Brining the shine back to the PEO industry.
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.
Leading companies suggest their top relocation cost-saving ideas.
In todays economic environment, relocation budgets are not protected from the microscopic view of upper managements request for reductions. Companies are seeking creative methods to reduce costs including working with relocation consultants, outsourcing relocation functions, and researching techniques and ideas that present savings without diminishing service.
Runzheimer International, a consulting company with more than 70 years of experience in employee mobility, interviewed leading companies to uncover cost-saving ideas that are being presented to next-level management. If you are currently (or considering) outsourcing your relocation functions, working with a consulting firm, or just looking to make internal changes to save costs, you might want to consider these ideas.
POLICY EDUCATION AND LANGUAGE
The ultimate goal of a relocation policy is to facilitate the companys need to have a valued employee be productive in a new job in a new location by covering the costs associated with the move without over payment. Long gone are the days when no expense was too great if it made the transferee happy. Language in the written policy must set clear parameters in order to reduce over payment and to deter employees from negotiating for more money or assistance.
Relocation professionals should also consider extending policy education beyond the transferee to the hiring managers. One professionals training presentation included review of policy in relation to:
- Cost to relocate employees into the division;
- How inconsistency in delivering benefits creates concerns about discrimination; and
- Why an exception to policy may set precedence for future relocations and hinder the goals of the program.
The training was intended to stop hiring managers from making promises that would not be supported by the company.
INITIATING PAYMENT CAPS
Reviewing your most costly moves may uncover excessive payments to employees. Evaluating these costs may help determine potential caps, and determining a maximum amount for a particular benefit can reduce the companys cost while at the same time treating all employees consistently. One area to consider is loss-on-sale policy.
Loss on Sale
Home market values have continued to appreciate at a faster pace than inflation. As long as this trend continues, loss on sale will not be a topic of discussion. And since it is not currently an issue, now would be a good time to initiate a cap in the relocation policy.
Organizations may implement a cap equal to a percentage of home sale (original purchase), a percentage of the loss, or a flat amount. A common policy may state: Occasionally, due to economic conditions, property values decline. If this causes you to incur a loss on the sale of your existing home, Company may reimburse you for the loss. This vague policy indicates the company would pay for loss on sale regardless of the size of loss; it also does not address capital improvements. Table 1 demonstrates the financial ramifications of this. This is a simple calculation, and it does not address improvements made to the home during the five years.
If the relocation policy addresses loss on sale, clearly defines capital improvements, and notes maximum disbursement, not only is interpretation limited, financial liability is also reduced. A better policy may say: Occasionally, due to economic conditions, property values decline. If this causes you to incur a loss on the sale of your existing home, Company may reimburse you for the loss. Eligibility for reimbursement is based on: the property value at the time of purchase (established by a pre-purchase appraisal, or contract purchase price, whichever is lower); plus contributory value of capital improvements, if any; less the current market value (sale contract). The contributory value of capital improvements, as determined by the appraisers, may be higher or lower than the actual cost of the capital improvements. The maximum compensation for this relocation benefit is 25 percent of your annual pre-move salary. Table 2 shows the calculation for this more clearly written policy. The mid-level manager would be reimbursed for $21,500 and incur a $3,750 loss based on the company-calculated loss on sale. The executive would have a non-reimbursed $19,000 loss, based on the calculation.
Table 3 shows the same example using a percentage of home cost. In this case, the policy would need to be changed to read: Occasionally, due to. The maximum compensation for this relocation benefit is 10 percent of the contract purchase price of the home. In this example, the calculated loss-on-sale benefit for both the mid-level manager and the executive would be within the policy limit.
It is important to compensate for a loss on sale. This information is presented as an example of what organizations are reviewing to protect themselves in regard to the loss-onsale benefit.
CHANGING EXPENSE REPORTING
Replacing direct expense reporting with a lump-sum program is another way for companies to realize savings. A typical lumpsum program bundles all travel, meal, and lodging expenses associated with the home finding, final move, and temporary living benefits.
