Bundled HR Service Solutions vs. Best of Breed Providers

The HR BPO market had forecasted growth from $20.8 billion in 2004 to $31.3 billion in 2009, reflecting an 8.3% compound annual growth rate. The estimated revenue is $28.69 billion in 2009. (Source: Robert H. Brown, “Gartner Research – Sourcing options Grow as the HR BPO Market Matures”, July 26, 2006) One of the primary reasons for this sustained growth is the value that both employers and HR service providers recognize in outsourcing non-core business functions to third parties. In the down economy, the number of employers evaluating HR outsourcing as a cost cutting measure has increased dramatically. This ranges from employers who have never outsourced any function of HR to employers who seek a fully outsourced solution. Financial buyers see outsourcing non-core transactional functions as an opportunity to streamline HR processes to reduce direct and indirect costs. Outsourcing provides employers and employees access to the latest technology and communication tools which align the HR function with the overall business strategy. It provides a platform to consistently achieve better quality around managing human capital in an efficient and cost effective manner. Some employers feel that the benefit of outsourcing is even more effective when it can be managed through a single source HR service provider who offers multiple HR services in a bundled, comprehensive offering while other employers find more value in partnering with specialty providers who focus their services in one main area of HR.

Over the last few years, many HR service providers have expanded their serving offerings beyond their core business to adapt to demands of a growing market. For example, 401(k) providers now offer payroll services or a staffing company may now also offer benefits brokerage services. A PEO offering non co-employment solutions via an ASO arrangement is yet another example. In several instances, strategic alliances are formed as non-competing HR service providers align in order to accommodate the multiple and/or changing needs of their client via a bundled “menu of services” type offering. Other HR service providers have chosen to acquire additional companies instead of partnering to strengthen their offerings. Still, other HR firms choose to build additional offerings through their own internal resources and HR industry expertise.  The question then becomes: Do the benefits of a consolidated offering truly outweigh those of “best of breed” providers?

Perceived Benefits of Consolidated HR Outsourcing Offerings:

1. Integration and streamlined processes. With HR technology being at the core of many HR service offerings, several transactional processes can be automated. This is especially true if all HR processes are managed within a single system or by a common vendor. An example of this would be when an employee is terminated, a COBRA notification is automatically sent because the payroll provider and COBRA vendor are one in the same. Another example may be when an HRIS system has the functionality to initiate an electronic job offer to a candidate and through process workflow an automated alert for instructions to complete a drug/background check is initiated to the screening vendor and the pending candidate. In many instances, employers are able to eliminate headcount or reallocate duties as manual processes become automated and less error prone.
2. Multiple service offerings allow for the most competitive pricing structure. A bundled offering includes the benefit of economies of scale. The more revenue that a vendor earns, the more leverage a company has for negotiating volume discounts. This also holds true for guaranteeing higher service-level agreements or contract terms.
3. Simplified employee experience. Having one point of contact or one system to access for managing multiple requests or transactions creates an efficient employee experience. This heightens employee productivity and increases employee satisfaction.
4. Ease of vendor management. Coordinating with multiple vendors is time consuming and creates risk when dealing with time-sensitive and sometimes compliance-driven processes. A single vendor approach creates efficiencies and reduces errors. An example is a consolidated invoice for services.

Perceived Benefits of “Best of Breed” multi-HR Vendor Approach

1. Quality of service delivery. A specialized vendor that offers one core service tends to offer a higher quality experience because they are not focused in any other area. Many times this allows for custom solutions designed with the client in mind rather than a “boxed” approach. An example would be an HRIS vendor that delivers a function-rich system that is configured to the needs of each customer vs. an out-of-the-box software application.
2. Access to expertise. Specialty vendors seek a competitive advantage by deploying the best possible industry experts to meet the unique needs of their clients. An example of this would be a health and welfare consulting firm that specializes in servicing employers with self-funded benefit plans.
3. Ease of transition to begin or end vendor relationship. Implementation of a multi-faceted service offering can be a very time consuming project which may create comprised success due to deadlines. Focusing one just one functional area creates a higher success probability because a project isn’t dependent on competing projects. Additionally, if a consolidated vendor is performing well in one area and poorly in another, the entire relationship may be compromised. An example would be an employer terminating a benefits consultant relationship due to poor service and being forced to change HRIS systems because of the bundled offering.

