Payroll

We will explore the challenges of multi-country payroll, from tackling cultural issues to handling smaller country populations, including:

– Payroll Data
– Assessing Strategic Options
– Planning for Transformational Change- Payroll Strategy,
  Business Planning & Vendor Selection

PwC: Almost All Fast-Growth Companies Outsourcing HR Functions

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PricewaterhouseCoopers Trendsetter Barometer interviewed CEOs of 360 privately held product and service companies identified in the media as being among the fastest growing < ?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />U

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Case Study: Lifestyles of the Rich and Outsourced

Multi-million dollar Anderson Companies still likes to save money through HRO.

by Marsha Kendall

 

The Anderson Companies are a real estate development operation focusing on recreational and residential communities. Founder Lyle Anderson defined this market in the early 1980s with the creation of exclusive golf communities in north < ?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Scottsdale, Arizona. Current properties are located in Santa Fe, New Mexico; on Hawaiis Kona coast; east of Phoenix, Arizona; and Scotland. With a variety of business interests in luxury homebuilding, golf-related enterprises, and investment properties, the HR department had to juggle numerous employees in different regions and with different needs. It made Anderson the perfect candidate for outsourcing. < ?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

 

Our employees serve a very sophisticated clientele, explained Bill Siwek, executive vice president and chief financial officer for the Anderson Companies. In choosing an HR provider it was critical that we partner with an organization that understands our business as well as treats our employees the way we expect them to treat our members.

 

Andersons initial needs were the consolidation and standardization of accounting and payroll functions. However, after re-evaluation, the opportunity for full service human resources and payroll outsourcing was present. In late 2002, Anderson partnered with Core3, Inc., a provider that specializes in human resources, payroll, finance and accounting, and information technology outsourcing for the mid market, with shared service centers located in Phoenix, Arizona and Delhi, India. The company chose Core3 because it provided every level of service from field support for the Anderson Companies employees and management to strategy, recruiting, training, and transaction processing, as well as access to a Phoenix-based shared service center.

 

This is a unique delivery model in that the client wanted to maintain employee visibility to HR on a daily basis, while improving the quality of the function and reducing costs. The provider has on-site staff who are committed to employee and management support, while all strategy, development, and the majority of transaction processing are handled on a centralized basis at the providers shared service center.

 

The first-year results were impressive. Employee satisfaction with HR grew from 74 percent at the start of the relationship to 92 percent by the years end. Accuracy in benefit administration rose from 64 percent to 100 percent in the same time frame, and payroll accuracy has consistently exceeded 99 percent each month.

 

Special projects during the first year included the introduction of a standardized HR Policy Manual, new employee handbooks in both English and Spanish, new hire orientation, customized trainings, and the standardization of job titles and job descriptions, thus reducing titles by more than 20 percent. In addition, through a combination of field and support staff, the service provider was able to successfully partner with two Anderson Companies properties and increase staffing by more than 30 percent to handle the seasonality in the business. Equally important, the outsourcing relationship contributed to the reduction of HR/payroll costs by more than 20 percent, and impacted other related costs, such as a 40 percent reduction in legal fees and tighter controls for severance and relocation packages.

 

These accomplishments were driven by the providers combination of HR expertise, experience with global models, and comprehensive set of delivery tools. Core3s familiarity with global delivery allowed it to take the model a step further and understand the challenges and opportunities surrounding the support and management of thier own employees placed at client sites. Daily calls, weekly phone conferences, and regular site visits, are some of the tools they have has utilized to create a sense of team with its HR staff assigned to this relationship. In addition, through tools such as CoreSupport, the HRO companys new issue identification, management and resolution tool, Core3 has up-to-the-minute access to employee issues and concerns. This information allows them to ensure a timely and consistent response at the property level, report to client executives on the specifics surrounding a particular employee issue, plus identify trends for proactive workforce management.

 

Core3 has enabled the Anderson Companies to focus on our core competencies related to real estate development by addressing all our employee related issues. They truly understand our business and continue to deliver innovative solutions to support our success, concluded Siwek.   

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The Super Seven

Mid-market HRO rules and tools.

by Harry Feinberg

Are you a mid-market company with 1,000 to 10,000 employees? If so, youre probably outsourcing specific HR functions to specific providers, for example payroll to ADP, benefits administration to Fidelity, and other processes to other specialists. And yet, if you are reading the pages of this publication, you know theres a better way to be outsourcing your HRhanding all functions to one multi-process provider.