The typical transferee takes 8 to 12 weeks to relocate and often completes 6 to 12 expense reports. Add the approval process and the cost to prepare the check or direct deposit for the transferee, and a lump-sum program can eliminate both expenses and headaches. Companies interviewed who are not currently using a lump-sum program are looking to start during their next fiscal year.
Some Runzheimer clients who are currently using a Lump-Sum Program are implementing reductions. One company, who averaged $7,600 per lump-sum payment, recently reduced the number of temporary living days from 45 to 30 for homeowners and to 15 for renters. They also reduced the home-finding trip by one day. Because of these minor changes, they expect to reduce the average payout to $6,785 and save an estimated $125,000 in relocation expenses.
One major food processing company has changed their lump-sum program several times since the inception. They started with a calculation that was very generous and, over time, reduced components. The employees continue to be satisfied with the lump-sum amount provided.
Table 4 demonstrates changes made for the homeowner calculation for the home finding trip. Reducing the home finding nights by one was a minor change. Switching from a 5-star hotel to a different class also enabled significant savings. The size of the car was another minimal change that resulted in significant savings.
Table 5 identifies changes that were made to the temporary living portion of the calculation. A majority of the savings are due to the reduction in temporary living days. Efficient arrangements to ship the employees personal vehicle makes seven days of car rental more realistic.
Table 6 demonstrates changes made to the final move. The increase in the threshold used to determine when air travel may be used allows for savings on airfare. Also, the change from the IRS business mileage rate (37.5 cents/mile) to the relocation mileage rate (14 cents/mile) provides for a minor savings in this category.
Going forward, satisfaction among transferring employees should continue to be measured. As transferees are surveyed, companies must evaluate this program to determine if the policy is too lean or if they have an opportunity to make even further reductions.
Cost savings and administration ease are just a few of the benefits of a lump-sum program. Companies adding a lump-sum program may start by offering a choice to their employeeseither direct expense reimbursement or a lump-sum payment. After a test period, companies usually eliminate the direct expense option because a majority (more than 80 percent) select the lump-sum payment over direct reimbursement.
Companies considering initiating policy changes, payment caps, or changes to expense reporting (such as lump-sum programs) may want to speak with a relocation consulting company or service provider about establishing goals and implementing new programs. In an era of increasing globalization and projected declining trained workforce, no one predicts relocation costs will be moving anywhere but up.
The Industry’s Top Full-Service Relocation Providers
This list was developed by contacting 15 of the largest full-service relocation companies. Participating companies were asked to fill out a questionnaire providing data on their own services and on those of their main competitors. Numbers were averaged to come up with an industry average for each company that was then compared to the companys self-reported data. Although there was some variation between each companys self-reported number of employees transferred (usually higher) and the industry average (usually lower), there was no difference between the self rankings and industry rankings. Thus, the Bakers Dozen was determined
Last Years Rank: 1
Transferred Employees 2003: 82,000
Services: Supporting more than 2,000 clients worldwide. Offering consulting, intercultural training, mobility management, global supplier management, reporting, program admin, and technology solutions for move management. Support for international and domestic relocation includes home sale and home marketing assistance, household goods shipment, property rental management, closing services, home finding and destination assistance, rental assistance, mortgage services, expense admin, policy counseling, consulting, and group move management. Specialized expertise in cross-cultural and language training and global workforce development. Integrated, scalable technology to support international assignment compensation. Relocation management services to membership organizations (members receive assistance with home finding and purchasing, home listing and selling, and moving and mortgage services.)
