How PEOs Increase Your Profitability

Outsourcing HR is often seen as a way to save time, but it is less often thought of as a way to actually increase profit. However, a recent study by the National Association of Professional Employer Organizations (NAPEO) found that companies that partner with Professional Employer Organizations (PEOs) are, on average, 16% more profitable than companies that do not. 

So, how does partnering with a PEO increase profitability? The answer lies in cost savings and increases in productivity. 

Cost Savings 

Partnering with a PEO reduces costs in a number of ways. Here are some of the most significant ways a PEO can lower your costs. 

No Need to Hire Additional HR Staff 

While a PEO does not replace your in-house HR team, it can allow you to grow further before you need to hire additional HR staff. By taking on routine matters such as payroll and benefits administration, it allows your HR team to focus on what is more important: planning for growth and improving company culture. 

Ultimately, a PEO provides the same support that an additional employee would but at a fraction of the cost.  

Better Employee Benefits 

Most small-and-medium-sized businesses are unable to afford the kind of benefits that make them competitive in today's job market. Through a PEO, your business can access a competitive benefits package for a lower price than would otherwise be possible. 

This means that you are not paying more money (cutting into profits) for an inferior package that does not attract the kind of talent your business deserves. 

Lower Turnover 

According to the study, employees of PEO clients show a greater intent to stay. Specifically, only 8% of employees of PEO clients intend to leave within the next year, as opposed to 14% of employees of non-PEO clients. The longer the company has been a PEO client, the more inclined employees are to stick around. 

The primary reasons for this are the better benefits and stronger company culture. Turnover costs companies a lot of money. Hiring, onboarding, and training new employees is expensive and time-consuming. 

Increase in Productivity 

In addition to the above, PEOs increase productivity in a number of other ways. 

Higher Engagement 

While intangible and sometimes hard to measure, employee engagement is vital to productivity. The NAPEO study scored PEO clients versus other companies out of 100 on two measures of engagement. The first was whether employees would recommend the company, in which PEO clients scored 73 points versus 68 for others. The second was whether employees felt they were inspired to their best performance, and in that one PEO clients scored 71 points versus 67. This is a statistically significant difference. 

Recent statistics show the value of employee engagement. They include the fact that highly engaged teams show 21% greater profitability (as well as a 41% reduction in absenteeism), that employees who feel their voice is heard are 4.6 times more likely to perform at their best, and that disengaged employees cost U.S. companies as much as $550 billion a year. 

Better Hiring Practices 

While PEOs do not hire or fire employees and don't choose employees, they can help you support good hiring practices, for example, sharing their knowledge. Employees of PEO clients rated their employer's hiring practices 8 points higher than non-clients. 

Hiring the right people in the first place reduces absenteeism, presenteeism, and turnover. It helps ensure a good company culture and ensures that you find high-quality talent that will offer the best productivity. 

Job Design 

Employees of PEO partners are also six percentage points more likely to say that the company does a good job of defining their job and the skills needed to be successful. They are seven percentage points more likely to say that the company has good, well-defined processes for tasks. 

PEOs can help you with job design both at the position description level and the task level, leveraging experience from working with multiple clients. This contributes to increased productivity as people are able to get their work done smoothly, in less time, and with fewer mistakes. 

Fewer Administrative Burdens 

When the PEO handles payroll, benefits administration, workers' compensation, and other such matters, your HR team can focus on strategic matters such as hiring people who can grow with the company, training employees, etc. 

You are also not delegating basic paperwork to the owner, office manager, or receptionist. This means they can concentrate on their jobs and also that you don't have people making mistakes outside of their scope of work. 

In summary, PEOs increase profitability in a number of ways. The NAPEO study shows that the annual median revenue growth for PEO partners is twice that of comparable firms and that PEO partners are also less likely to be concerned about their ability to handle the key challenges of hiring new employees, raising capital, and increasing revenues. 

By outsourcing to a PEO, companies save time and money and develop a better company culture, all of which increases the bottom line.