If challenged with making a clear distinction as to the best approach for your company, I suggest asking a few key questions:

• What do you value more – quality or simplicity?
• Are you solely interested in saving on hard dollar costs or do you the see a greater opportunity for indirect savings by increased quality relationships and delivery?

If you are leaning towards a consolidated approach, I suggest asking detailed questions around the service integration. Qualify which resources are actually internal or if some are outsourced partnerships. With this, clarify defined responsibilities of the service provider vs. the employer and more importantly who holds the liability. If a specialist approach seems more fitting, ask for specific examples of success stories from their clients who were able to achieve measurable benefits that could not otherwise be realized in a consolidated approach. Contact us today for a free consultation. www.gocentripetal.com.

Does a PEO Make Sense For Your Company

The recent legislative changes that impact employers including healthcare reform, tax incentives for hiring unemployed workers, and the extension of the COBRA subsidy have many employers feeling overwhelmed and more confused than ever. The function of managing human capital can be daunting as it is critical to the overall success of a business. This also includes the risk that employers bear in the form of lofty penalties for non-compliance with federal and state employment law. One strategy for mitigating this risk and shifting some of the burden associated with managing HR is outsourcing with a co-employer or PEO. This solution can provide immense value to a company for several key reasons. A PEO is a complex co-employment solution that involves many moving parts which can be confusing when trying to determine the quantifiable value or if the PEO can meet the unique needs of the business. Information is power and fully understanding the dynamics of co-employment will not only ensure a good decision on the front end but will also allow the business to take full advantage of its inherent benefits.

What is a PEO?

A Professional Employer Organization is a contractual co-employment relationship between an employer and a PEO provider that involves shared responsibility and risk for the management of employees. The employer and employee are commonly referred to as the worksite employer and worksite employee. The worksite employer maintains operational control of the day-to-day operations of the business while the PEO absorbs the employer into their client pool and assumes the responsibility of HR administration, regulatory compliance, payroll and tax filing, worker’s compensation, and employee benefits. Ask these key questions to determine whether a PEO may be a potential fit for your company.

1. Are you challenged with obtaining affordable quality medical benefits for your employees?

The size, demographic makeup, and overall health of your employee population are the main factors that impact how much an employer will pay for health insurance. If these factors are unfavorable in the eyes of insurance carriers, you might be forced to pay higher premiums to obtain coverage. If your company experienced a renewal increase which exceeded 11% in 2009, the national average renewal increase, a PEO may provide a hedge for controlling future increases in healthcare costs. A PEO allows your employees to obtain insurance at the premium rates that are dictated on the entire PEO’s client population as opposed to your company’s group as a stand-alone entity. In a sense, you are able to leverage and access a larger group of employees or risk pool that can absorb the risk with less financial impact because of the size of the group.

Consideration: It is important to note that many employers are joining the PEO for this same reason, so it is imperative that the PEO partner you are considering is doing a good job at managing their new client risk population. If a surplus of bad risk is added to the group health plan, the renewal will correspond accordingly. The premium savings you were expecting to realize may not occur and potentially be worse than what you could have obtained as a stand-alone entity. Employers who join the PEO are joining the PEO for the same reason that you may for a year or two, but consider all of the other companies that are also joining the PEO for the same exact reason. Eventually, you will become the healthier risk in the pool yet you will be paying the same rates as the unhealthy groups. In the evaluation process, you should ask for the PEO’s renewal increase for the last 2-3 years to determine how well they are managing their client risk pool. It may be helpful to understand the dynamics of the relationship that they have with the carrier who insures the group.