CENDANTS BEST 3 SERVICES:
1. Ability to provide single-source,one-stop solution with total, end-to-end support for the mobility process
2. Self-service Web portals
3. Online, global T&E system
Prudential Real Estate & Relocation Services
Last Years Rank: 2
Transferred Employees 2003: 41,000
Services: DomesticConsulting, concierge, partner assistance, policy development, cost accounting, amended value sales,buyer value option, guaranteed home sale, home finding, mortgage, marketing, policy counseling, rental, temp living, transitionmanagement. GlobalConsulting, candidate assessment, intercultural and language training, global workforce development, com-pensation admin, cost projections and management, ongoing assignment support, policy counseling, repatriation and reassign-ment, destination services, education consulting, partner assistance, tenancy management, visa and immigration, short-termassignments, global business briefings, mortgage.
PRUDENTIALS BEST 3 SERVICES:
1. Cost tracking
2. Home sale
3. Policy explanation and familiarization to relocating employees
Weichert Relocation Resources
Last Years Rank: 3
Transferred Employees 2003: 23,000
Services: Assignment management; consulting; cross-cultural and language training; cost-of-living analyses; destination services; lump-sum and financial admin; gross-up processing; group move; home finding, marketing, and sale; household goods and inventory management; mortgage; payroll; policy consulting; property management; rental; repatriation; spouse career services; supplier management; tax services; temp living; tenancy management; visa and immigration.
WEICHERTS BEST 3 SERVICES:
1. Tax services
2. Expertise with home sales program
3. Reporting capabilities
Last Years Rank: 5
Transferred Employees 2003: 21,000
Services: Corporate ProgramPolicy consulting, cost projections, immigration, compensation/tax/payroll, expense audit reimbursement, repatriation, reporting. Real EstateHome sale, property management, leasing. DestinationCulture programs, cost of living analysis, orientation, temp housing. HR ConsultingPolicy development, candidate assignment, global business assignment, spousal programs, risk management, benefit admin.
PRIMACYS BEST 3 SERVICES:
1. Web-site technology
3. Expense services
Last Years Rank: 6
Transferred Employees 2003: 20,000 (With an additional 100,000 assisted through SIRVA moving companies.)
Services: ConsultingBenchmarking, policy evaluation, cost analysis, program development. Relocation Management Expense management and tax evaluation; group move; internal training; lump-sum benefit admin; Web-based reporting and financial services; quarterly financial review; SLAs; lease cancellation; property management; appraisal values; home finding, marketing, buying, and selling; moving. DepartureHome marketing, lease cancellation, agent recommendations, management. DestinationCounseling, orientation, home finding, rental, temp living, partner career assistance, concierge. Global Solutions Assignment planning and admin, relocation and repatriation, compensation and payroll, tax services.
Last Years Rank: 10
Transferred Employees 2003: 16,000
Services: GlobalCustomized Web site/Internet-tracking system, plan admin, candidate assessment, cultural and language training, home finding, household goods transportation, repatriation. CorporatePolicy review and admin, group move, tax grossups, equity advances and funding, expense tracking and reimbursements. DepartureMarketing assistance, buyer value option, home sales, household goods transportation. DestinationHome finding, mortgage assistance, temp living.
GMAC Global Relocation Services
Last Years Rank: 7
Transferred Employees 2003: 15,000
Services: GlobalSupply chain management and transition management of assignees. ConsultingResearch, policy development, joint venture, M&A, workforce reduction, other HR. DomesticComprehensive program management for departure and destination including financial admin, plus GM vehicle assistance, mortgage, and credit services. InternationalRange of services for host and home locations to more than 110 countries.
Royal LePage Relocation Services
Last Years Rank: New to list
Transferred Employees 2003: 13,000
Services: ConsultingPolicy; group move; market, location, and property studies. DepartureHome marketing and sale (with guaranteed buyout program); moving coordination. DestinationHome search and purchase assistance; rental; temp living; education, elder care, career, and community connection programs. InternationalRelocation programs including orientation and training. Accounting and AdminFunds management and invoicing, supplier management, performance reporting.
