Employee EngagementPayroll & Compensation

PEOs Back with a Vengeance

Growth comes with a rise in employment among organizations with 50 or fewer workers. Opportunities for HRO providers may exist in the $44 billion market.

by Andy Teng

Professional employer organizations (PEOs) operate in a realm foreign to most HRO Today readers. That’s because most PEO clients tend to be small businesses with no more than 50 employees, while HRO buyers—even on the lower end of the mid-market—boast a few thousand heads. Nevertheless, this sometimes overlooked segment of the outsourcing market grew tremendously last year and could gain greater share in a segment with $44 billion in market potential, a recent study found.

According to a report released by IDC , small employers are increasingly turning to PEOs to manage their HR functions after a decline in 2003. Lisa Rowan, program manager for HR and talent management services for IDC, pointed out that last year marked a turnaround point for this market segment, in part because of a strong economy, low unemployment, and an explosion in small-business growth.

“PEOs had declined in 2003 but made a 35-percent swing back (in 2006). They seem to be alive and well and kicking,” she said, noting that nearly five percent of all small businesses in the U.S. are covered by PEOs.

One reason for its recent strong growth was the rise in the number of employees at small businesses. Rowan pointed out that between 1999 and 2004, their ranks swelled 8.4 percent, pushing up the need for outsourced HR services for these organizations (Table 1). And with this increase, many of those new companies also chose not to administer HR services on their own, instead opting for the services of PEOs and other providers.

Aside from employee base size, the differences between PEO and HRO providers are stark. Unlike HRO providers, PEOs are co-employers of workers and retain the right to hire and fire staff. They also pay wages from their own accounts and collect and pay taxes to local, state, and federal governments.

Rowan also noted that because of the price sensitivity of the PEO market and the co-employment aspect, services are standardized for all employees administered by the same PEO. Typically a small administrative staff serves a very large employee base. In contrast, many large enterprise HRO deals are custom delivered on dedicated platforms. Standardization, until recently, has not typically been a hallmark of larger HRO contracts.

The PEO provider market is also much more fragmented than the HRO market. Only a few, large national PEO organizations serve the market, with many more regional players in business. National brands include TriNet and Gevity. On the other hand, enterprise end-to-end services are only available from some two dozen global service providers.

Because only five percent of organizations with fewer than 50 employees use a PEO, Rowan said the potential for growth is significant. With the addressable small employer market worth $44 billion annually, even a small incremental rise in market penetration could yield tremendous revenue gains for providers. The report added that there are opportunities for service providers in adjacent segments to tap this market. For instance, it suggested, HRO providers may want to consider the downstream market, citing the case of ADP with its Total Source PEO offering.

Tags: Engaged Workforce, HRO Today Global, Payroll

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