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Each month, you have read HRO Today cover stories about the largest, global companies engaged in HR business process outsourcing (BPO) dealscompanies such as Sun Microsystems and Proctor & Gamble. You have read about how these companies are reducing costs, gaining expertise, and becoming more strategic. You know as an HR professional that your mid-market company needs the same strategy as the big guysso why are you handling your HR outsourcing differently?

 

With more than 20 million employees in the U.S. midmarket, you can bet that the largest HRO providers are gearing up and equipping their companies to make standardized offerings available so that they can move down stream and start serving the mid-market organizations (admittedly, to make a bucket load of profit). Taking the opposite approach are the service providers known as professional employer organizations (PEOs), looking for a way to take their co-employment model, traditionally designed to serve the small company market, and move upstream to the mid-market (again, seeking profits from the same bucket). These two different approaches have both pros and cons for the potential buyer. So when shopping for an HR BPO provider, it is important to know the service providers model and remember these rules to steer your efforts in the right direction. Here are the seven shopping rules and tools you need to keep in mind when browsing for a service provider in the mid-market.

 

Rule # 1:

Shop in the right shopping mall. Attend HRO World, April 12-14, at the New York City Hilton Hotel. All the providers will be there, all in one place, and all at the same time.

 

Rule # 2:

Seek out the most scalable mid-market provider and you shall find that it is the one that has mastered the art of systems standardization. Multifunction standardized outsourcing that integrates HR and finance and accounting will reduce your costs and reduce your need for managing more than one provider. Standardization allows providers to leverage infrastructure and implement more quickly, more effectively, and at less expense. Be prepared to take on the providers process and change yours.

 

Rule # 3:

Shop for the innovators. They are the ones that created this industry and are doing the most valuable things in HRO.

 

Rule # 4:

Talk with some of the big guys. When we say big, we mean enterprise-level, like Accenture and Aon for example. The big guys are starting to smell the sweet opportunity of mid-market HRO and have begun to move downstream. The large-company market is getting saturated. Analysts are saying that the demand for smaller sized BPO deals of less than $100 million is extremely high in the < ?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />United States.

 

Rule # 5:

Look for a stellar client reference list from providers. And call them all.

 

Rule # 6:

Determine your HR goals and know your HR metrics before starting your search or outsourcing transaction, so that you can effectively measure cost saving with provider prospects. Know thy annual cost of HR per employee.

 

Rule # 7:

Shop til you drop, or use a sourcing consultant to help show you a more sophisticated way to shop. In fact, think of sourcing consultants as your personal shoppers, but remember they will cost you.

 

Using these rules and tools as your starting point in your search for a mid-market HRO provider will help ease the pain. And as you continue your search and start to add your own rules, please e-mail and tell us about what you are learning so that we can pass on your knowledge to other readers of HRO Today magazine. And, if youre at the HRO World conference and expo and bump into me, please let me know how helpful the super seven are when shopping on the trade show floor.  

 

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The Japanese HRO/PEO Market Potential

Japan is hoping that small businesses, with a little help from HRO, will help revitalize the economy.

by Hiroshi Karibe, Dr. Kenneth A. Polcyn

Since the early 1990s, Japanese entities have been monitoring the < ?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />U.S. business model, with particular interest in the Professional Employer Organization (PEO) and other variations of HRO. Companies have been intrigued by the PEO industrys potential for assisting small businesses. U.S. small businesses in the 1990s were the leading contributors to U.S. job growthproviding 50 percent of the GDP. Future projections expect U.S. small businesses to create up to 60 percent of the new jobs in 2005not the situation in Japan!

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What does U.S. small business performance have to do with the Japanese economy? For more than a decade, Japan has been in economic turmoil. Deflation, banks that prop up large debt-ridden companies, and government directed capitalism that supports large, unprofitable, and poorly run business, have all discouraged competitive business. Over time, small businesses have suffered.

 

Now in some circles, there is a growing interest in emulating the Anglo-American Competition Model to reap the potential of small business contribution toward reviving the Japanese economy to compete in the global economy. Nevertheless, Japanese firms, when faced with new foreign competitors, can be ruthlessly fierce to keep them from succeeding. This has led to an interestingly innovative Japanese approach.

 

During 2002, delegations consisting of the Japanese government, academia, and business representatives visited the United States in order to explore the PEO/HRO potential. They met with personnel from U.S. government agencies and the National Association of Professional Employer Organization (NAPEO). After further research, the decision was made to pursue HRO in Japan and to establish a Japanese-based small/mid-sized business outsourcing model unique to the country. The result was the September 2004 creation of the Japan Association for Professional Employer Organization (JAPEO).

