The ROI of Using a PEO: How a PEO Pays for Itself
Published: October 26th, 2023
The business landscape is ever-changing, with managers constantly searching for innovative solutions to enhance efficiency, cut costs, and maintain a competitive edge. A Professional Employer Organization (PEO) stands out among the many robust solutions available to companies.
This article delves into the realm of PEOs, breaking down their roles, advantages, potential financial gains, and, most significantly, how your business can save money by understanding the ROI of using a PEO. By utilizing services from different PEOs, outsourcing companies can efficiently optimize time and resources for your business.
Understanding Professional Employer Organizations
This partnership allows businesses to shift focus to core operations and delegate all complex HR functions. This results in businesses saving on costs and growing their revenues. Essentially, a PEO is like a human resource expert who comes in and tackles the major HR activities businesses may find difficult or tedious.
The role of PEOs in HR outsourcing
PEOs play a crucial role in outsourcing HR functions as they take control of various tasks like payroll processing, employee benefits, HR administration, and employee administration. Through co-employment, a PEO shares liability and responsibilities regarding your employees and the functions they provide.
An HR department carries out multifaceted functions, and a PEO offers invaluable consultations, management, and software to optimize operations, cut costs, and minimize wasted time. From employee benefits and payroll processing to minuscule tasks such as time tracking and attendance, their services significantly contribute to the success of a business.
The ROI of Using a PEO
Return on Investment (ROI) is the net benefit of an investment. Pat Cleary, NAPEO president, said, “There really is no better value proposition than PEOs in the HR space.” The ROI of using a PEO has proven impressive through reducing administrative responsibilities, improving HR compliance, and offering access to better employee benefits.
Leveraging the capabilities of these service providers can save costs for businesses. Data from the National Association of Professional Employer Organizations (NAPEO), based on the ROI of using a PEO, states that your business gets a return of 27.2% for every penny you invest. A PEO investment can also deliver elevated employee satisfaction, which translates into diminished employee turnover rates.
What are the financial gains of a PEO?
Understanding the quantifiable economic improvements of this investment guarantees that you are making sensible decisions that will benefit you in the long run.
As mentioned above, the ROI of using a PEO indicates that when spending $1,000, you can save $1,272 which results in a net benefit of $272. Top PEO companies, such as ADP TotalSource, may go a long way toward similarly providing a high ROI.
How PEOs save time and money for businesses
A little overlooked benefit of a PEO is that businesses can save time and reduce their HR personnel costs. A few ways in which PEOs do this include:
Payroll Processing: Efficient payroll processing is a crucial aspect of running any business, big or small. It involves various tasks, including calculating total wages, deductions, time, and attendance and delivering payments. This process can be complex and time-consuming, especially for businesses with a large workforce.
Furthermore, when payments are made on time, the workforce morale is improved. When an efficient payroll system is in place, valuable time and resources can be distributed elsewhere, shifting focus to other essential business functions.
Employee Benefits: An average client of these providers receives healthcare benefits such as medical, dental, vision, dependent care, and more. These extensive employee benefits offer significant value to attract top talent and lead to higher employee satisfaction. You can create a positive work culture by providing the right benefits to current and potential employees.
Regulatory Compliance: Businesses that use employees to perform services must report to the Internal Revenue Service (IRS) regarding wages, employee taxes, unemployment insurance, and more. Within a co-employment model, risk and liability are shared among both parties. Tax filings and payments are monitored, reducing the risk of penalties and fines.
Risk Management: They have extensive experience mitigating HR risks by handling employee-related issues, from worker compensation claims to disputes. Addressing these issues decreases the risk of financial, legal, and other external expenditures. In addition, they provide expert guidance on compliance and legalities, saving you time and money in the long run.
