The Pros and Cons of HR Outsourcing


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John Allen takes an in-depth look at HR Outsourcing and discusses who should be outsourcing to a and why, how small and mid-size businesses can take advantage of HR outsourcing administrative functions and common questions and answers in regards to PEO services.

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The Pros and Cons of HR Outsourcing

  1. 1. The Pros & Cons of HR Outsourcing Presented by John W. Allen, CPA, CMA
  2. 2. What do these companies all have in common?• ABB • International Paper• Bank of America • Levi Strauss• Best Buy • Motorola• BP Amoco • Proctor & Gamble• British Telecomm • Prudential Financial• Cap Gemini • Sony• Credit Suisse • Sun Microsystems• General Motors• Goodyear • TXU
  3. 3. And what about these governmental entities?• U.S. Defense Finance & Accounting Service (DRAS)• U.S. Office of Personnel Management• United States Postal Services• Transportation Security Administration• State of Florida• State of Texas HHSC
  4. 4. They all outsource HR
  5. 5. Agenda• Who’s outsourcing?• Why are they outsourcing?• What are they outsourcing?• How & when are they outsourcing?• To whom are they outsourcing?• Q&A
  6. 6. John W. Allen • President and COO of G&A Partners • 25 years of management consulting experience• Has been responsible for providing support services to organizations valued up to $5 billion and with as many as 46,000 employees.• Specializes in providing administrative services to emerging growth companies.
  7. 7. Amazing Facts• In 2003 HRO transactions impacted an estimated 2.8 million employees, or 4% of the U.S. workforce• In 2004, the Top 22 HRO deals covered over 700,000 employees• HRO revenues grew to $61 billion in 2005• HRO Today reports continued growth in 2006 and 2007
  8. 8. Why are they outsourcing?• Reduce costs/Increase EBITDA• Gain access to cutting edge technology• Avoid additional investments• Provide more self service tools to employees• Focus HR on strategic vs. tactical
  9. 9. What are they outsourcing?• Payroll• Health and welfare administration• Recruitment• Compensation planning• Performance planning• Learning management• Relocation• Records management
  10. 10. To whom are they outsourcing?• Accenture HR Services• ACS• ADP• Aon Consulting• ARINSO International• Ceridian• Convergys Employee Care• ExcellerateHRO• Fidelity Employer Services• Hewitt Associates• IBM Global Business Services
  11. 11. The trend is clear – the big boys are outsourcing HR, but what about the rest of us?
  12. 12. If growth in the PEO industry isany indication, small businessesare outsourcing more and more of their HR functions too.
  13. 13. More Amazing Facts• Number of PEOs has grown from a handful in mid 1980s to more than 800 today.• Number of co-employees has grown from 10,000 in 1984 to over 3,600,000 in 2006.• Gross revenues billed by PEO Industry grew from $5 billion in 1991 to over $51 billion today.• Wall Street estimates annual growth rate of 20%
  14. 14. Why the Growth?What’s driving businesses, large & small, to outsource HR?
  15. 15. How many hats do you wear? Are you tired of the rat race? Are you overwhelmed with paperwork?Is this what you signed up for?
  16. 16. Using a PEO helps you focus on what you do best !
  17. 17. Pop Quiz
  18. 18. Average administrative cost per employee $1,152 per year ($414 - $6,274 per year) Bureau of National Affairs
  19. 19. Average administrative cost per employee• 6% - 12% of payroll (SBA & US Chamber of Commerce)• 8.45% of payroll (UT-Austin)• $600 to $750 per annum per employee (major insurance company estimate)
  20. 20. So what is a PEO?
  21. 21. How does a PEO work?
  22. 22. What services does the PEO provide?• Payroll Administration – Provides time & attendance solutions – Issues paychecks and W-2s – Accrues vacation, sick and other leave – Withholds and deposits taxes – Withholds and remits garnishments & premiums for employee benefits – Files all payroll tax returns
  23. 23. What services does the PEO provide?• Employee Benefits Administration – Group Health Plans – Group or Voluntary Dental, Vision, Life, AD&D, STD, LTD & LTC – Section 125 Cafeteria Plans – 401(k) Retirement Plans – HRAs, HSAs, FSAs, & Gap Plans – Prepaid Legal, Purchase discounts, Wellness, EAP
  24. 24. What services does the PEO provide?• Human Resource Management – Compiles job descriptions & employee handbooks – Provides recruitment assistance – Conducts pre-hire background checks – Advises clients on employee discipline or performance problems – Educates clients on regulatory compliance issues – Handles unemployment claims & COBRA and HIPAA administration – Conducts exit interviews
  25. 25. What services does the PEO provide?• Risk Management – Workers Compensation Coverage – Master Safety Plans – Site Inspections – Safety Training – Accident Investigation – Workers Comp Claims Administration – Drug Testing & Modified Work
  26. 26. What responsibilities do you retain?• Management of business operations• Use of facilities and equipment• Safeguarding assets & people• Employee compensation• On-the-job supervision• Quality control
  27. 27. How would your company benefit?• Greater focus on your core business• Broader range of affordable employee benefits• Workers compensation insurance at competitive rates, with no deposit or annual audit• Fewer compliance issues & employee lawsuits• More time and money
  28. 28. How would your employees benefit?• Better, more affordable benefits• Higher “take home” pay• Greater understanding of company policies and procedures• Improved safety awareness and fewer on- the-job injuries• Happier, more productive employees
  29. 29. So how much does it cost ?• The cost of PEO services is generally less than or equal to the cost to do everything in-house.• Additional savings come by redeploying talent, reducing turnover, reducing workplace injuries and avoiding employee lawsuits.
  30. 30. Service fee is a percentage of payroll & includes: includes• FICA/Medicare• SUTA• FUTA• Workers compensation insurance• Employee benefits costs• Miscellaneous charges• PEO’s fee
  31. 31. PEO in Action – Aluminum Frame Manufacturer Cost Factors Before After ReasonsPayroll $522,000 $522,000 No change.Payroll Taxes 49,564 43,231 Lower SUTA rate & Sec. 125 planWorkers Comp 36,725 21,317 Higher rate tier discountsEmployee Benefits 31,200 31,200 Used client plan.Payroll Administration 17,460 18,720 Expanded services.Totals $656,949 $636,018Savings $20,931
  32. 32. PEO in Action – Freight Forwarder Cost Factors Before After ReasonsPayroll $1,371,550 $1,353,550 Eliminated one position.Payroll Taxes 141,467 115,255 Lower SUTA rate & Sec. 125 planWorkers Comp 48,004 32,806 Replaced accident plan with true workers comp.Employee Benefits 0 34,884 Restored lost coverage.Payroll Administration 18,000 41,147 Expanded services.Totals $1,579,021 $1,577,642Savings $1,379
  33. 33. For more information, visit• “PEOs take load off companies by filling human resource function”• “Human resource outsourcing can boost bottom line”• “PEOs can help small business grow”• “PEO’s: help for small companies in good times and bad”• “PEOs: the wave of the future”Source: NAPEO website
  34. 34. Guidelines for Selecting a PEO• Lists available thru NAPEO or TDL• Verify that PEO is licensed & in good standing• Ask for banking & credit references• Ask for client & professional references• Visit their offices• Review customer service agreement
  35. 35. Licensing Requirements• Controlling person must be 18 years of age and of good moral character• Controlling person must have educational, managerial, or business experience relevant to the operation of a business entity offering staff leasing services• Must demonstrate net worth of $100,000
  36. 36. Questions & Answers For More Information: John W. Allen G&A Partners4801 Woodway, Suite 210 Houston, Texas 77056 (800) 253-8562