PEOs Grow
As professional employer organizations mature, they're adding more services, larger clients.

by Kathy Mayer

(May 2003) - As professional employer organizations grow, like adults they’re taking on more responsibilities and branching into new areas.

Popularly known as PEOs, professional employer organizations emerged in the mid-1980s as co-employers with small client companies and as suppliers of benefit packages. Today’s PEO industry is becoming more of a human-resources outsourcing business, representatives of Indiana PEO companies report. They’re now offering traditional co-employment services to a broader and larger-size client base and delivering an array of add-on products, from employee assessment and training to full-service human-resources-department functions.

Many–such as WorkSmart Systems Inc. in Indianapolis, which serves 1,300 white-collar work-site employees–also are finding that business is good in boom and bust times alike.

"As the economy has gone in the tank, our business has really boomed. And we were doing well in the high cycle before the economy started crashing, too," says Matt Thomas, president of WorkSmart, a 10-employee company he founded five years ago. "I think we’re kind of recession-proof, because we have two avenues to success," he says.

"In a booming economy, people are willing to go out and spend money for expertise in these areas. In a tightening economy, they look at streamlining, so they outsource some of their infrastructure," he says. "And with the buying power in the group benefits market, we can help them save money on these items as well."

Serving a broader base of employers and companies of greater size is by design, Thomas says. "Most of us have tried to go up-market. That is part of the evolution of the PEO industry."

"The industry is becoming more broadly appealing to a lot of different businesses," agrees Mark Elwood, president of Strategic HR Group Inc. in Columbus. Typical companies range from service to manufacturing industries and include both profit and not-for-profit clients, he notes.

Other than motels and restaurants–which traditionally offer low pay and no benefits–just about every other industry is eyed as a potential PEO client, says Harlan Schafir, president of Professional Staff Management Inc., with offices in Richmond and Carmel. "We have clients in manufacturing, physicians’ offices, medical services, CPA firms, information-technology companies and retail."

Historically, the average-size company turning to a PEO would employ about 17 or 18, says Brent Tilson, who owns Tilson HR in Greenwood. In business since 1995, today Tilson employs 20 and brings in $66 million in annual revenues. He believes the industry is moving toward serving companies that employ from 100 to 500. And that’s not because small clients are growing to become larger companies.

"We are starting to talk to more and more of those size companies about our services, and those mid-mark companies are going to begin to entertain HR outsourcing," Tilson says.

Schafir at Professional Staff Management agrees. Since his business began in 1991, the average size of clients he’s served has grown from year to year–and his own business has grown, too, to a staff of 22.

"We signed up a lot of one’s, two’s and four’s and five’s in the early years," he says. "Now, we’re pushing toward the larger size."

An example is Kipp Brothers, a Carmel-based wholesaler of toys and novelty items and a client of Tilson’s PEO. With about 50 employees, it’s considerably larger than what used to be a typical PEO client, but the arrangement makes a lot of sense, according to controller David Regenstrief. The company initially was looking for someone to handle payroll, then found that it could also save on health insurance by hooking up with a PEO. That’s possible because Kipp workers are co-employed by Tilson, which pools its client’s employees to gain better group discounts.

For workers, being employed by the Tilson HR/Kipp Brothers partnership provides health benefits not unlike those enjoyed by corporate giants. Once a year workers have the option of choosing which health plan they want through open enrollment, and this year Kipp Brothers was pleasantly surprised to see premiums actually decline a bit.

The PEO industry’s move from fledging to well-established has occurred exponentially as more companies have signed on with PEOs. "Like anything, when you introduce a new service that the market has not experienced before, there’s a time delay where people have to get used to what you do and understand it," Schafir says. "If my neighbors are not doing it and my business associates are not doing it, then I have to ask, ‘What is it you do and what are you talking about?’ There’s a lot more market recognition now that this is a very smart way to do business."

More and more, he suggests, "You will see bigger companies saying, ‘How much are we making when we mess around with payroll and posters on the wall and benefits?’ They’re going to outsource so they can stay focused on their core competencies. And if they have HR staff, they’ll use them for higher-level intervention."