Additional Benefits of Using a PEO
Partnering with the right provider brings many benefits that can positively impact your business. These include:
Expert HR Knowledge: You can leverage a PEO's expertise to navigate complex issues that may arise. Their extensive knowledge allows them to handle many aspects of employee management, like recruitment, training, and benefits administration. In addition, they make sure your business stays up-to-date on changing rules and regulations, ensuring it stays compliant and mitigating the risk of penalties and fines. This allows you to focus on more critical aspects of your business.
Cost Savings: A PEO can provide substantial cost savings. According to NAPEO, businesses that partner with a PEO experience 10-14% lower employee turnover rates. This suggests that a PEO’s services increase employee retention and employee satisfaction, which translates to enhanced productivity and efficiency.
Competitive Employee Benefits: Through their large clientele and immense experience, PEOs can access high-quality employee benefits at competitive prices. By taking advantage of their economies of scale, companies can significantly reduce the costs of high-quality healthcare benefits, retirement funds, and other employee benefits, primarily benefiting employees of small businesses. Small businesses can offer their employees high-quality benefits at a lower cost thanks to economies of scale. This means that companies can provide healthcare benefits, retirement funds, and other benefits essential to their employees' well-being.
Time Efficiency: Managing HR functions can be a timely task for small and large companies. However, PEO services can reduce time wasted in a variety of ways. Outsourcing tasks allows employees and business owners to allocate their efforts to other aspects of the business, such as dedicating more time to your daily business operations rather than administrative HR tasks.
Business Growth: Improving employee satisfaction can have a direct impact on productivity, ultimately leading to a more successful business. This can be achieved through offering workers compensation, providing employee benefits, and seeking expert guidance. Doing so can increase employee satisfaction and, as a result, boost productivity.
In conclusion, all these non-monetary comprehensive offerings, such as payroll services and health benefits, provide extensive advantages. They can streamline human resource management processes and improve financial performance by reducing costs and amplifying employee satisfaction.
How do PEOs give businesses a competitive edge?
Human resource management solutions, automated payroll processing, time and attendance tracking, and provision of employee benefits are all functions of the software these companies provide. This advanced software gives your business a competitive edge.
Simply put, PEOs attract top talent. By partnering with a PEO, your businesses can offer potential employees extensive benefits, including comprehensive health insurance plans, dependent care, and retirement savings options. As the Harvard Business Review states, job seekers are more likely to accept a job at companies that offer these comprehensive benefits.
Moreover, administrative workloads are reduced through payroll processing, legal compliance, and other tasks in the HR space. Outsourcing these tasks lets businesses focus on other aspects, further increasing their competitiveness.
Can Your Business Afford Not to Use a PEO?
A business that underestimates a PEO will lose the advantages of utilizing one. These advantages are linked to cost savings, streamlined HR management, competitive employee benefits, and business growth.
Some businesses do not have the financial capabilities to hire proficient HR professionals, and some large companies with multiple locations may find it challenging to keep up with state and federal laws. PEOs help such businesses reap all the advantages of better-established peers with their customizable, competitive plans.
When a PEO Might Not Be the Right Fit
Different businesses have different needs when it comes to a PEO. Some may benefit significantly from their services, while others may find them unnecessary.
If a company already has a robust internal HR department, then using a PEO may be unnecessary. Furthermore, small businesses with only a few employees may not see the value of investing their money into a PEO when compared to the cost.
To benefit from a PEO, there is an extended period of waiting time, therefore, businesses with fluctuating HR needs may not require the services of these providers. If you require HR assistance but see yourself falling into any of these categories, then it is best to explore other HR outsourcing options.
Outsourcing your HR functions from a PEO positively influences your business’s bottom line. The two main advantages are that they save you time and money through their invaluable expertise and resources, helping your business grow and succeed. Additionally, the ROI of using a PEO proves to save costs when utilizing them substantially.
A PEO also makes your business attractive in the competitive market, attracting top talent and providing effective HR solutions. Choosing a PEO can be risky for your business and finances, but knowing how to choose the right one can help your business grow and succeed.