 

A key player was the Japan Business Federation, a comprehensive economic organization created in 2002 by absorbing the Japan Federation of Economic Organizations and Japan Federation of Employers Association. As of May 2004, the Federation had a membership of 1,623, including 1,305 Japanese companies, 91 foreign companies, 129 industrial associations, and 47 regional employer associations. Its mission is to achieve a private-sector led, affluent market economy, creating a model for Japan that will lead to national economic recovery and contribute to the global economy.

 

At a November 16, 2004, Tokyo meeting in the Hall of the Japan Business Federation, the concept was presented to HR representatives from various large and small companies throughout Japan as well as the media. Speakers from the United States, the Japanese Business Federation, legal circles, and JAPEO provided presentations. A new Japanese book, Employment Revolution with PEO: The New Employment Business in the USA, was also provided to attendees. It explained the U.S. PEO/HRO concept and the potential of this model for Japan.

 

The meeting generated considerable interest from the attendees and requests for further information. Moreover, an article that followed in the monthly Japanese Human Resources Business magazine created additional inquiries. Since then, JAPEO has been conducting meetings with Japanese businessmen. This has resulted in a desire to talk with American PEO/HRO companies that are interested in expansion in Japan. Partnerships and joint ventures are options. However, some Japanese entrepreneurs are considering establishing their own companies to service small businesses.

 

JAPEO, with its partners, is moving forward with models for conducing PEO/HRO business in Japan. They should be available in 2005. One model will explain the steps required to create such a business. Another will address the unique services, products, and operating components of a Japanese PEO/HRO as well as related processes reflecting government laws and regulations. There will also be a model devoted to treating the financial aspects of establishing an HRO service firm, including pricing strategies and a proposal system for helping to sell products and services. The final model will focus on Japanese/American partnerships and joint ventures.

 

In an increasingly global economy, the ability to adapt to new business trends, such as HRO, will become important for businesses that want to stay competitive. JAPEO hopes to play an active part in helping Japanese business contribute to the new economy.

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The PEO Bunch

PEO Case Studies: Here’s the story of several happy HRO families.

by Margo Alderton

Picking the right HRO partner is a deciding factor in improving your company’s chance of success… or, seen the other way, lowering your risk of failure. What makes a successful pick? Where are the pitfalls? These case studies tell all.

Conventional wisdom says that small- and mid-sized businesses fail 90 percent of the time. In the introduction to the reality TV show The Restaurant, the 90 percent failure rate is thrown around as casually as a plate of deli meat. The actual number is quite different, quite dependent on your choice of partners, and especially sensitive to your pick of an appropriate HRO provider.

Statistics from Professor H.G. Parsa of Ohio State University, as quoted in USA Today May 6, 2004, found that the actual three-year failure rate for restaurants is 59 percent. For small- and mid-sized businesses overall, the number is 50 percent over five years according to David Birch, a small-business research expert. Yet for those small businesses who choose HRO services from professional employer organizations, or PEOs, the anecdotal evidence is that the failure rates are much lower, probably as low as 15 percent for companies with less than 500 employees and 5 percent for 500+ employee companies, according to HRO Today’s informal survey of PEO top management.

What are the factors that go into picking the right HRO provider for small- and mid-sized businesses? How are companies that go the HRO route different from their go-it-alone counterparts? What is the experience of those who have partnered with a PEO? What are the risks and rewards? For these answers and many more, HRO Today turned to some of the leading PEO providers and their clients for frank answers and very revealing lessons. Here are their stories.

Finding Precisely the Right Partner
For Precyse Solutions, a successful HR outsourcing was all about finding the right partner.

Finding the Right Partner at the Right Time
A time and a place for HRO: for this growing company, HRO was a question of when, not if.

Man Bites Dog: Small or Large Provider?
Regus knew that one day they were going to outsource HR. The question was, what type of company could best meet its needs?

A Shot of Employee Satisfaction
Jose Cuervo Internationals HRO satisfies its highly discerning customers & Cuervos employees.

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The PEO, Finally Re-Invented as HRO

Brining the shine back to the PEO industry.

by Jay Whitehead

For 20 years, PEOs have been more sizzle than steak. Over-charged customers, faulty IT, scams, and catastrophic failures have overshadowed the successes. Finally, one company has broken through to the Holy Grail. But which one?

I have seen the future of the PEO, and its name is enterprise-level HRO for small business. It is a future I have predicted before. But until now, the reality was one brick shy of a load. Providers have lacked sufficient scale and adequate risk-management. They have lacked a mature management team and transparency in their IT systems and finances. And most importantly, they have lacked a broad, satisfied, and sustainably-priced client base.

