The competitive landscape for Professional Employer Organizations (PEOs), which provide outsourced human resources to companies across the nation, may be starting to tilt in favor of the largest PEOs, according to a new report by Staffing Industry Analysts, the premier provider of market intelligence about the contingent workforce.
The largest PEOs are gaining a competitive advantage because they are lowering costs due to increased economies of scale, are developing a well-diversified risk pool of employees who receive benefits, and are continuing to invest in technology. Some larger PEOs also are enjoying a sales advantage over smaller companies because they can market PEO services to established customers that outsource their payroll.
Additionally, the report found that investment capital continues to flow to the strongest PEOs, thus enhancing their ability to dominate what has been a fragmented market. In the past four years, about 10 smaller PEOs were acquired by larger competitors. Three acquisitions were done with
investments from private equity firms.
"The PEO industry has enjoyed 20% growth over the past few years, so some consolidation is inevitable after a period of rapid growth," said Barry Asin, Executive Vice President and Chief Analyst of Staffing Industry Analysts. "There is still plenty of opportunity for PEOs both large and small who deliver quality services to the marketplace. PEOs continue to play a very important role in the U.S. economy because they are efficient, cost-effective way to deliver human resources services, particularly to small business."
Staffing Industry Analysts estimates that gross PEO revenue will reach $8 billion in 2006, and net revenue for PEOs will grow an estimated 8% in 2007. For the first time, the top 25 PEOs all had gross PEO revenue of more than $100 million. There are now about 700 PEO companies with 4,000 offices nationwide. An estimated 18 PEOs have 10,000 or more worksite employees.The average number of worksite employees per client is 23.
Top PEOs Remain The Same
The order of the top five largest PEOs remained unchanged from Staffing Industry Analysts’ ranking last year. The top 5 by 2005 Gross PEO revenue were:
—ADP TotalSource of Miami, FL. $6.97 billion. The company had 5,700 clients and 139,000 worksite employees. Gross PEO revenue grew 26.9% from 2004 to 2005.
—Administaff Inc. of Kingwood, TX. $6.63 billion. The company has 5,000 clients and 94,000 worksite employees. Gross PEO revenue grew 23.4% from 2004 to 2005.
—Gevity HR Inc. of Bradenton, FL. $4.77 billion. The company had 8,200 clients and 136,600 worksite employees. Gross PEO revenue grew 10.8% from 2004 to 2005.
—Paychex Business Solutions of Rochester, N.Y. $2.48 billion. The company had 3,300 clients and 59,000 worksite employees. Gross PEO revenue grew 8.6% from 2004 to 2005.
—TriNet Group Inc. of San Leandro, CA. $1.67 billion. The company had 1,100 clients and 16,600 worksite employees. Gross PEO revenue grew
20.6% from 2004 to 2005.
The fastest growing PEOs were No. 14 Barrett Business Services of Vancouver, WA, which grew 51.7%; No. 19, Progressive Employer Services of Sarasota, FL, which grew 48.4%; and No. 12 Ambrose Employer Group of New York, NY, which grew 44.6%.