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January 28, 2011
Is Your PEO Still Serving Your Needs?

Stay in any business long enough, and you start to notice cycles. Or, perhaps you’re a student of economics, in which case you’ve read about business cycles in earlier decades. Either way, as an HR pro, you probably know that the cutting edge HR solutions of today may be gathering digital dust 10 years from now.

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One trend that gained traction in the mid-1980s was the Professional Employer Organization, or PEO. PEOs allow small companies to pool together in order to take advantage of the economy of scale in their human resources functions, including employee benefits. Small, growing companies no longer needed to expend resources on these functions, relying instead on a much larger group consisting of similarly situated employers.

At their peak, PEOs allowed companies to focus on their core businesses. “For that business owner who has never done payroll or benefits, he can focus on research and development in his own organization without having to set up payroll processes, or research how to handle workers compensation, or learn all about employee benefits,” says Justin E. Roberts, co-founder (along with Brian P. Hassan) of San Francisco’s BayPoint Benefits (

“Back in the days, PEOs were very selective about who they brought into the risk pool,” Roberts continues. “At that time, the population they were underwriting tended to be single, ages 25-35… they were young entrepreneurs. Because they were so selective, they could look at trend and utilization of the group, and it was very low.”

PEOs losing traction

But then something happened. As the PEO’s coverage expanded, so did the classes of employees they covered. “The PEO acquired groups with older populations, and also a lot of bad claims,” Roberts explains. The result is that the PEO has lost some of its appeal. “What we’ve seen is that, over time, they’ve become less effective than they were. They got a little more competitive with their rates than they should have, and now they’re having to make changes”.

Among those changes are a reduction in the number of health plan options their clients can adopt, and an increase in premiums. “One major PEO has remapped their plans for 2011, watered them down, and at the same time they’re still presenting a premium increase between 15% and 20%,” says Hassan. “They experienced more claims than they anticipated, and that really affects a lot of the smaller companies in the PEO that run a healthy workforce, because they’re subject to the experience of the other 150,000 employees in that pool.

“So for this PEO, not only did the plans get watered down and the premiums increase substantially, one major insurance carrier dropped them entirely. So now they only offer two carriers and a limited number of plans.

“That’s a really big deal because one of the reasons companies use a PEO is that they claim to offer Fortune 500 benefits to small companies. That is no longer true. This particular PEO now only offers two carriers. But if you go out on your own, you’re able to choose from among eight carriers, with about 30 plans under each of them. And when your company grows above 50 employees, you can actually mix and match deductibles, copays, pharmacy benefits, and everything else to create your own custom plan design. You simply can’t do that with a PEO.”

Medical practice makes the switch

One of BayPoint Benefits’ clients is a 125-employee West Coast medical practice that is currently reaping the rewards of withdrawing from a PEO. The company president reports substantial savings from doing so. “We’re expecting to see over $100,000 of savings annually, on benefits and administration alone,” she says.

Hassan says several of their clients are enjoying similar savings. “We are moving four or five companies out of one large PEO for January 2011,” he says. “The smallest company has only 15 employees, and they are saving close to $60,000 annually by making the move. Another company has 95 employees and will be saving $145,000. This is when doing an apples-to-apples comparison of the benefits, and also considering administrative costs. The latter company is actually considering increasing employer contributions and offering richer benefits due to the savings.”

Many of the companies using PEOs are start-ups funded by venture capital, say Hassan and Roberts. As they begin to take off, their image – both externally and internally – is an important part of their credibility. Hassan says that savings realized from leaving a PEO is sometimes used to hire HR staff. “Especially in a recession, companies often don’t want to share with employees the company revenues, balance sheet, and income statement. What they can show them is, for example, the onboarding of maybe a senior vice president of HR whom they’ve hired on a contract basis.

“The employee perception is that the company must be doing well. So part of strategy is to use those special touches to really encourage the employees to see that the company is doing well. We find that you get a lot more value for a fraction of the cost, having an onsite HR or compensation/benefits manager, as opposed to just having an outsourced HR generalist you can call and speak to on the phone.”

Keep your eye on the trends

“I sit on the board of directors of the Northern California HR Association, and one of the biggest issues that the entire HR profession is facing right now is that it’s becoming outsourced,” Hassan continues. “What new, successful HR practitioners need to understand is that, in order for them to get a seat at the table, they have to earn a seat at the table. How do they do that? It isn’t just by providing a warm, fuzzy feeling. It’s actually contributing to the company’s overall bottom line.

“I think that’s very important, and it’s something that HR practitioners need to be fully aware of; their profession is no longer just pushing papers, but it’s providing strategic initiatives that will really benefit the company as a whole. That’s something the CFO can respect because the person is speaking in terms of quality and quantity, in ways the CFO can truly understand.” Watching for trends like the move away from PEOs may be a part of capitalizing on that kind of strategic initiative.

Making the decision about whether or not to stay with a PEO may seem intimidating. It’s all about education, say Hassan and Roberts. “Companies need to decide from a business standpoint, looking at hard dollar and soft dollar costs, what is the best fit for their organization,” Roberts says. “We can talk about all these great things about savings and benchmarking strategies and plan design, but I think readers should be concerned with what their true costs are, and how those are impacting their business. When we educate people on how to truly evaluate a PEO, whether or not they decide to stay or move onto a standalone solution, at least they are afforded the opportunity to know exactly where they stand and exactly which services they’re paying for.”

Employees need to be educated, too. The medical practice president says communication is an important part of any big change. “Don’t underestimate the importance of communicating with employees,” she says. “When you make this kind of move, it means another website, more paperwork, different plans; it’s a confusing area for employees. We did a lot of the comparison work for employees, showing them the plan most comparable to the one they had before. We wanted to give employees enough time so they didn’t feel rushed. And we haven’t had any complaints.”

A PEO may have served your business needs through its start-up phase; our spokesperson credits them with being there during the early phase of the medical practice. But as business cycles roll ever forward, it might be time to make a change. Your company may have outgrown your PEO and be better served with a different solution.

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