For the first time, I see one company with 8,000 happy customers and 140,000 satisfied serviced employees. It has customers in more than 40 industries and in 50 states, paying more than $1,600 per employee per year, a price that is reasonably in line with value received. I see strong scale economies, with capacity for two or three times more customers. I see open financials and technology. I see an experienced management team befitting of an industry leader. I see both coemployment and non-coemployment choices for clients. I see a sales leader focused on ramping up to 15 percent net annual growth from new sales and cutting the cost of customer acquisition from its current $1,250 per employee to much lower numbers. I see the future. It has finally come. Hallelujah.

Certainly, because one company has done it, others will surely follow. Now more small business customers can be on a level HR playing field with the Fortune 500.

This news is quite convenient for us. Imagine, this clear winner emerged just in time for HRO Todays special feature on the segment (see the center gatefold).

The PEO, an acronym for professional employer organization, has been around since the late 1980s. The niche has always held bucket-loads of promise. It serves a great unmet needfor HR services and affordable benefits for small business. It spawned a high-flyer stock or two and some spectacular train wrecks. The business attracted some scoundrels. Some of those bad guys ended up in jail. Our center gatefold timeline of the PEO industry tells the tale of some horrors, near-disasters, and even flashes of brilliancea story of evolution in action. It is not unlike the history of 19th century British banking. After all, it took British banks nearly a century to figure out how to make a profit.

I have been waiting for this moment for a long time.

After a decade of publishing technology magazines such as PC, CRN, and UPSIDE, in 1993, I started a company called Payroll Options, as a division of public staffing company Uniforce. It converted 1099ers of Sun Microsystems, Wells Fargo Nikko Securities, and Silicon Graphics, among others, to W-2 employees, and leased them back. We cut employment tax and other risks for big company clients. Although I did not know it at the time, Payroll Options was a PEO. Then I started another one, ABE, now a big winner for Californias Nelson Personnel.

In 1995, as VP of Sales for TriNet, a PEO, I perfected that companys focus on venture-capital backed technology clients. In 1997, as CEO of EmployeeService.com, I invented a new employee service model for small and mid-sized business, the ASO (Administrative Service Outsourcing) or non-coemployment HRO services. I raised $20 million in venture capital and landed 150 dot-com clients. At peak, EmployeeService profitably served 20,000 employees. When the dot-com bomb burst in late 2000, so did the company. But my vision of HRO for small- and mid-sized businesswith both coemployment and non-coemployment options still burns strong.

HRO Today magazines mission is an extension of that visionto bring the promise of outsourced HR services to all business and government, big, midsized, and small.

It makes sense that it has taken a few years longer to grow a clear winner in the small-business HRO space than it did for several heavyweights to emerge in the large-market HRO space. To be sure, acquiring one 30,000-employee client requires much less selling, management effort, and expense than selling 2,000 clients of 15-employees each.

Proof of the wonderful promise of small-business HRO is the fact that you have read this entire column just to discover the winning companys name. Now here comes the payoff. Just go to your browser and type in GevityHR.com.

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Revisiting the PEO, Part II

Look for the biggest and most effective PEOs to get bigger and more effective.

by Randall Mehl

I have to apologize for leaving you hanging. In the last edition, after a brief history of the PEO and a discussion about their recent success in the public markets, I abruptly ended on a quite cynical (okay, dire) note about the future of the industry. Let me clarify.

I believe the co-employment (i.e., PEO) model will continue to work, and for some, thrive. Administaff, GevityHR, and TotalSource all generate (or are on target to generate) operating profit of $100-200 per serviced employee annually-that is real money to which investors and analysts will attach real value. However, I do not expect the sector to swing back into favor in the eyes of investors, and therefore, I do not expect the area to re-emerge as a booming area within business services. What I do expect is the perception of the co-employment model and possibly the PEO business model to change over the next few years.

The staff leasing (predecessor to the PEO) sector was created as a vehicle for small businesses to obtain cost-effective insurance. The idea was that scale, effective claims management, and the ability (sometimes unwarranted) to assume risk enabled the provider to maintain a lower cost of insurance. When PEOs emerged in the public markets in the late-nineties, the value proposition changed to one of fee-based HRO-much like you would find with ADP in payroll or TALX in automated employment verification. The trend has clearly been to de-emphasize insurance as part of the value. Administaff has always maintained a “white collar” focus within its client base; GevityHR has dramatically lowered its workers’ comp exposure; and ADP-TotalSource spent two years cleansing its worksite employee base. I believe the co-employment models-even the ones just mentioned-remain heavily reliant on the value of delivering cost-effective health and workers’ compensation insurance to small businesses. In other words, a substantial portion of the $100-200 per serviced employee per year comes from insurance-related profits, in my view.