2. Have you experienced significant Workers Compensation claims within the last 2 years?

Similar to health insurance, a PEO allows an employer to access a larger risk pool which essentially dilutes the exposure for the smaller group. If your company has had recent worker’s compensation claims which have negatively affected your experience modifier and caused premium increases to renewal of the policy, utilizing a PEO may be a strategy to consider as a way to hedge future increases. One reason that the PEO can serve as a hedge is that claims can potentially affect an employer for up to 3 years. In addition to this benefit, the PEO offers risk resources, which may not be available to a smaller organization who has expertise in developing a risk management strategy and safety plan. This will create a safer work environment and potentially prevent future claims or injury from occurring. Implementing a risk strategy will benefit the company from a long term perspective and will protect your business regardless of how long your company stays in the PEO relationship. A PEO is also a great cash flow tool to control unexpected eorker’s comp underfunded premiums that are discovered at the time of the audit. In a PEO model, premiums are collected on actual payroll dollars instead of estimated payroll dollars thus allowing a much more predictable cost control model.

Consideration: Risk tolerance varies from PEO to PEO. So if you have had claims, the PEO is going to want to know about them in the application process. They will request loss runs and may want to do a site visit of your facility to see how the operation is being managed. Be careful to fully disclose what losses you have experienced to avoid future rate increase from the PEO if they are able to discover the losses once you become a client. It is also important to note that when your company decides to leave the PEO relationship and you seek to obtain your own worker’s comp coverage, you lose the experience that you had while in the PEO. You are rated by the carrier with a new experience modifier as if you were a new business with no prior worker’s compensation history. This fact may work in your favor or against you depending on if your experience has been favorable or not.

3. Do you have high turnover or have you experienced a recent layoff?

In a PEO arrangement, your employees are absorbed within the PEO’s customer base or pool from a tax and that PEO assumes tax filing liability as the “employer of record” in the eyes of the IRS. The SUTA, (employer paid state tax used for unemployment) rate that your organization pays to each state where you file may be a higher rate that the rate of the PEO. These rates vary by state and change from year to year. If you are able to gain a favorable and hedge SUTA liability under the PEO by employing your company with a larger group with a lower SUTA rate, the savings could be significant. The PEO also assumes responsibility for changes to the rates on a state by state basis. If you employ people in multiple states keeping up with this can be administratively cumbersome and expose you to liability and the penalties associated with late or inaccurate tax payments.

Consideration: If your SUTA rate is better than the PEO’s, you are helping them lower their rate for the rest of their clients and paying more than needed if you were not on a PEO. Usually the SUI limits are met fairly early in the year; in fact, the average wage amount where SUTA is capped is $9K, however this amount varies as does the tax rate. If you decide to join a PEO, make sure that the PEO honors the SUTA caps and will track when each employee meets the limit. You should verify this in the service agreement; otherwise you could end up paying a much higher amount of SUTA without realizing it. Additionally, it is important to note than when you leave the PEO and begin to file SUTA under your own tax ID, the state will look at your organization as it would a brand new business that has no prior unemployment history. Unless the PEO’s SUTA was higher than this or you were overpaying without realizing it, your SUTA expense will more than likely increase. This also applies to FUTA and Social Security taxation.

4. Are your internal HR resources or staff bogged down with time-consuming HR administrative processes?

If you are in a rapid growth mode, the amount of paperwork needed to recruit, hire, compensate, manage job changes, and terminate employees can be overwhelming. It may be the job of a full-time employee or perhaps it has BECOME the job of a full time employee! These tasks are non-revenue producing and can be outsourced to a PEO who deploys HR technology that can automate many of these processes. This HRIS technology is otherwise not accessible or affordable for purchase or deployment internally. Not only do you gain access to the technology, but also the accredited HR resources and staff that the PEO employs. These HR professionals BECOME your HR staff or augment an existing staff. The HR expertise now readily available to you comes at the fraction of the cost of hiring a Director level HR person. In addition to the technology, the access to HR expertise, the PEO also acts as shelter for HR compliance via the co-employment arrangement. As a new client, the PEO provides a compliant employee handbook that each employee acknowledges understanding and acceptance of company policies and procedures surrounding employment. All “new hire” paperwork must be completed when the employer joins a PEO. This includes I-9 verification which is a potential exposure area that the worksite employer no longer assumes. From an ongoing perspective, the PEO maintains management over employment related requirements such as new hire reporting, FLSA, FLSA, EEO, ERISA, COBRA, etc. In addition, they provide documented processes to avoid lawsuits around discrimination, wrongful termination, and sexual harassment to name a few. Administratively, the PEO’s HR representatives also do much of the heavy lifting as it relates to benefits enrollment and administration. With the right PEO partner, HR staff is truly an extension of the employer’s staff in which the employees view no differently than if the employee were an internal HR manager.