AmeriCorp Global Relocation
Last Years Rank: 8
Transferred Employees 2003: 9,000
Services: CorporateEducation, policy development, benchmarking, recruiting and retention, reporting, group moves, cost of living analysis. Departure Counseling, needs assessment, lease cancellation. DestinationCounseling, needs assessment, orientation, career assistance, dependant care, pet transport, rental, mortgage, purchasing, home value program, closing assistance. GlobalMove manager, single booking agent, freight, audit process. InternationalPolicy consultation, candidate selection, visas, tax and Social Security, property management, transportation of goods.
Paragon Relocation Resources, Inc.
Last Years Rank: 9
Transferred Employees 2003: 8,000
Services: Program AdminInternational and domestic relocation; global and short-term assignment; recruitment; relocation benefits; home marketing, sale, and finding; property management; mortgage; rental; temp living; spouse assistance; outplacement; transportation of household goods; travel management; tax program. Global RelocationAssessment surveys, communications, program and relocation center development, supplier selection, staff augmentation, training, global business entry and expansion management. Group MoveOrganization re-engineering, move planning, employee demographic study, communications, orientation, business continuity planning, facility move management.
PARAGONS BEST 3 SERVICES:
3. Employee relationships
Last Years Rank: 4
Transferred Employees 2003: 8,000
Services: DepartureMarketing, market value purchase, home buyout. DestinationConsulting, home finding, renting, executive assistance, affordability analysis, mortgage. AdminOutsourced admin, household goods management, temp living. Relocation Accounting (domestic)Cost estimator, expense management, tax reporting, lump-sum admin, closing cost reimbursement, employee loan admin. Consulting (domestic)Policy analysis, development, and review; group moves; training. International Pre-departureCandidate assessment, cost estimate, work permit, home sale, cultural and language training, partner counseling. OtherOngoing assignment support, repatriation, international consulting.
Last Years Rank: 11
Transferred Employees 2003: 7,000
Services: Global Relocation Management and Technology SuiteProgram admin, supplier selection and management, employee counseling, departure services, destination services, expense admin, household goods management, property management, group move, vehicle assistance, student relocation. Global AssignmentAssignment management, visa and immigration, intercultural services, spouse support, language training, tenancy management, transit insurance. ConsultingGlobal policy consulting, benchmark studies, trends report, M&A and joint ventures planning, group moves, global HR strategy and workforce planning.
Cornerstone Relocation Group
Last Years Rank: 12
Transferred Employees 2003: 4,500
Services: ConsultingPolicy development and review, benchmarking, group move. DepartureHome marketing, home sale. DestinationHome search, mortgage, temp living, rental, family assistance programs. GlobalOrientation, settlement services, home search, temp living, cultural and language training, consulting. AccountingExpense management and tax reporting, funding, lump-sum admin, closing cost reimbursement. AdminTransportation assistance and outsourced admin.
CORNERSTONES BEST 3 SERVICES:
1. Policy consulting
2. Total program management
3. Home sale assistance
How effective relocation outsourcing helped Agilent Technologies (a spinoff of HP) build a new, global company.
Its March 1999, and
As we prepared the business case, it became clear that leveraging the variable costs of an outsourced relationship, versus the fixed costs of internal staff, would save us money. Whether we were moving one employee, or 1,000, we had to deliver a complete, end-to-end, international solution. We simply couldnt devote our staff to the day-to-day management of this essential, but non-strategic, role.
Unable to justify the HR staffing levels we were accustomed to at HP, and aware that global relocation management wasnt a core competency, our team evaluated a dozen service providers, ultimately choosing Cendant Mobility for all relocation administration and supplier management. Cendant provided the crucial compliance know-how in each country where Agilent does business and enabled the HR team to focus on other responsibilities.
Outsourcing also allowed us to reduce by 422 percent the number of suppliers we had to manage. We now had only one supplier to manage. Not only were many of our previous suppliers already part of Cendants GlobalNet program, Cendant agreed to manage select, regional providers not in the GlobalNet program that we wanted to maintain in our cadre of suppliers. Many of our direct costs have decreased due to streamlined supplier management and better leveraging capabilities. We were also able to free up IT dollars for core, revenue generating activities by using our providers systems via our own intranet.
