What About Using a PEO as a Small Business Leads to Success?
You’ve probably seen some crazy statistics about how and why a professional employer organization (PEO) can help boost your business success. For example, your employee retention will be better, you’re less likely to go out of business, and you grow faster on average than businesses that don’t use a PEO. Why is this? The statistics are there, but what is the reason behind the numbers? We dug into the data to show you where exactly these numbers are coming from and possible reasons why a PEO might positively impact your business. This isn’t just a case of simple correlation; the numbers paint a bigger picture.
What is a PEO?
Many small business owners do not have the means or resources to employ an entire HR department. That means these businesses have three options if they don’t have the resources to hire a full-time HR employee. They can forego hiring any HR staff and direct your employees to the marketplace for essential benefits, outsource HR services to a PEO, or offer HR services but pay top dollar for offerings such as employee benefits.
You may assume the first option is the only one you have for very small businesses and start-ups, depending on your industry. For businesses such as restaurants or small street-side retail shops, this might be true. But, on the other hand, HR professionals bring a host of financial and operating benefits, so foregoing the hiring of HR staff shouldn’t be an indefinite choice if you want to grow. In short, you can get away without an HR department, but that shouldn’t be a long-term plan for all but a very select few scenarios.
Outsourcing HR to a PEO is growing in popularity, and many professionals are familiar with the reasons given for why hiring a PEO is a good idea. PEOs exist to offer small and medium-sized businesses comprehensive HR solutions. Essentially, a PEO enters a joint-hiring agreement with a business and employs all of the employees at the company. This allows them to serve those companies in a host of ways that wouldn’t usually be available. Whether that’s payroll support, benefits, or compliance, a PEO allows businesses to focus on growing rather than all the legal requirements of hiring employees.
The third option is to perform everything in-house. You run payroll yourself, you handle taxes, and you’re responsible for keeping the business running and compliant. If an employee gets hurt, you handle workers’ compensation, and if you choose to provide benefits to your employees, you’re paying top dollar to companies in exchange for benefits packages. Sometimes this can make sense for your business, but it will also cost you since you can’t negotiate the same rates that large corporations can for benefits. You may also have fewer options for which benefits you can select from.
What Do the Numbers Say?
If you find yourself in that camp of small to medium-sized businesses considering a PEO, but you aren’t sure if it makes sense for you, it might be helpful to get a clearer picture of what the numbers say.
You’ve likely seen impressive statistics for companies that work with a PEO: your business will grow 7-9% faster, employee turnover will be 10-14% lower, and you’re 50% less likely to go out of business. In addition, the average annual return on investment (ROI) of using a PEO is 27.2%. But, where do these numbers come from, can you trust them, and can you assume those numbers will be accurate for you? These are essential questions to ask yourself.
These numbers come from the National Association of Professional Employer Organizations (NAPEO). NAPEO is an advocacy organization that helps support the PEO industry. They specifically research PEOs to demonstrate the economic violability of using a PEO as a small to mid-sized business. Though that means they have financial bias, can we explain where their numbers are coming from, and can we trust them?
In a 2019 whitepaper, NAPEO found that the ROI of using a PEO was 27.2% on cost savings alone. This number doesn’t consider that businesses that partner with a PEO have more excellent rates of employee satisfaction and employee turnover, which are primarily qualitative benefits. The figure this whitepaper concludes with, 27.2%, comes from five different categories: HR personnel costs, health benefits, worker’s compensation, unemployment insurance, and “Other external expenditures in areas related directly to HR services” such as payroll services or other benefits.
This research was conducted by polling PEO clients and businesses that do not use a PEO through an employee survey. With each batch of surveys, businesses submitted forms that gave additional information pertinent to the survey data. The exact methods of the research study are included in an appendix, but the respondents came from various referrals from at least 14 different PEOs. This ensures that the ROI figure is not dependent on the work of a single PEO outperforming the others; through using various sources, the surveys produce a more accurate average concerning the true average ROI.
The exact numbers found in the survey show that the average cost savings from using a PEO are $1,775 per year per employee, while the average PEO cost per employee is $1,395, which is where the annual 27.2% ROI comes from. The research is conducted without any glaring issues in the sampling size, surveying, or exclusions in the data, which indicates a relatively accurate data set. Though this is an average, that doesn’t mean you are guaranteed these returns; running the numbers for your own business will help you better understand your financial situation.
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Why Do Young Businesses Struggle?
Small businesses often fail. Entrepreneurship is not for the faint-hearted, and business leaders know that. What exactly makes small businesses struggle, though, and can we gain insight into those reasons to combat failure?
Businesses that startup without a plan, vision, or niche struggle the most. These make up the majority of problems associated with business failure. You have to be aware of who your business is serving, how you’ll market yourself, what you hope to achieve, and what plan you’re going to implement to get you there. In other words, you have to be thorough, but that plan won’t work out exactly how you envisioned it. You have to be flexible, knowing the direction you’re headed but dynamic enough to roll with the punches of doing business.
That is to say; even if you have a smaller company with only a handful of employees, by using a PEO to arrange your health plan, you’ll be able to access the same highly professional, well-respected, expertly underwritten insurance policies as large corporate entities.
With that being said, the people you hire are a massive foundation of how these things are put into action. Startups typically begin with a vision, progress into a reality, then strengthen and solidify with a few core individuals who help you breathe life into your business. It isn’t something you do by yourself in most cases.
The small business that does manage a few employees will quickly find themselves between a rock and a hard place. Working for a startup is hard, but it also looks great on a resume. The Harvard Business Review highlights how quickly your competition can begin to poach your top talent. Many businesses struggle to grow because they continually have their top talent poached or their employees look for jobs that better suit their needs. To succeed, many companies need talented and committed individuals who will stay and work for business growth for years, which means employee retention is a primary concern.
Essentially, it comes down to an HR problem. You want to keep your employees because it’s expensive to hire and train new ones, but you also often don’t have the means to compete with the offers your competition can throw at your employees. It’s deeper than a question of loyalty. Everyone has their priorities, and significant offers from competitors will often sway talented individuals. Better offers aren’t everything though, business leaders who work hard to retain their employees can often succeed.
We’re seeing this right now in the job market. Much of our workforce is currently planning to switch jobs in the near future, and a primary reason is not salary but jobs not being able to provide what they desire. That can mean anything from flexible work environments, benefits plans, growth opportunities, or many other factors. For these reasons, it’s essential to have conversations with your employees about needs, wants, and desires on an active basis.
Why Don’t All Businesses Use a PEO?
When you see the numbers, it’s easy to say that it’s a no-brainer to use a PEO, yet so many small and medium-sized businesses forgo the expense. There are at least three common reasons why this is the case, but businesses will still profit significantly from hiring a PEO in most cases.
First, ROI is a complex number to digest when you’re adding a considerable expense to your P&L statement. The value isn’t immediately seen until you add up all the hidden costs associated with employment. Because of that, many small and medium-sized businesses view PEOs as simply a cost rather than a cost-saver. As the numbers have shown, the business owner who uses a PEO can look past the line item cost and the actual cost of employing people. Additionally, a PEO helps small and medium-sized businesses offer additional value to their employees in almost all cases. A PEO doesn’t just make financial sense, it boosts your employee relations, and you’ll continue to reap non-monetary benefits in addition to the aforementioned monetary benefits.