Professional employer organizations, which traditionally cater to companies with fewer than 100 employees, enter into "co-employment agreements" with their employer clients. They then act as the employer of record and handle all human resources issues and processes.
But as more professional employer organizations recognize the untapped potential of targeting midmarket companies—those with 2,000 to 10,000 employees—many are launching business processing outsourcing services to cater to these clients.
Most of the major HRO providers are targeting only Fortune 500 companies, leaving room for smaller players to move upmarket, says Jay Starkman, president and CEO of AlphaStaff, a Fort Lauderdale, Florida-based professional employer organization that has gone from targeting just small employers to seeking agreements with companies that employ 500 to 5,000 employees.
"What you are going to start seeing is that the large HRO providers will move downmarket while many of the professional employer organizations are starting to target bigger employers," says Phil Fersht, global research vice president at NelsonHall, a MacLean, Virginia-based consulting firm. He predicts this market will grow by from $1 billion to $3 billion in the next year to 18 months.
To cater to larger employers, AlphaStaff is offering clients more flexibility so that if they want to keep their own 401(k), for example, they can. Similarly, while traditional professional employer organizations put their own names on all payroll stubs and employee materials, AlphaStaff is not requiring it.
"Midmarket companies don’t want to fit into the box that traditional professional employer organizations require," he says. Also, two years ago AlphaStaff launched a service that allows clients to outsource functions to AlphaStaff without entering a co-employment agreement, which larger companies often are resistant to doing.
Administaff, a Houston professional employer organization that traditionally targeted companies with 10 to 50 employees, is one of those that has its eye on bigger clients. Administaff is targeting clients with as many as 2,000 employees, and may go bigger--up to 5,000 employees, chairman and CEO Paul Sarvadi says. "The companies between 300 to 5,000 are really the most underserved right now," he says. It has created a Web-based platform that lets clients create self-service applications for their employees.
And last month, Gevity, a Bradenton, Florida-based professional employer organization, announced that it is actively targeting employers with 500 to 5,000 employees. Many analysts predict that it will be one of the leaders in this business.
Analysts also predict that there may be some consolidation among professional employer organizations as they try to grow and compete with the likes of Ceridian and ADP, which already provide HRO services to midsize companies.
Keith Strodtman, senior vice president and general manager of human resources outsourcing at Ceridian, doesn’t rule out the possibility that Ceridian may someday buy a professional employer organization, although nothing is being discussed currently.
"Right now we are not seeing a lot of competition from the PEOs," he says. "But I do think that we are going to take them seriously in terms of a future threat."