The ability to maintain a small internal staff has been a boon to HRs bottom line. As our outsourcing model stabilized, we were able to progressively reduce our internal resources. The current relocation team consists of three part-time regional relocation managers and an expatriate tax manager, each concentrating on vendor management, policy development, exception review, and escalation management.
Today, this team monitors service levels on a quarterly basis, evaluating employee and manager satisfaction via a Web-based survey, and consistently finds that the satisfaction level is climbing and, in some cases, is higher than scores received prior to outsourcing.
Open and frequent communication maintains our productive vendor relationship and outsourcing environment. The relocation managers meet with Cendant account managers weekly to discuss status reports, issues, and opportunities. We also have a monthly global meeting so that policy or process issues can be resolved.
Today, only four years after its inception, Agilent boasts a streamlined relocation team, integrated technology, marked cost savings, increasingly satisfied managers and employees, and an approach that flexes with the ebbs and floods of employee relocations.
By continuing to improve operations by leveraging external competencies and efficiencies worldwide, we are better able to focus on what we do best to retain and gain competitive advantages in the markets we serve. Success in outsourcing has meant success in our core businesses.
Lin Contino is the Global Relocation Manager for Agilent Technologies. You can contact her at email@example.com. Sarah Fenson is Leadership Communications Representative for Agilent Technologies.
Case Study: Creating a national health portal for employees.
An outsourcing partnership delivers e-health portal to Northrop Grumman employees in all 50 states.
Following 16 major acquisitions since 1994, Northrop Grumman, the second-largest defense contractor in the United States, had grown from roughly 40,000 employees to 120,000. Along the way, we also inherited nearly 350 different health and welfare plans and 16 different pension plans. And, although we have been outsourcing a significant portion of our administration for the past 10 years, we did not bring all of our acquisitions together onto one common administrative and design platform until recently.
The catalyst for this consolidation was our 2001 acquisition of Litton Industries. We used this acquisition as an opportunity to redesign all of our benefit programs for several reasons. First, we hadnt redesigned most of our programs for several years and were facing pension issues. And, as we realigned newly acquired employees into different areas within Northrop Grumman, the benefit programs needed to make more sense across the entire company.
Integrating our acquisitions gave us the opportunity to redefine health care at Northrop Grumman. This was a huge undertaking that required a threepronged approach: plan redesign, health care resources, and engaging our leadership and employees from the beginning. Because of the magnitude of the task, we couldnt do it alone. We needed the help of our main outsourcing vendor, Towers Perrin, an HR consulting and administration services firm, to actually make it all happen.
Integral to the changes we were making, and a key piece that we outsourced to Towers Perrin, was the creation of a Web portal to promote health care consumerism (which has the potential to help stem rising health care costs.) We looked at consumerdirected health plans but realized they would only touch those employees who selected them. We wanted to provide health care tools and resources for all of our employees. One of our key messages was that health care was changing dramatically. For employees, the message was that, whether or not we took all of these 350 different health and welfare programs and merged them into one, we were still going to have to address health care cost increases.
In making the decision to outsource the e-health portal, we recognized both the complexity of the task as well as the fact that we were still in the process of implementing our redesigned flexible benefit, recordkeeping, and defined benefit programs. We chose Towers Perrin, in partnership with WebMD, a leading provider of Web-based consumer-focused health care information, because we believed that they would be able to provide us with a solution that would meet our needs.
With our input, Towers Perrin developed an entire health online strategy for Northrop Grumman. They delivered an e-health portal that contains all of the critical health care information needed to help our employees become better health care consumers. Those resources include Health Online, a medical plan comparison tool, online open enrollment, and care management.