Consideration: Read the PEO’s service agreement very carefully or have it reviewed by outside counsel. There are gray areas as it relates to stipulations around whether the PEO or worksite employer controls certain processes and responsibilities and moreover, where the liability falls. Common examples of this surround terminations, drug screening, lawsuits for non-compliance, job classification, and workplace safety. Also, determine how much and what kind of access you have to the HR resources of the PEO. Will they be onsite or just available via phone? Is there a limit to the time spent with the employer or is their time only allocated for certain functions?Are you billed an additional fee for special projects that may be out of the normal scope of the relationship?

If you answered yes to one of these questions, evaluating a PEO is worthy of further analysis. With the increasing complexity of business decisions in the economy today, it is important to understand all the facts and to choose the RIGHT PEO. For assistance with this determination and potential vendor selection process, rely on Centripetal Consulting Group. We recognize that this business choice is a strategic decision that may promote the growth of your business. Our goal is to keep our clients focused on running their business and maximizing the value of their human capital which in turn increases your business value to your customers. For more information on the services provided by Centripetal Consulting Group, click here.

Getting Out of a PEO

Many small to mid-size employers have looked to PEOs as an affordable HR outsourcing solution for managing liability and controlling the cost of health care and worker’s compensation insurance. The events of the past year have prompted employers to re-think whether co-employment will still offer the same benefits it once had. One of the questions lingering is how new legislation around health care reform will affect PEOs and their clients. There is a case to be made that administratively the PEO will help employers track the new changes in legislation such as tax credits, new HSA limits, and employee enrollment in the new health care exchange. However, is this really a benefit to the employer or to the PEO? Who is the “employer of record” in the eyes of the IRS? Will the PEO be receiving the tax credit or the employer? Will the size of the employer even be considered since participation in a PEO pools several employers together? How will this affect the penalties and/or tax credits? The way regulatory authorities (such as the DOL, IRS, Department of Health and Human Services) treat PEOs has always been a bit uncertain and inconsistent and now, with the upcoming health care reform changes, it will only create more confusion.

In addition to the unknown future for PEOs, many employers are no longer benefiting from lower health insurance premiums like they once did. In years past, many PEOs were able to offer health plans that were less expensive than the national average and could guarantee renewals that were lower than the trend (10-13%). This past year proved that this no longer the case as many PEOs delivered renewals upwards of 35% to their clients.

If you are an employer that is wondering whether the PEO relationship is still a good solution for your business, consider these four questions carefully to determine whether the value of the PEO is worth the expense and furthermore how to craft a plan of action for leaving the PEO. Often it is very difficult to determine your true costs so seeking outside help may make sense and mitigate any confusion.

Questions to Ask When Evaluating Leaving a PEO

1. Am I being serviced from an HR perspective so well that, without the PEO, I would have to hire someone internally to replace them?
2. Can I obtain similar health coverage at a comparable rate outside of the PEO?  How do the last few years’ renewals with the PEO compare to the national average?
3. Can I obtain similar Workers Compensation and EPLI (Employers Practice Liability Insurance) coverage outside of the PEO at a comparable rate?
4. Will my SUI (State Unemployment Income) rate be higher or lower as compared to that of the PEO?

If you are unsure about at least one of these questions, a cost analysis is definitely worth conducting. In many cases, an employer may be getting a good deal in one area yet could be overpaying in another.

The cost to consider is a fee that many PEOs call Administrative Costs or an Admin Fee. This fee could be shown as a flat per employee per month rate or it could be shown as a percentage of the total payroll and combined with other cost components such as SUI or Worker’s Compensation. The Administrative fee is where the bulk of the profit margin lies for the PEO and when the services are bundled, it makes it easy for the PEO to shift costs so they remain profitable.

