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4 Reasons Why Startups Use PEOs

A professional employer organization (PEO) is a natural fit for startups because PEOs can offer access to enterprise-grade HR services for organizations whose time, money, and expertise are scarce and high-value.

Specifically, a startup working with a PEO delegates employee management functions – like payroll, benefits, retirement programs, insurance benefits, etc. – without losing control over their workforce. Because PEOs have many clients, they can often offer premium services at economy-of-scale pricing that’s accessible even to small organizations just getting off the ground. As a result, startups can leverage PEOs for the following advantages.

1: To gain time

Perhaps the biggest benefit a PEO can deliver is to significantly reduce the costly and non-productive administrative time that would otherwise be required to handle the functions described above. A PEO is virtually the only vehicle in existence that can considerably get the employer out of the employer business, allowing workers to focus on building their business offering. “PEOs free up managers to focus on the business rather than employment-related rules, regulations, and paperwork,” says management consultant Peter Drucker.

2: To reduce the cost of HR

Failing to implement any sort of formal HR program is a grave risk – it can literally put startups out of business – but sometimes cash-strapped startups can’t see another option. Thankfully, PEOs can significantly reduce HR administrative costs. According to the National Association of Professional Employer Organizations (NAPEO), the average cost per employee for HR administration is 35% lower for PEO clients when compared to all employers. Peter Cappelli of the Wharton School at the University of Pennsylvania says of the difference, “This is one of those rare instances that is both cheaper and better.”

3: To boost revenue

A PEO won’t do much to directly increase revenue, but many startup founders underestimate the opportunity cost incurred when they follow a DIY approach to HR. By helping startups to free time to focus on business-building and growth, and lowering employee-related costs on average, PEOs can help clients to generate more revenue than if the business tried to do it all on their own. NAPEO’s 2017 PEO industry report analyzed revenue growth and profitability at companies that use PEOs versus those that don’t. They found that PEO users had double the average median revenue growth and 16% higher profitability increases year-over-year.

4: To stay in business

Startups can fail for many reasons, and a lack of sales is only one. As mentioned above, HR issues can put organizations out of business just as surely. PEOs can help startups to reduce costs while simultaneously covering their HR bases. The result is an improved ability to stay in business. NAPEO has also found that businesses that used PEOs for at least four quarters are approximately 50% less likely to go permanently out of business from one year to the next when compared to the overall failure rate for similar private businesses in the U.S.

 

CoAdvantage, one of the nation’s largest Professional Employer Organizations (PEOs), helps small to mid-sized companies with HR administration, benefits, payroll, and compliance. To learn more about our ability to create a strategic HR function in your business that drives business growth potential, contact us today.

 

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