In early 2003, we introduced our new Web site NG Benefits Online to our employees, following an intensive communication effort. Through NG Benefits Online, employees can now access a wealth of information and enroll in their benefits with just one click of a mouse. A customized consumerism guide highlights all of the new resources now available.
At Health Online, employees can take a health risk assessment, visit a condition center, maintain their family health records, and use tools to compare drug costs or determine the quality of different hospitals. Care management provides a nurse advice line, a disease and case management option, and a list of centers of excellence. We also use the information employees provide in their health risk assessment to match them with appropriate disease management programs.
We have had very good results to date and view our new e-health portal as an ongoing endeavor to get employees to pay attention to health care costs and their part in managing them. Towers Perrin has provided user statistics that underscore the success of our portal, including the fact that 90 percent of our employees enrolled in their 2004 health care benefits online, 40 percent used the medical plan evaluation tool, and 17 percent registered at Health Online. Based on these encouraging results, we will continue to work with Towers Perrin and WebMD to provide our employees with the best tools to help them become even better health care consumers and managers of their health program costs.
Corporate training and e-learning are poised for a rebound.
Corporate training budgets are notorious for being the first ones to be slashed by organizations in difficult economic times. The last two years proved no exception to the rule, and providers of corporate training services have had to learn new survival skills during dismal years for their industry. For the survivors, though, there is finally some indication that the corporate training market is recovering and is expected to grow robustly over the next several years.
According to research firm IDCs U.S. Corporate and Government eLearning Forecast2004-2007, all three segments of the corporate training market covered in the survey (e-learning, business skills training, and IT education services) should see substantial growth during the next five years. In particular, strong increases in e-learning spending should continue to outpace the already robust growth expected for the broader training market.
Three recent transactions, all taking place within weeks of each other earlier this year, illustrate the different ways in which investors and strategic buyers are placing new bets on the corporate training market.
In January, Chrysalis Ventures led a B-round investment in TechSkills, the Austin-based national provider of IT certification, medical education, and general businessskills training. Chrysalis was joined in this round by OCA Ventures and Tobat Capital, both current investors in TechSkills.
TechSkills is extremely well-positioned to take advantage of the rebound in corporate training spending with an offering specializing in blended-learning solutions that combine instructor-led training with elearning solutions. With 30 learning centers across the country and more than 100 courses focused on skillsbased training or certification, TechSkills clearly hopes to bridge the gap many businesses are expected to face during the next five years as the U.S. educational system comes about 6 million graduates short of the anticipated demand for skilled labor.
INTREPID LEARNING SOLUTIONS
A few weeks later, Seattle-based Intrepid Learning Solutions announced an additional round of investment led by new investor Rustic Canyon Partners. Existing investors Madrona Venture Group, Buerk Dale Victor, and Staenberg Venture Partners also participated in the new round of financing.
Unlike TechSkills, with its proprietary training centers, Intrepid Learning is a provider of outsourced training services who takes over the management of existing corporate training departments for large clients (like Boeing) and applies a proprietary learning delivery system aimed at improving employee performance in a cost-effective manner. This model should appeal to larger organizations that have invested heavily in corporate university models and are now seeking to run these cost centers more effectively.
Finally, in February, publicly-held Phoenixbased Prosoft Training and Berkeley-based Trinity Learning announced that they had agreed to merge their businesses.
The merged company combines Prosofts line of certification products and services for IT and communications professionals with Trinity Learnings current training and certification offerings. Prosofts Certified Internet Webmaster certification program, in particular, is a very well-recognized professional certificate covering IT job-role skills (in Web-site design, e-commerce, network administration, security, application development, and programming) and has been earned by individuals in more than 100 countries.
According to Harvard professor David A. Garvin, an expert on learning organizations, At the core of active learning is a deceptively simple requirement: Students must be personally invested in the learning process. Trinity Learning, Prosoft, and the roster of fund managers who invested in TechSkills and Intrepid Learning are in fact betting that investing with their wallets will bring rewards well beyond sheer learning for their investors and shareholders.
