Exploring PEOs: 5 Question Guide for HR Outsourcing

Professional Employer Organizations (PEOs) can be an exceptional option for cash- and resource-strapped small to mid-sized business owners. They allow businesses to gain access to enterprise-grade services and expert assistance across their HR department. This covers areas like recruitment, benefits administration, labor compliance, risk management, and more, all at economy-of-scale pricing.

But how do you know when a PEO becomes the right option for your business? When is the best time to begin outsourcing some or all of your HR activities to a PEO? To answer those questions, it’s necessary to take stock of your business situation.

1: How big is your company?

In general, PEOs are ideal for small to midsize companies. Nearly two-thirds (65%) of PEO users have between 10 and 49 employees; 94% have fewer than 100 employees. That said, it’s not really the raw number of employees that matters.

Rather, you want to look at the point at which the administrative requirements of handling HR begin to outpace internal resources. At this point, the small business owner is spending too much time on the work and productivity begins to slow down.

In other words, are business owners able to focus on their core business activities? Activities such as product development, strategic initiatives, customer acquisition, etc. If a business owner isn't able to focus on these activities, a PEO can free their time and resources.

2: Will the PEO successfully save you money?

Outsourcing almost always comes down to cost reduction – and more often than not, it works. Deloitte's 2023 Global Outsourcing survey found that 83% of organizations aimed to reduce costs through outsourcing in 2021. By 2023, 84% of them had successfully achieved this goal.

Indeed, for small and midsize businesses, managing HR expenses can become challenging. They can quickly spiral out of control if not managed properly. Another challenge for small businesses is finding cost-competitive pricing for benefits and other HR services. This can be nearly impossible without considering outsourcing HR to a PEO.

When a business works with a PEO, it can result in reduced costs. PEOs can negotiate favorable rates with benefits providers, manage payroll administration, and handle compliance matters. This can lead to cost savings and reduced administrative workloads.

The National Association of PEOs (NAPEO) conducted a study comparing the annual cost savings for PEO users and non-users. It found that the average annual cost savings for PEO users is around $1,775 per employee.

3: Does the PEO provide greater value compared to its cost?

PEOs can be surprisingly inexpensive relative to the value they provide. The cost generally ranges between 2% and 15% of payroll, but raw costs are only half the story. The support PEOs provide can often produce unexpected and hard-to-quantify value.

For example, a report by the NAPEO showed that PEOs provided significant support during the post-COVID-19 period. The study found that businesses working with PEOs were 60% less likely to permanently close. Additionally, they were 119% more likely to secure Paycheck Protection Program (PPP) loans.

4: Are you struggling with any HR areas?

If so, you may benefit from a professional service. Consider your recruitment and employee turnover. Roughly 80% of all turnover comes from poor hiring practices, with an average annual turnover rate of about 19%.

However, this level of turnover isn’t inevitable. Research indicates that companies could have retained typically more than 75% of employees who quit. PEO clients specifically see 10% to 14% lower annual turnover rates on average than U.S. companies as a whole.

Many aspects of HR can be complex to administer, especially for small to midsize businesses. Aspects like recruiting, onboarding, payroll management, and compliance can become very complicated and time-consuming. If you notice an area within your business that is struggling, a PEO will likely be able to help.

Similarly, if your business encounters HR-related risks that are unknown or challenging to manage, a PEO can provide significant assistance. In one of our blog series, we've covered HR-related risk management, with an introduction and four parts, linked here: Intro, Part 1, Part 2, Part 3, and Part 4.

Risk management, especially related to labor law and regulatory requirements, is a complex, confusing, and always-changing field. Simply having a partner by your side can substantially help reduce the risks your business faces. A PEO offers a business model centered around staying up-to-date and proactive about these issues.

5: Is your HR operation scalable?

As your business grows, can your HR grow alongside you? With growth like an expanding workforce and business territory, the demands on HR increase. Outsourcing HR to a PEO provides access to scalable solutions that can adapt to changing needs.

PEOs have the tools and knowledge to manage changes in the number of employees you have. They can also manage HR-related functions in different locations for businesses operating in multiple locations. Additionally, they can help your business grow and develop.

Key Takeaways

Professional Employer Organizations offer a valuable solution for business owners facing resource constraints. They provide access to high-quality HR services, including recruitment, benefits administration, compliance management, and more, all at cost-effective rates. 

To determine if a PEO is the right choice for your business, consider these questions about your business:

1. How big is your company?
2. Will the PEO successfully save you money?
3. Does the PEO provide greater value compared to its cost?
4. Are you struggling with any HR areas?
5. Is your HR operation scalable?

In addition, PEOs excel in risk management, especially concerning labor laws and regulations, offering proactive and up-to-date support. They can substantially reduce the risks your business faces.

 Overall, outsourcing HR functions to a PEO can enable your business to focus on its core activities, reducing costs. It also helps navigate HR challenges effectively, fostering long-term growth and success.

CoAdvantage, one of the nation’s largest Professional Employer Organizations, dedicates itself to supporting small to medium-sized businesses. We offer a range of services across HR administration, payroll, employee benefits, and recruitment. Our services also cover areas like workers' compensation, health insurance, compliance with ever-changing laws and regulations, and more. To learn more about growing your business with the assistance of a PEO, contact us today.