Regenstrief says it’s been a relief to have the staff at Tilson handle the whole range of HR tasks. "It’s very helpful to us. I don’t have the time to be an HR expert."

Higher-level tasks undertaken by today’s PEOs include identifying strategic-training needs. "If you have internal staff, you will do that. If you don’t, you will look to us for that, too," Schafir says. Professional Staff Management’s newer services include employee assessment products and teambuilding training. "We’ve started an HR training division that’s beyond the PEO training we did. It’s an add-on," he says.

Training is one of the hottest trends in the PEO industry, these Indiana executives say.

When Tilson HR moved to new Greenwood offices recently, it tripled its space and added an on-site training center. "That’s something we didn’t do in the past," Tilson says. "Our goal is to help companies not only outsource the transactional components of HR, but to introduce new product offerings, to take HR support systems to a higher level."

Testing before training is one aspect of WorkSmart’s business, Thomas says. "Larger companies have wanted a more sophisticated HR department, someone to help them enhance their productivity, enhance their leadership, find and retain employees, and obtain all that from a one-stop shop."

WorkSmart uses its tests results to develop its training programs. That kind of add-on takes the PEO beyond its traditional services–what Thomas calls the "core package" of employee handbook, policies and procedures and HR compliance, as well as co-employment of a company’s workforce.

"Five to 10 years ago, a lot of people looked to PEO companies because they thought they could get better deals on health and workers’ compensation insurance," says Elwood at Strategic HR, who entered the market in January 2002 by expanding his then 3-year-old HR consulting business. He also operates a temporary staffing business, finding that a PEO complements that focus.

"Now, companies still want employee benefits and workers’ comp, but they also want expertise in the areas of safety, risk management, HR services and those value-added areas," Elwood says. "They have expertise in the product they manufacture or the service they provide, but things like payroll, benefits, HR services, legal compliance issues–those things are not their strength, so in a PEO relationship, they get instant access to highly skilled, trained HR, finance and legal professionals."

For Kipp Brothers, benefits of using a PEO become apparent every time the company has to deal with such issues as wage garnishment. If that type of order comes in, Regenstrief says he simply drops it in an envelope and ships it off to Tilson HR, which has the time and expertise to handle the situation.

Strategic HR employs a full-time lawyer and certified public accountant. "We offer recruiting and screening, training in areas of safety, sexual harassment prevention and other important areas, as well as technical assistance with compliance issues," Elwood says.

At Tilson HR, Tilson predicts, "HR is the next step in outsourcing. It may not look like the PEO services of today, but remnants of this model will remain."

Professional Staff Management already is billing itself as just that, offering human resources consulting to larger companies. "Our own HR people are so strong, we can use them in many aspects," says Schafir, who believes service is key. "We’ve now evolved into an HR solutions company."

While companies appreciate someone else handling the payroll, reporting and other administrative aspects of employment tasks, it’s the outside-the-everyday events where service–and appreciation–come into play, he says.

"Somewhere, they hit a bump in the HR road. We’ll get a call from a client, who says, ‘Susie said Billie said this and is going to sue me.’ Our client’s ask, ‘What do I do?’ It’s usually an HR issue with some depth to it, some detail, and we’re taking care of it. They are amazed at our capabilities and how we walk with them through the maze and handle it."

Regenstrief agrees that a PEO is a good resource for dealing with thorny HR issues. For example, if it becomes necessary to fire someone, representatives at the PEO know the best procedures for doing so and may even come out to handle the dirty work. It saves Kipp Brothers the hassle and also the expense of consulting with an attorney, he says. In general, he says, the variety of cost savings of dealing with a PEO more than offset the administrative fee for PEO services, and the elimination of hassles is an added bonus.

A broad range of service is what more and more clients will seek in a PEO, Schafir believes. "Our focus is about having clients for a lifetime."

As for the PEO industry itself, he says, "This business has a strong future. Most businesses already outsource legal work and accounting work. This is the outsourcing of human resources. You have to do human resource things to be in business, but it’s usually not strategic to your business." And it’s not usually what a business does best, because it is outside its product or service focus.

"This is the new wave for small business to do business," Schafir predicts. "It’s the next major leg of outsourcing in the U.S."