Employee EngagementPayroll & Compensation

Resource Guide PEO Feature -David Versus Goliath: PEOs to Enter the HRO Space

Why and how PEOs might win the race for the mid-market despite the resources and established presence of enterprise-wide HRO providers.

by Martin Babinec, CEO, Trinet

It should be obvious why PEOs ought to expand their service lines and reach outside the boundaries of the co-employer model: the market for the BPO model is gargantuan.

There’s still an unquenched appetite for small business PEO services, but there’s even less competition—and more demand—among the so-called “mid-market” space, where companies with several hundred employees up to several thousand might happily partner with a provider who can offer a similar range and depth of HR services. As of today, there’s no real dominant player serving that market, so it’s wide open and ready for business.

But does a PEO stand any chance of getting to that market? Aren’t the big guys who already serve multi-thousand employee workforces likely to get there first?

To understand why PEOs may have a competitive advantage, it’s necessary to take a step back and evaluate the bigger picture landscape for multi-process HRO. The larger enterprise deals are led by companies such as Hewitt, Accenture, ACS, Fidelity, IBM, and Convergys, and they serve customers with around 10,000 employees and more.

In a model pioneered by Exult (now Hewitt), the enterprise players typically adopt a client’s existing HR systems platform, bring aboard a chunk of its HR team, and maintain many existing HR processes. Over time, the enterprise HROs may implement process improvements and portions of a web portal or another component introduced across their entire customer base, but the core HRIS remains unique to each customer.

As we know, the PEO model pretty much presumes that all customers will be inducted into the provider’s system platform and adopt many of its own business processes. The best PEOs have developed a level of maturity to put multiple clients on a single instance of a large database, as well as how to guide customers to adopt the PEO’s business processes—all of which are leveraged by the efficiencies gained by being the employer for most payroll taxes, workers compensation, and benefit plan sponsorship.

This is significant because the big guys look at the mid-market and say “why bother?” A company of, say, 1,000 to 5,000 employees is not going to be large enough to allow for the standard process of customizing and refining a pre-existing HR platform.

Of course, PEOs have substantial challenges in cracking the mid-market themselves. While PEOs may have the proven methodology to serve multiple customers on a single platform, the overall economics work in the small business sector largely because of the efficiencies brought about by the shared employer relationship. Under a BPO arrangement, which would not make use of a shared employer relationship, customers would sponsor their own benefit plans and workers compensation and remit payroll taxes under their own ID.

In addition to foregoing revenue opportunities historically gained through workers compensation risk management, PEOs would face significantly greater administration costs to process transactions under client-sponsored plans and tax IDs. Even PEOs today who have a so-called ASO-style offering are not delivering an identical level of processing capability and service (e.g. benefits reconciliation and remittance) as those from a standard, full-service PEO arrangement.

Despite all the barriers to mid-market entry, PEOs are ahead of the game due to their ability to leverage a single database and platform. That’s a technical advantage over the larger companies forced to adapt and customize a pre-existing infrastructure or platform at the client company.

But there are other advantages as well. PEOs understand how to get companies to adopt the outsourcer’s own business model. Furthermore, PEOs understand how to sell to price-sensitive customers—and the customers in the mid-market will be far more price sensitive than the Fortune 500 companies served by today’s enterprise-level HROs.

The PEO-turned-BPO will also be able to allow mid-market customers to exit the relationship relatively quickly, rather than force them to commit to multi-year contracts. By offering a multi-tenant architecture in which the customer adopts the outsourcer’s business processes, it will be possible to offer a lower cost of implementation than typical enterprise deals.

The challenges are still there. PEOs need to figure out a way to turn some of the more granular services, such as remittances and reconciliations, into a one-size-fits-all process that doesn’t depend on the co-employer model for scalability. PEOs also need more depth in delivering human capital management services such as applicant tracking, compensation management, eLearning, and performance management, to name a few. It’s inevitable that they pursue the mid-market, the battleground for the future of HRO. This is one area where David stand a good chance of beating Goliath.

Tags: Employee Engagement, Payroll & Compensation

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