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ROI of PEO: How PEO pays for itself

ExtensisHR7 minute read
PEO discussion with human reosurces

We won’t keep you waiting—studies show that the average return on investment (ROI) for businesses that partner with a PEO provider is just above 27%.

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 professional employer organizations (PEO). According to the National Association of Professional Employer Organizations (NAPEO), PEOs provide services to approximately 175,000 small- and mid-sized businesses, employing 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 balk at a partnership. We are getting specific about the ROI of PEOs so you can determine if partnering with a PEO would be a smart investment for your organization.

What is the ROI of using a PEO?

Based on hard cost savings alone, the return on investment (ROI) for companies using a PEO has reached 27.2%, according to independent research firm McBassi & Company.

So, how does the ROI of a PEO get calculated? 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:

  1. HR personnel costs
  2. Workers’ compensation
  3. Unemployment insurance
  4. Health benefits 
  5. Additional external HR expenditures (think payroll administration and employee benefit packages)

Employers dedicate significant resources, including time and dollars, to managing HR tasks in-house. Based on our experience, many employers end up spending 3-5% of their annualized gross payroll on HR-related tasks. 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.

Don’t assume partnering with a PEO automatically replaces any member of your staff. While the HR experts at a PEO provide valuable day-to-day support, strategic guidance, and insight, your staff remains the frontline HR team for your company.

Deciding to partner with a PEO does indeed add a new line item to the books. However, hard cost savings quickly become apparent and begin to offset your PEO investment almost immediately.

How to identify the ROI of a PEO for your business

Of course every business is unique and has varying sets of challenges and goals. Here are a few questions to ask yourself as you consider what impact working with a reputable PEO provider would have on your business.

What’s the opportunity cost of not having a PEO?

Some employers subscribe to the adage: “If it’s not broken, don’t fix it.” However, they may lack an understanding of how much time and resources are required to deliver quality human resource (HR) management. No business owner launched their company to manage HR-related tasks and paperwork. For many, it’s simply considered a tedious but unavoidable aspect of running a business.

As an organization expands and evolves, most business owners absorb the additional workload incrementally. Years pass and company leaders never realize just how much time they ultimately dedicate to HR-related tasks. When a company’s workforce grows, leadership must dedicate more and more hours to daily HR management, benefit administration, and monitoring compliance.

Outsourcing HR to experienced PEO companies frees up business owners and leadership to focus on revenue-generating activities. According to NAPEO’s latest data on the topic, 70% of businesses reported revenue increases after partnering with a PEO. Further data reveals how greatly PEO clients benefited during the pandemic in comparison to other small businesses.  

Can you consolidate HR vendors?

Some employers adopt an ad hoc approach to outsourcing HR, which deprives them of the full benefit of 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, worker’s 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.

At ExtensisHR, our 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 must make significant cutbacks to provide a competitive price – concessions you, as the business owner, are likely to feel.

Could you increase employee retention and satisfaction?

In today’s competitive recruiting environment, employers who are unable to offer ambitious compensation and stand-out benefits remain at a perpetual disadvantage, particularly in smaller markets. 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:

While there are no hard dollar figures associated with the above, the soft cost advantages afforded by a PEO partnership strengthen your organization on a foundational level.

Does your team feel peace of mind over compliance?

The final cost savings from PEO partnership are both immeasurable and invaluable: compliance peace of mind. The complexities of industry regulation and state-specific legislation, especially given the uptick in remote and multistate workers over the last few years, can catch even well-meaning employers unaware. These consequences can cause serious, lasting damage to your organization. A sound PEO partner will ensure you are compliant in the following areas:

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 organization. Professional HR managers are up to date with every regulatory change in every state and industry. They will inform you of current compliance requirements and upcoming proposed legislation affecting your business. Their insight positions you to pivot quickly if needed. Additionally, if you are working with a Certified PEO, they will hold sole liability for federal tax filings, removing that layer of liability from your organization.

A smart investment

Partnering with a PEO is a smart investment for employers wanting to increase efficiency, consolidate costs, focus on their business, attract and retain top employees, and worry less about maintaining compliance. When you evaluate the impact of hard costs, soft costs, and opportunity cost savings, working with a PEO clearly pays off.

Is partnering with a PEO right for your company? Contact our HR experts today and let’s discuss.

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