In order to get a full understanding of the financial impact of moving away, ask your PEO to break out each cost area separately: Benefits, Workers Compensation, EPLI, SUI, and Administrative fees. You then have a basis to compare costs as a stand-alone group outside of the PEO. The only sensible way to compare is to look at the total cost WITH the PEO versus the total cost OUTSIDE of the PEO. The only cost that will remain constant in or outside the PEO is employer-paid FICA and FUTA taxes.

The Five Cost Components to Shop

1. Health Insurance and other related benefit products including STD/LTD, Life Insurance, Vision, Dental, COBRA, FSA, and HSA
2. Workers Compensation/EPLI
3. SUI – this rate will be the manual rate for a new business in each state
4. Payroll/HRIS services
5. Fractional HR or the cost of hiring an HR resource

If you are utilizing the PEO’s 401(K), add this to the list items to consider.

The timing of the transition away from the PEO must be considered because of tax implications to both the employer and employees. Making a change later in the year will have a greater impact because more employees will have met their Social Security wage requirements and employers will have met their SUI and FUTA limits. Employees will have to adjust this when they do their tax return because they will have an overpayment. The tax duplication payments need to be deducted from any savings if you are looking to make a mid-year switch.

Also, an employer’s unemployment experience rating adjusts as if the employer were a new business in each state that it has employees. This could have either a positive or negative impact on the employer and should be considered in the financial analysis as well.

Evaluating getting out of a PEO and actually making the transition can be very confusing and time consuming. Centripetal Consulting Group can help you alleviate the guesswork and complete the financial analysis. Depending on the outcome, we can help transition you off the PEO and help select vendors from our network of over 100 top-rated HR outsourcing providers.  Contact us today for a free consultation. www.gocentripetal.com

Bundled HR Service Solutions vs. Best of Breed Providers

The HR BPO market is forecasted to grow from $20.8 billion in 2004 to $31.3 billion in 2009, reflecting an 8.3% compound annual growth rate. The estimated revenue is $28.69 billion in 2009. (Robert H. Brown, “Gartner Research – Sourcing options Grow as the HR BPO Market Matures,” July 26, 2006)

Many HR service providers have increased their serving offerings beyond their core business to adapt to demands of the market. For example, a 401(k) provider might now offer payroll services, or a recruiting company is now offering benefits brokerage services. Even further, a PEO starts marketing non-co-employment solutions via an ASO arrangement. In several instances, strategic alliances are formed as non-competing HR service providers align in order to accommodate the multiple or changing needs of their client via a bundled “menu of services” type offering. Other HR service providers have chosen to acquire additional companies instead of partnering to strengthen their offerings. Still other firms choose to build additional offerings through their own internal resources and HR industry expertise.

My question then becomes: Do the benefits of a consolidated offering truly outweigh those of “best of breed” providers?

Perceived Benefits of Consolidated HR Outsourcing Offerings:

1. Integration and streamlined processes. With HR technology being at the core of many HR service offerings, several transactional processes can be automated. This is especially true if all HR processes are managed within a single system or by a common vendor. An example of this would be when an employee terminates, a COBRA notification is automatically sent because the payroll provider and COBRA vendor are one in the same. Another example may be that when the HRIS system is told that an offer is being made to a candidate, the process for completing a drug/background check is initiated. In many instances, employers are able to eliminate headcount or reallocate duties as manual processes become automated and less error prone.

2. Multiple service offerings. These allow for the most competitive pricing structure because a bundled offering produces economies of scale. The more business that is given to a single vendor, the more leverage for negotiation. This also holds true for guaranteeing higher service related agreements.

3. Simplified employee experience. One point of contact or one system to access for multiple requests, creates an efficient employee experience. This heightens employee productivity and increases employee satisfaction. A new hire can enroll for benefits, request time off, and view a paystub in a centralized location.

4. Ease of vendor management. Coordinating with multiple vendors is time-consuming and creates risk when dealing with time sensitive and sometimes compliance driven processes. A single vendor approach creates efficiencies and reduces errors. A consolidated invoice for services is an example of this.

Perceived Benefits of “Best of Breed” Multi-HR Vendor Approach

1. Quality of service delivery. A specialized vendor that offers one core service tends to offer a higher quality experience because they are not focused on any other area. Many times this allows for custom solutions designed with the client in mind rather than a “boxed” approach. An example would be a HRIS vendor that delivers a function-rich system that is configured to the needs of each customer vs. an out of the box software application.

