Are PEOs a Threat to HR Professionals

December 1, 1996
The obvious question you're probably wondering is: Are professional employer organizations (PEOs) a threat to my job as an in-house human resources professional? That's a good question. At this point, it's anyone's guess how the outsourcing of human resources activities will affect the profession in the near or distant future. But here's an educated guess.

Overall, outsourcing HR services has become increasingly common in the past few years. According to a 1996 survey of 160 employers regarding HR outsourcing by Lincolnshire, Illinois-based Hewitt Associates LLC, 93 percent of employers currently outsource some part of their HR activities. Another 4 percent are considering it. Only 1 percent have thought about it but have decided against it.

Hewitt Associates' survey indicates that the most common HR-related functions to be outsourced are the administration of health and group benefits (95 percent), defined contribution plans (91 percent) and defined benefit plans (68 percent). In addition, the survey shows that HR activities are most frequently outsourced so HR can focus on strategic business responsibilities and to save money.

However, until professional employer organizations showed up en masse starting around 1983, companies couldn't outsource the entire HR function. Until then, HR activities were outsourced on an ad hoc basis. But with the advent of PEOs, companies no longer have to have an HR person on staff to function at optimal efficiency in handling employment issues.

At this point, however, the majority of PEOs serve companies that don't yet have an HR person on staff and in fact, aren't really large enough to have one. It's still an industry servicing primarily smaller firms with fewer than 50 employees. At those firms, PEOs take over the HR headaches for the often small, senior-executive staff.

In some cases, a small- or medium-size company will decide to disband its HR staff and completely outsource its HR concerns, and often also will lease its employees to a PEO. But most larger companies that use PEO services still maintain their own HR departments. In those cases, PEO services are used simply to take care of the more administrative types of HR activities, such as the administration of payroll, benefits and workers' compensation. In so doing, PEOs simply help existing HR managers have more time to be strategic.

Many PEO experts say HR professionals shouldn't see them as job threats. "I think it's potentially a great thing for people in the HR profession," explains Kirk Scoggins, president of the National Association of Professional Employer Organizations (NAPEO) based in Alexandria, Virginia. "I see a lot of opportunity in this industry for HR professionals to migrate our way." According to Scoggins, PEOs present an interesting new business that features HR and HR services as a profit center, rather than as a cost center. Becoming a money-making entity is an idea that many HR professionals strive to achieve.

"[Outsourcing to PEOs] allows your people who used to dedicate their time to employee administration and compliance issues, to now spend time working in areas that would be considered more productive to the bottom line," says Scott Avery, president of WorldTec Group International, a PEO services firm based in Cerritos, California.

And certainly, as with any type of HR outsourcing, someone has to still oversee the process. And often in medium- to large-size organizations, that's still an in-house HR professional. Someone is still needed to collect and interpret employee data and forecast staffing needs. Once a company reaches a certain size (usually about 100 to 300 employees), the economies of scale that make outsourcing HR activities in smaller companies a good idea no longer apply because it becomes more cost-effective to take care of HR business in house. And, as organizations continue to rely on HR professionals to help them venture into new markets and cross global business boundaries by providing solid human resources forecasting advice and know-how, companies simply won't be able to survive without HR expertise.

And that expertise will have to come from somewhere. Whether the HR professionals providing that knowledge are in-house professionals or outside consultants will be determined in the future. But for now, since everyone's agreeing that HR services must be provided in a strategic and cost-effective way, HR isn't going away anytime soon. And neither are you.

Personnel Journal, December 1996, Vol. 75, No. 12, p. 68.