Big problem? It depends. Insurance-related profits can be okay, at least for a while. Clearly, there is value to aggregating employees for distribution efficiencies. Insurance underwriters often struggle with cost-effectively serving the small business market, due to high cost of sales and service, and sometimes adverse selection. As a result, it is not uncommon for the premiums for comparable coverage to be substantially higher for small businesses on a per-employee basis, or for underwriters to actually pull out of some small business markets altogether. If PEOs can deliver small business employees to underwriters at a reasonable cost, value is created. How much value depends on many factors, but a good starting point is the sales commission typically paid to insurance agents. A 10 percent commission rate on health and workers’ compensation combined could produce “value” of more than $500 per employee per year or more-interestingly, this turns out to be the difference in gross profit per employee between a co-employment contract and ASO contract.

Insurance-related profits are bad (unsustainable) when the difference between what the PEO pays for coverage and what clients pay for coverage is simply the result of the PEO absorbing a higher level of risk. This is called insurance arbitrage, and is predicated on the notion that PEOs either do a better job than the insurance company in assessing risk (doubtful!), or believe that they can actually reduce risk (a possibility). Over periods where claims experience is relatively light and abnormally few adverse events occur, profitability may appear extremely high. However, the tables can turn quickly, and PEOs often do not have a strong enough balance sheet to handle a worst-case scenario.

The co-employment model will likely survive, but the perception will undoubtedly change over time. If the value proposition of co-employment is largely rooted in efficient insurance distribution, then the sustainable business models must include size, consistent client selection, and effective management and operations. Due to the complexities of employment and insurance, the PEO business is one of the most difficult to manage. Do not expect to see a line-up of new publicly traded PEO prospects coming out of the woodwork. Rather, look for the biggest and most effective to get bigger and more effective.

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Revisiting the PEO, Part I

The PEO rollercoaster.

by Randall Mehl

Surviving PEOs are bouncing back, but does it mean the industry will do the same?

When I began my career as an analyst in the mid-90s, my first major project was to understand an emerging area that promised to transform small business HR-the PEO. My goal was to figure out whether this would be an investible area. My conclusion? I am still working on it.

For those not familiar with the PEO concept, it is most easily understood from the client perspective. A company outsources their entire HR function and their employees become employees of the PEO for administrative purposes-a co-employment relationship. This offers small companies “big company” benefits. The value proposition is straightforward. The challenge is in managing the risks and the costs- PEOs act as underwriters and distributors of workers’ comp, healthcare, and state unemployment insurance. If the price charged to clients does not cover the losses, the PEO will have problems.

For the first few years, PEOs were a hit in the market. Employee Solutions, Vincam, Administaff, OutSource International, and Staff Leasing took turns in the IPO spotlight. Investor favorites ADP and Paychex paid large sums to buy their way into the business, legitimizing the model. However, investors discovered (the hard way) the difficulty PEOs have in managing risks. Employee Solutions and Outsource International became insolvent-largely due to inadequate workers’ comp reserves and acquisition-related issues. Vincam hit a wall following several acquisitions, before selling to ADP. Staff Leasing imploded more than once after discovering inadequate health and workers’ comp insurance reserves. And Administaff’s stock fell more than 90 percent during the nine months following the announcement of a dispute with its health insurance carrier. By mid-2002, investors had seen enough of the PEO.

But 2003 has been a different story. The two pure PEOs in the public markets, Administaff and Gevity HR (formerly Staff Leasing), have increased 81 percent and almost 300 percent, respectively (see charts below). Administaff is now trading at more than 5 times its low and Gevity at more than 18 times. TotalSource (ADP’s PEO) has arguably become one of ADP’s best performing business units, growing 37 percent in the recent fiscal year. Why the sudden turn? First, each of the Big-3 companies has undergone significant change resulting in stronger business-Gevity has refocused sales and retention on the less risky white collar clients; Administaff has changed health carriers and overhauled its billing system. Second, the extraordinarily tight insurance market has forced many smaller competitors out of business. Finally, rising insurance costs have become a big problem for small businesses, increasing the value proposition of the PEOs.

Is the PEO coming back? I don’t think so, and I would be cautious when considering investing. While the Big-3 should continue to show improving results, the industry faces three key obstacles: (1) Legislation is working against PEOs (more on that next month); (2) Insurance markets change-a less penalizing market for small businesses could take away from the PEO value proposition; and (3) The ASO concept is gaining traction, particularly among the payroll processors. Next month, I will elaborate on these challenges.

 

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