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PEOs Look to Reel In Bigger Fish

February 8, 2007
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While the smallest employers—those with fewer than 50 employees—commonly reach out to professional employer organizations for HR services, larger companies are usually unwilling to pay the price points for a PEO. Some PEOs are developing comprehensive HRO services to capture as clients those companies that have up to 1,000 employees. It’s a vast potential market of 93,000 firms, including 8,400 in the range of 500 to 1,000 employees.

    There is some talk about PEOs moving up into the comprehensive HRO midmarket, but little evidence that it’s happening. Gevity, the third-largest PEO in the United States, has more than 8,000 PEO clients but only 11 comprehensive HRO contracts in the midmarket.

    TriNet, the fifth-largest PEO in the country, serves the technology, financial services and professional services industries. TriNet has more than 1,500 PEO clients but only two comprehensive HRO contracts, and these two represent companies with a few hundred employees each.

    "We plan to add a few comprehensive HRO clients by the end of 2007 and more in 2008, but our initial offering will be for companies with less than 1,000 employees," TriNet CEO Martin Babinec says. "A number of platform issues must be resolved before a PEO can reach up into midmarket firms, and we are solving those now."

    PEOs generate $51 billion in annual gross revenues, according to the National Association of Professional Employer Organizations. The average client company is a small business with an average of 17 employees that does not want to cope with compliance issues, administrative tasks and HR technologies.

   What separates PEOs from HRO providers is the employer-of-record issue. PEOs serve as employers of record of their client companies’ workforces, while HRO providers are just that—companies contracted to provide HR services to their clients. That bright line, however, has been blurred by PEOs that have adopted the HRO label while maintaining a traditional PEO structure.

    "The services provided by PEOs and HRO providers form overlapping circles, but what does not overlap is the PEO’s legal status as the employer," notes Barry Asin, vice president and chief research analyst at Staffing Industry Analysts Inc.

    Still, many PEOs identify themselves as HRO companies and leave the employer-of-record, or "co-employment," clarification buried in the fine print.

    "HRO is hot, and PEOs want to grab on to it," Asin says. "There’s a lot of marketing going on. PEOs tend to be entrepreneurial and aggressive, and HRO is a buzzword without a lot of commonly accepted definitions of what it means.

    "PEOs aren’t more forthcoming about the co-employment factor because it makes people nervous and there have been issues in the PEO industry with firms playing games with taxes and payrolls. There’s a low-level awareness generally of these scandals."

    Larger PEOs have an advantage in moving up the market because of their scale and purchasing power, Asin reports. "These larger PEOs can provide comprehensive HRO for small and midmarket companies, but they won’t get traction against the big players," he says.

    Moving the PEO model upstream is extremely difficult, primarily because of technology issues.

    "I don’t see PEOs morphing into HRO providers for the real HRO midmarket companies with 2,000 to 15,000 employees," Asin says. "But there’s a lot of room between firms with 20 employees and 2,000."

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