A professional employer organization (PEO) is a natural fit for startups because PEOs can offer access to enterprise HR services for organizations whose time, money, and expertise are scarce and of high value. Specifically, a startup working with a PEO delegates employee management functions—such as payroll, benefits, retirement programs, insurance benefits, etc.—without losing control of its workforce. Because PEOs have many clients, they can often offer premium services at economical prices that are affordable even for small organizations just starting. As a result, startups can use a PEO. Let us discuss why startups should use a PEO.
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What is a PEO (Professional Employer Organization)?
The human resource outsourcing structure focused on comprehensive co-employment services is called a PEO (Professional Employer Organization). They usually act as professional employers for their client’s employees. When the client company reports its salary using the PEO’s Federal Employer Identification Number (FEIN), the employee’s liability is transferred to the PEO. In this arrangement, the PEO oversees payroll and other administrative benefits, as well as other administrative responsibilities of employees on behalf of the business.
PEOs save investors and their entrepreneurs a lot of money
Money is not a good business tool if it goes out. Doing business cost-effectively is the name of the game to keep investors happy. They love to see business people save their money as if it were their own. PEOs make sense because their cost is incomparable to buying it all individually.
Investors use PEOs because they offer more
When it comes to being able to do a lot more with less, a PEO is the only choice. There are so many expenses associated with employing people, and PEOs help entrepreneurs accomplish it all in one place:
- Health care benefits
- Workers Compensation
- EPLI insurance
- Payroll processing
- Compliance with labor law
- Help with recruitment
- Administration of employment taxes
- And more!
Having to pay for all these services adds up quickly, not to mention trying to manage all these suppliers is quite a headache. A PEO is a one-stop shop for the busy entrepreneur who doesn’t have time to manage their HR department. Investors are particularly keen to eliminate things that detract from an entrepreneur’s productivity as the business grows. PEO saves time and has many advantages.
Challenges of startups
A start-up, even if full of energy, new ideas, motivation, and excitement, can still fall short of its goals due to the challenges of an ultra-competitive business environment. Experts agree that one of the main challenges startups face is attracting top talent.
On the one hand, startups may encounter difficulties in hiring people with the skills needed to add value to their company, and on the other hand, it may be difficult to find employees who share the founder’s passion.
Another important aspect is the time and financial investment in finding the right people for your organization, which will inevitably take away from other areas of the business. Once you do the math, hiring a new–paid–an employee can cost 6 to 9 months’ salary. For an employee making, say, $60,000 a year, that works out to $30,000 to $45,000 in recruiting and training costs alone. This time spent recruiting is time the organization loses by not working on other necessary operations. When all costs are considered, recruitment can be a costly and time-consuming process.
For startups looking to expand internationally, imagine the process taking place in another country. Complexity, cost, and headaches increase by a factor of three overall—conservatively. Most startups simply don’t have the manpower, knowledge, resources, or expertise to handle the challenges of an international business or the associated legal environment that governs a new location. This is where a PEO plays its role.
Benefits of PEO
- Gain time: Probably the greatest benefit that a PEO can bring is a significant reduction in the costly and unproductive administrative time that would otherwise be required to handle the functions described above. A PEO is virtually the only tool in existence that can significantly get employers out of the employer business and allow workers to focus on building their business proposition.
- Reduce HR costs: Failing to implement any formal HR program is a serious risk—it can put startups out of business—but sometimes cash-strapped startups see no other option. Fortunately, PEOs can significantly reduce HR administrative costs. According to the National Association of Professional Employer Organizations (NAPEO), the average cost per employee to manage human resources for PEO clients is 35% lower than for all employers.
- Increase revenue: A PEO won’t do much to directly increase revenue, but many startup founders underestimate the opportunity cost they incur when they take a DIY approach to HR. By helping start-ups free up time to focus on building and growing the business, and on average reducing employee-related costs, PEOs can help clients generate more revenue than if the business were trying to do everything themselves. NAPEO’s 2017 PEO Industry Report analyzed the revenue growth and profitability of companies that use PEOs versus those that do not. They found that PEO users experienced double the average revenue growth and 16% higher profitability year over year.
- To stay in business: Startups can fail for many reasons and lack of sales is just one. As mentioned above, HR issues can certainly put organizations out of business. PEOs can help startups cut costs while covering their HR bases. The result is a better ability to stay in business. NAPEO also found that businesses that used a PEO for at least four quarters were about 50% less likely to go out of business permanently from one year to the next, compared to the overall failure rate for similar private businesses in the US.
Final words
An effective and beneficial strategy for the international expansion of your business is cooperation with a PEO (Professional Employer Organization). Depending on the customer, their line of work, and their expansion wishes. PEOs can help an individual achieve their goals. That’s why engaging with a human resources PEO is essential if you’re just starting and want to get your business noticed. Working with the right PEO service provider can give you access to specialized solutions that are right for your company’s goals.
