Why Is PEO Profitability Rising for PEOs with Greater than 2500 Worksite Employees?

Once the relatively unsophisticated and simple provision of payroll and the administration of human resources services, the Professional Employer Organization (PEO) business has turned the corner. PEO companies have become the internal Human Resources Department, the trusted advisor and the Human Resources business partner for their customers.

Why is PEO profitability rising for PEOs with greater than 2500 worksite employees?

A 2500 worksite employee PEO is typically a strong regional player with solid experience who has garnered client loyalty and a respected regional presence. We see the profitability of these companies rising for a number of different reasons.  First, they offer a more sophisticated product in an ever-changing employment and regulatory environment. While PEO companies provide basic payroll and administrative services, they also serve as the HR Manger, the HR Consultant, the Employee Relations Director, the Benefits Analyst, the Recruiting and Compensation department – just to name a few. In addition, most PEO companies have become more customer/client focused. They take the time to understand their client’s business, provide more sophisticated pricing and sales proposals and present a truly value added – customer centric service. BY virtue of the fact that the product offered is more sophisticated and the focus more customer service oriented, the PEO is able to charge a higher fee. A higher fee in conjunction with lower expenses leads to higher profit.

How does a PEO lower expenses? Often, an investment is required before expenses can be lowered.  One of the most important investments is technology -- the key to all service driven industries, including PEO.  The internal and external systems capability necessary to complete in today’s environment allow larger PEO companies to provide more efficient and more competitive services – again allowing for a higher price yet ultimately lower expenses and therefore higher profit.

Most  PEOs have developed a financial model in which they take minimal risk – which adds to the profitability by limiting exposure and unexpected expense. The historical PEO financial mode whereby profits consisted solely of Worker’s Compensation arbitrage, are no longer viable or profitable on a long-term basis. With minimal risk come more consistent profit, more reliable net income, and therefore greater profitability. 

It is true in the PEO industry that “bigger is better.” A larger PEO by virtue of worksite employee lives is able to negotiate better pricing with vendors and therefore make a greater profit. A larger PEO has more experience, more consistent client selection, more seasoned management and more efficient operations. Streamlined administration coupled with a customer service – high touch – high quality model makes for a more profitable PEO.

Quite simply, increased profitability develops from higher revenue (fees) and lower expenses. Larger, more established PEOs typically have more industry experience, a higher level of management and technical expertise, more sophisticated product offerings, and a deeper focus on customer service. Because of this, they can demand higher fees. These companies lower expenses via technology efficiencies, prudent risk management and negotiation of lower pricing for vendor products.

top of page | back to articles