2. Access to expertise. Specialty vendors seek a competitive advantage by deploying the best possible industry experts to meet the unique needs of their clients. An example of this would be a health and welfare consulting firm that specializes in servicing employers with self-funded benefit plans.

3. Ease of transition to begin or end vendor relationship. Implementing of a multi-faceted service offering can be a very time consuming project which may create compromised success due to deadlines. Focusing on just one functional area creates a higher success probability because a project isn’t dependent on competing projects. Additionally, if a consolidated vendor is performing well in one area and poorly in another, the entire relationship may be compromised. An example would be an employer terminating a benefits consultant relationship due to poor service and being forced to change HRIS systems because it is core to the bundled offering.

If you are challenged with making a clear distinction as to the best approach for your company, I would suggest asking a few key questions.

The first being what does your company value more: quality or simplicity. Furthermore, are you to simply save hard dollars costs or do you see a greater opportunity for indirect savings by increased quality relationships?

If you are leaning towards a consolidated approach, I suggest asking detailed questions around the service integration. Qualify which resources are actually internal or if some are outsourced partnerships. With this, clarify defined responsibilities of the service provider vs. the employer and more importantly who holds the liability.

If a specialist approach seems more fitting, ask for specific examples of success stories from their clients who were able to achieve measurable benefits that could not otherwise be realized in a consolidated approach.

Evaluating a PEO

There are an array of issues to consider when evaluating a co-employment arrangement. The business owner will receive great value from such a relationship if they are able to discern a few key items.

As a business owner, it is imperative to understand the parameters in which you are being measured by a potential business partner. In a sense, are you helping or hurting “the pool” you are about to join? If insurance arbitrage is your goal, I urge you to consider if this is truly a long term solution for your business. Here are four things to consider:

1. Did your health insurance rates rise more than 11% in 2006? The national average rate increase was 11%, either you beat that or fell victim to a heftier increase than the average. Do you see the Professional Employment Organization (PEO) as a way to hedge that increase? It may for a year or two, but consider all of the other companies that also are joining the PEO for the same exact reason. Eventually, you will become the healthier risk in the pool yet paying the same rates as the unhealthy groups. On average, the rate increases that most PEO’s are experiencing are right in line with the national average.

2. Have you experienced significant claims within the last 2 years with regards to workers compensation? If not, the same risk pool concept applies. You are bearing the brunt and potentially overpaying in premium to insure riskier groups that may have unsafe practices. If you have had substantial claims, this may be a strategy to consider as a way to hedge future premium increases. Provided the PEO will underwrite your group favorably and accept you as a client, you gain access to the PEO’s expertise to form a sound safety plan and implement better practices for the future and at the same time shield yourself from the high premiums. Once the risk has been improved and you leave the PEO, you gain a brand new experience modifier as if you were new business with no prior workers comp experience.

3. What is your State Unemployment Rate and will the PEO provide credits once the limits are met? Once again, is your rate better or worse than the PEO? If it is worse, you can save significant dollars in utilizing a PEO to shelter your from SUI tax. If your rate is better than the PEO, you are helping them lower their rate for the rest of their clients and paying more than needed if you were not on a PEO. Usually the SUI limits are met fairly early in the year, in fact, employers are taxed on the first 9k of wages for each employee. Will you stop paying SUI after your company meets these limits within the PEO?

4. Will the PEO break out the cost for each service in your proposal? Will you be able to see the cost of benefits, workers comp, and administration separately? Is this broken down as a percentage of payroll or a flat dollar amount? If the PEO will not break fees out as a flat dollar amount, ask for a credit in fees. You shouldn’t have to pay more in fees simply because you give your employees a raise. With the increasing complexity of business decisions, partnering with the right PEO solution is a strategic decision that may enable the growth of your business. Consider the PEO a partner to your company rather than a mere vendor of services but make sure to understand all of the aspects before making this decision. In this light you will be growing the value of your employees and your business to your customers.

For more information, contact Centripetal Consulting Group to help in the decision making process: info@gocentripetal.com (214) 824-4439