I got an e-mail from a reader about PEO v HRO:
What is your advice to a company (100-1000) on what TYPE of outsourcing would be best for their company? Basically, PEO VS BPO. Pretty broad but there are all kinds of companies trying to figure out the breaking point.
Rather than talking about BPO, I’m going to talk about HRO. The reason for this is that BPO exists “down market” but I don’t really believe true HRO exists below the 5000 employee space. ADP, Ceridian and now Accenture are all chasing the mid-market HRO space with ADP in the clear lead (in my opinion). I think ADP calls their offering Comprehensive Outsourcing Services (or COS) and has sold more HRO deals than anyone else save Hewitt Associates. If I’m right, ADP’s COS sweet spot is in the 5-10K employee market.
Ceridian obviously plays in the same space, but Ceridian never seems to execute complex deals as well as ADP. Accenture is now in the mid market space and will be a real threat to ADP, but there are more than enough clients to go around.
An HRO provides much more extensive services. For example, not only are we talking HR, payroll, benefit, compliance services, but we’re talking about systems, process and call center of a totally different scale. HRO will provide best of breed applications for case management and telephony, talent acquisition, talent management, HRMS, payroll, learning, business analytics, etc… Just to give you an idea of a single component, recruiting alone generally will cost $1M to implement. That does not include license fees or any service. Recruiting outsourcing (RPO is a component of HRO) can easily run into the $M’s each year just to have your outsourcer recruit for you.
What’s PEO? according to PEO.com
A Professional Employer Organization, or PEO, becomes your co-employer to relieve you of many Employee Administration duties. Depending on the PEO you choose, the PEO can take on the responsibility of handling everything from payroll and tax filings, to workers compensation, labor compliance, risk management, employee files, benefit administration and more. Basically your PEO takes care of the administrative side of employment and allows you to focus on the day-to-day tasks involved in maintaining and growing your business. ((Retrieved from http://www.peo.com on February 24, 2006.))
What’s the functional gap? A PEO is basically a way to lease employees to another entity’s FEIN. This allows the employer to cost share with other small organizations. For example, it would be advantageous to have a larger group when negotiating benefit plan costs. However, there is a HUGE cost gap between what HRO is versus PEO. However, mid-market HRO is getting a bit more reasonable. ADP’s offerings will come in somewhere between $10-100M over a 5 year contract, unlike $100M to $1B for large market contracts from Accenture, Convergys and Hewitt. These higher costs are partly due to larger organizational (and headcount) sizes, but also because of the much better technology HRO clients get.
I believe the gap between HRO and PEO is getting steadily smaller, but for now, I doubt many 1000 employee companies have the type of cash to get the higher levels of service and applications associated with HRO. Perhaps PEO is also getting more sophisticated, but honestly I haven’t really watched the PEO market.
4 responses to “PEO vs. HRO again.”
Dubs,
From my explorations into the PEO space it still seems largely stuck in the past. The industry got started largely as a way for very small (read: under 10EE) employers in industries like construction that had large workman’s comp liabilities to reduce their exposure. This market by its nature has restricted the demand for more sophisticated services as it is mostly price-driven and mom-and-pop oriented.
In the white-collar segment there are often factors that work heavily against the traditional PEO arrangement; for instance the leasing company cannot issue tax-favored Incentive Options to leased employees because they are not the actual employer. There are many other subtle things that come into play. This is leading to some companies doing an “Everything but the lease” model. This works for white-collar employment where legal risks are significantly smaller. These pseudo-PEOs (one I know in Massachusetts is http://www.hrknowledge.com) seem to be growing well (unlike the rest of the PEO industry) and and have at least talked about offering more sophisticated services like recruiting. However, most still seem very stuck in a commodity product foodfight.
Colin: I agree completely. My hope is not that PEO’s start thinking more strategically about their place in HR as outsourcers, but rather that true HRO vendors begin brining their expertise down market. Not to be snobbish, but most of the PEO space just doesn’t have the skills to truly be a strategic partner with HR executives.
I’d love to see some forward thinking HR professionals in the “everything but lease” model. While I’m not familiar with it, it sounds promising.
P.M.L and its members have been serving the needs of small and medium-sized businesses in the human resource field since 1985.
By outsourcing human resources for your current employees, business owners can reduce employee overhead and administrative paperwork. Our service removes the non-productive tasks from your business so that you can concentrate on growing your business. It’s like having your own personal staff of human resource experts to handle all of your employee hassles.
The best part is that it all within what you are already spending.
***Edited for marketing activity***
Thorough research should be done before choosing a PEO.
I went to http://www.onlinehrhelp.com and reviewed numerous PEO websites as well calling upon a few to “pick their brains”.
Fortunately, I found a few professional companies to deal with.