Florida Underwriter has more than once said the Professional Employer Organization (PEO) industry has "long been a cornerstone of Florida's economy." Like the polished granite beneath the stone, brick, and polished stained glass of a new sanctuary, it is an awesome compliment and humbling responsibility. Editor Michael Adams has described the PEO cornerstone in terms of the industry's growing client companies, rising worksite employee count, and expanding industry gross payroll. But these numbers represent the shine of the granite. The strength of the PEO cornerstone role comes not from the numbers, but from the true value and services of a new PEO industry.
The hard workers' compensation markets of 2001 brought painful memories and valuable life lessons. The PEO industry, like other large employers, faced limited carrier availability, restricted capacity, and dramatic rate increases. PEOs quickly learned that clients were easily attracted by the lure of cost savings easily left for the same reasons. PEOs also learned there was more to their business model than workers' compensation. Some PEOs were sold, others merged, and some simply chose to retire. Far more PEOs took dramatic actions to ride out the storm, to correct their path, and to chart a new course.
Today, the news is not about calm comp waters or bright blue skies. It is about a changed PEO industry!
Smaller Is Better
Most dramatically, many PEOs discovered increased profitability from a smaller book of business. It is easy to focus on certain class codes and suggest that many clients with these codes were not good for most PEOs. Certainly, eliminating high risks from a PEO book of business removes a significant variable from the profitability equation. However, the PEO business is about management of risk. The best workers' compensation professionals know that aggressive and proactive actions can, in fact, reduce both claims and costs. A closer analysis of the PEO industry revealed it was not the class codes but the business clients themselves that made the difference. Business clients that purchased PEO services based on cost savings alone turned out to be terrible clients and often unprofitable business. Simply put, clients focused on insurance services — and not on the PEOs' risk management or human resource services — are bad news for everyone.
Second, PEOs discovered the importance of vendor relationships. When the promise is rich, the ice is cold, and the music lively, the party is always full. But true relationships come from long-term commitment, mutual necessity, and dedicated hard work. Today, profitable PEOs have established long-term relationships with carrier partners. PEOs have learned that real profits come from strict underwriting of each and every new business client, meticulous worker coding, and daily execution of best professional industry risk management practices that truly result in fewer claims and lower costs.
Working with carriers, the PEO industry, through its trade association NAPEO, established comprehensive best practices for workers' compensation and then took the unprecedented step of establishing an independent certification program. Training materials and workshops were developed to educate and perfect the practices used by dramatically expanded risk management operations within PEOs.
Mining the Hidden Treasures
Third, during the hard market, PEOs discovered there was more to their value than just the exterior good looks of their workers' compensation services. Deep within the PEO were important human resource services and employee benefits that enhance a business client's ability to attract and retain the very best workers. Improving worker retention numbers does in fact improve a client's profitability. However, not all businesses know how to obtain the greatest return from capital and not all businesses recognize that investing in human capital can produce dramatic returns far greater than the recent meager returns of financial capital.
Business clients seeking a PEO to help them grow their top line are far more profitable than clients seeking quick cost savings below the line. PEOs recognizing the profitability of these clients have created an expanding new job market for certified human resource professionals. These PEOs have also added new employee benefits and retooled their sales operations to target business entrepreneurs willing to invest in world-class employment practices and Fortune-500 employee benefits.
Just as the Kennedy Space Program was not established to discover Teflon or Velcro, PEOs out of the hard comp market discovered expanding new markets in larger business clients and corporations. This is not to suggest PEOs have abandoned small business clients. They have always been and will continue to be the primary focus of PEOs. Florida's economy is dominated by these small retailers, contractors, and service providers. Struggling merely to meet the business of their business, these business men and women are ill-equipped and overwhelmed to meet the responsibility of the business of employment and find an oasis in their PEO's skills and services.
Finding the Profitable Middle Ground
However, the PEO business client with 50 or 150 workers is no longer a rare exception. Corporations with 200 to 500 workers are slowly discovering they too could benefit from a PEO's economies of scale and scope. Today, one of the fastest growing markets for PEO services is the new "middle market." No, we are not talking about corporations with 1,500 to 15,000 workers. The human resource equivalent of the large-box stores can meet their outsource service needs just fine.
Instead, we are talking about the Pensacola corporation with 100 Florida-based workers along with 40 in Atlanta, 20 in Dallas, and 30 spread around in five other states or the fast growing, 70-person Gainesville software developer whose vision has more to do with an IPO than FMLA or FLSA.
PEO discussions at the August FWCI Educational Conference might focus on the NAIC Model PEO Rules or upcoming discussion in Tallahassee. But the news is about a changed, maturing PEO industry: A PEO industry that has emerged from the hard workers' compensation market with fewer, stronger, and more profitable members; a PEO industry with new partnerships with its carriers and expanded professionalism in its risk management operations.
The news is about a PEO industry that discovered more profitability in delivering employment practices, human resource services, and Fortune 500 employee benefits than merely marketing payroll and workers' compensation services. It is about a growing PEO marketplace of smaller business clients and under-served mid-sized businesses and corporations.
From my viewpoint, the cornerstone of Florida's economy looks pretty good. Frankly, from the strength of today's new PEO service offerings, precision operations, and structural position in the marketplace, you have to ask why every business in Florida isn't using a PEO.
Milan P. Yager is the executive vice president of the National Association of Professional Employer Organizations, www.napeo.org. Information on the PEO Risk Management Certification Program from the Certification Institute is available at www.CertificationInstitute.org.
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