditional employment models are becoming less suited to many of today’s efficiency-driven, stability-seeking businesses. That’s why Professional Employer Organizations (or PEO) like Trion Solutions have prospered. The ability to provide a high-quality, stable, and affordable labor pool while containing costs has become a pivotal competitive advantage—and one that more and more forward looking businesses are finding impossible to ignore. There will always be temp agencies, of course, and there will always be companies that insist upon maintaining their own extensive HR infrastructure—but as labor and administration costs rise and as a technology-empowered workforce becomes ever more mobile, these will become more challenging to sustain.