Quick look: Research shows that the return on investment (ROI) of using a professional employer organization (PEO), based on hard cost savings alone, is over 27%. From vendor consolidation to avoiding noncompliance fines, here’s what contributes to that return and how to determine if a PEO partnership could benefit your business.
More and more of today’s small- and medium-sized business (SMB) owners recognize the value of outsourcing human resource (HR) management to experts at PEOs. According to the National Association of Professional Employer Organizations (NAPEO), PEOs provide services to approximately 175,000 SMBs and employ about 4 million people. This figure represents 15% of all employers with 10 to 99 employees.
However, failure to understand the true value of PEO causes some business owners to question the partnership. Here, uncover the ROI of using a PEO to can determine if partnering with one would be a wise venture for your organization.
What is the ROI of using a PEO?
According to independent research firm McBassi & Company, based on hard cost savings alone, the ROI for companies using a PEO is 27.2%.
To assess what the return of partnering with a PEO is, NAPEO analyzed the average cost savings per worksite employee of the following five HR business functions:
- HR personnel costs
- Workers’ compensation
- Unemployment insurance
- Health benefits
- Additional external HR expenditures (i.e., payroll administration and employee benefit packages)
Employers dedicate significant resources, including time and dollars, to managing HR tasks in-house. Depending on the size and distribution of your workforce, you could be allocating a significant investment to HR and still not reap the benefits of working with the human resource experts you would have access to with a PEO.
A significant perk of partnering with a PEO is that their professionals complement—not replace—your staff. A PEO’s team provides valuable day-to-day support, strategic guidance, and insight while your in-house employees remain the frontline HR team for your company.
Partnering with a PEO adds a new line item to the books. However, hard cost savings quickly become apparent and begin to offset your investment almost immediately.
How to calculate the ROI of using a PEO for your business
Every business is unique and has different challenges and goals. Here are a few questions to ask as you consider what impact working with a reputable PEO provider would have on your organization.
What’s the opportunity cost of not having a PEO?
Some employers may not understand how much time and resources are required to deliver quality HR management.
As they expand and evolve, most organizations absorb the additional workload incrementally. Years can pass, and company leaders may never realize how much time they ultimately dedicate to HR-related tasks. When a business’s workforce grows, leadership must dedicate more and more hours to daily HR management, benefits administration, and compliance monitoring.
Outsourcing HR to experienced PEO companies allows leaders to focus on revenue-generating activities. In fact, NAPEO reports that small businesses that use PEOs grow 7-9% faster, have 10-14% lower turnover rates, and are 50% less likely to go out of business.
Can you consolidate HR vendors?
Some employers adopt an ad hoc approach to outsourcing HR, which deprives them of the full benefit of a PEO partnership. SMBs often disperse aspects of HR management across an array of attorneys, accountants, payroll companies, time and attendance software providers, and consultants—none of whom possess a holistic perspective or deep experience in the complexities and legal obligations of HR management.
PEO takes all four corners of your back office—payroll, benefits, workers’ compensation, and HR—and consolidates them under one umbrella. Centralizing all aspects of HR management with a single provider unifies disparate expenses and improves the efficiency of your HR investment.
For example, ExtensisHR’s pricing model is based on a per employee per month fee. Companies with a higher employee count pay more, but they also gain valuable economies of scale in key areas like Employment Practices Liability Insurance (EPLI) and the bargaining power of the PEO’s large group insurance plans.
A word to the wise: beware of comparing PEO companies based solely on price. This is an industry where the adage “you get what you pay for” rings true. Low-cost PEOs may make significant cuts to provide a competitive price—concessions small business owners will likely feel.
Could you increase employee retention and satisfaction?
In today’s competitive recruiting environment, employers unable to offer ambitious compensation and stand-out benefits remain at a perpetual disadvantage. Partnering with a PEO plays an important role in increasing employee satisfaction and improving retention.
Per McBassi & Company, “employees of PEO clients also report significantly higher scores on key measures related to employee satisfaction and confidence in company management.” Employees of companies using a PEO were 8% more likely to say they had an “intention to stay with their current employer until retirement.” They are also 7% more likely to “trust their employer is supporting employees in delivering excellent customer service” compared to non-PEO-client employees.
Partnering with a PEO allows organizations to:
- Offer Fortune 500-level benefits
- Provide employees with useful self-serve HR tools
- Consult with dedicated experts for benefits and HR questions
- Strengthen company culture
- Recruit more strategically
While there are no hard dollar figures associated with the above, the soft cost advantages afforded by a PEO partnership strengthen businesses on a foundational level.
Are you confident with your compliance?
The final cost savings from PEO partnership are immeasurable and invaluable: compliance peace of mind.
The complexities of industry regulation and state-specific legislation, especially given the recent uptick in remote and multistate workers, can catch even well-meaning employers unaware. These consequences can cause serious, lasting damage to an organization. A sound PEO partner will ensure you are compliant in the following areas:
- Workers’ compensation
- Unemployment insurance
- Multistate payroll administration
- Changes in regulations and legislation
What applied years ago when your company launched may no longer be relevant to your organization today. Bringing compliance experts from a PEO into the fold is one of the smartest ways to cover your bases and protect your business. A PEO’s HR managers are up to date with regulatory changes in every state and industry. They will inform you of current compliance requirements and upcoming proposed legislation affecting your business, and their insight positions you to pivot quickly if needed. Additionally, if you are working with an IRS Certified PEO (CPEO), they will hold sole liability for federal tax filings, removing that layer of liability from your organization.
PEO partnerships: a smart investment
Partnering with a PEO can help employers increase efficiency, consolidate costs, focus on their business, attract and retain top employees, and maintain compliance. When you evaluate the impact of hard costs, soft costs, and opportunity cost savings, working with a PEO clearly pays off—but not all PEOs are equal.
As you choose a PEO, you should consider if they:
- Hold all relevant accreditations (CPEO, Employer Services Assurance Corporation [ESAC], Certification Institute [CI], SOC 1 Type 2).
- Outsource primary HR functions (when PEOs do this, they further distance themselves from your organization and typically don’t provide white-glove service).
- Would arrange for you to meet with one of their HR Managers and/or current clients.
- Provide a straightforward service agreement.
- Have a positive reputation and history.
- Can provide a technology demo.
- Understand and can help solve your organization’s largest challenges.
ExtensisHR is proud to do all the above and more. With over 25 years of experience nationwide, a 93% client retention rate, and a customer service team that picks up the phone in 11 seconds or less, ExtensisHR is committed to helping SMBs like yours succeed.
Would you like to learn more about the ROI your organization could experience by partnering with a PEO? Contact ExtensisHR today.