An occasional review of its moving parts is usually a good idea.
Recent scandals — ranging from questionable timing of stock trades to questionable communications to employees about the stability of their 401(k) plan investments — have brought to light a truism that benefits consultants have been gently sharing with plan sponsors for a very long time. Once in a while, just like you and your car, even the most uncontroversial of DC plans needs a check-up.
In technical terms, this check-up would ask, “Are you adhering to your fiduciary responsibilities to plan participants?” In plain English, it asks “Have you or anyone else looked lately to see how your plan’s administrators — i.e., your payroll system, recordkeeper, trustee, and anyone else with their hands on your plan’s data and/or its assets — are doing their jobs?”
Although plan sponsors typically think first of reviewing investment products, the operational review these questions suggest, sometimes called an “audit” (though not at all an accounting function), warrants attention and explanation. Such a review is often inspired by one of three general circumstances:
- preparation for an impending merger or acquisition, where the acquiring or controlling entity wants to confirm the operational stability of what it’s taking on;
- response to one or more major, visible breakdowns in, for example, recordkeeping accuracy, communications, payment timing, etc.; or
- responsibility of management (recognized, documented, and legally required) to monitor the benefits and related services provided to employees, even if nothing in particular has apparently gone wrong.
In other words: this exercise can be defensive, reactive or proactive, any of which is better than it being nonexistent.
There are many behind-the-scenes administrative aspects to DC plans. Some are very technical and some, rather mundane. The failure of any one of them can escalate into costly customer service problems, potentially with legal implications. The fundamental objectives of any operational review are almost always to confirm that:
- the day-to-day operation of the plan is in keeping with its rules (i.e., what is written in the plan document, any formal administrative documentation, SPDs, and any other formal employee communications); and
- no aspect of the plan’s operation is out of compliance with federal law (e.g., IRS contribution and pay limits, permissible hardship withdrawal circumstances, etc.).
While collecting and assessing an adequate variety of tell-tale participant test cases and plan-wide data and documentation to meet those two primary objectives, you might also want to confirm, for example, that:
- participants’ accounts are accurately updated with appropriate investment results;
- deposits into plan assets are correctly timed in relation to corresponding payroll deductions or participants’ instructions;
- the timing and amount of payments to plan participants properly relate to their submitted requests;
- generic and personalized communications regarding any particular transaction — whether on paper, a Web site, or an automated telephone voice response system — are accessible (and helpful) to current and former employees and beneficiaries as soon as they are first eligible to make the transaction or state an interest in doing so; and
- statistical reports provided to benefits management on plan utilization and customer service activity are accurate and informative.
Even if you didn’t have contracts or service level agreements with your administrative service providers, wouldn’t you want an objective appraisal of at least how these aspects of your plan’s operations are working, if not a more in-depth review of data management and customer service? It’s true that technological advancements and growing industry-wide expertise have rightfully led the DC plan administrative function to be taken for granted by many (think “commodity”). However, imperfections in any of the functions listed above can and still do spawn from payroll data problems, complex plan design, and customer service overload.
If identified, these imperfections would not necessarily lead to plan qualification or compliance issues (although they could). But any of them could be signs of potential or actual administrative breakdown and, possibly, someone’s failure to meet their fiduciary obligations to plan participants. If that is happening, or if significant required documentation (or charters or policy statements) turns out not to exist, wouldn’t you prefer to know that sooner rather than later?
Look for the biggest and most effective PEOs to get bigger and more effective.
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.
The PEO rollercoaster.
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.
Employee incentive programs are increasingly regarded as strategic business tools.
Once treated as little more than freebies with no measurable impact on a companys bottom line, employee incentives are now increasingly regarded as must-have programs, strategic business tools with the power to improve productivity and profits, and especially effective in dealing with a soft economy. The big difference is that now the roi power of incentives can be measured, and it is superb.
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