As outsourcing noncore functions becomes increasingly popular, more companies are asking themselves just how much of the human- resources function needs to remain on the premises. Enter the professional employer organization (PEO), which absorbs many, if not all, human-resources processes offsite. A common option for small companies, PEOs are moving upmarket, as executives grow more comfortable handing off entire departments to specialists.
A company first has to get comfortable with the unique nature of PEOs, which serve as co-employers in order to leverage the client base to provide large-company benefits to the small company. The PEO typically handles payroll, payroll taxes, benefits, and workers' compensation, and the employees are technically paid by the PEO.
But clients don't lose control of their employees, says Richard Rawson, CFO of Administaff, a PEO based in Kingwood, Tex. "We're allowing you to have more control over your business. You don't have to deal with all the administrative hassles," he says. PEOs can save small- business owners 20 percent of their time, says Tom Taylor, co-CEO of EPIX Holdings, a Tampa-based PEO.
Although many PEO clients didn't have HR departments to begin with, there is an appeal for growing midsize companies with multiple locations. "They don't have to build an HR infrastructure, because we're already there," says Rawson. One client, Luminant Worldwide Corp., is a combination of eight companies that provide Internet services; it has 920 employees and is publicly traded on Nasdaq. In-house HR handles employee- development issues, says Richard Scruggs, vice chairman and executive vice president of business development at Luminant. "We're trying to focus on things that are higher value-add to our business. I don't want to spend my time scouring the country for the best 401(k) provider."