Defending Against the PEO Threat - … · Defending Against the PEO Threat ... • The PEO value proposition ... – ADP TotalSource, TriNet, Paychex, Insperity, etc

Defending Against the PEO Threat

© Ceridian Corporation. All rights reserved.

Defending your business against the PEO challenge

A broker’s roadmap to success, presented by expert John Kelly

This webinar is to be viewed only by the webinar invitees and may not be distributed or furnished to any third parties. This presentation is for discussion purposes only.


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• More than 30 years of experience as a benefits consultant

• Served as a vice president at a national PEO

• Professional actuary

• Adjunct professor

• Author of articles and textbook chapters on benefits administration

John Kelly Director of Channels and Alliances Ceridian U.S.


• Who is Ceridian?

• Are PEOs really a Threat?

• The PEO value proposition

– What services do PEOs offer?

– Why do employers choose PEOs?

– How do PEOs compete with brokers?

• What PEOs deliver

• Forming a strong defense against the PEO challenge

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Our solutions help employers control costs, save time, optimize their workforce, minimize risk and grow their business.

Workforce Management

HR/Payroll & Tax Services

Health & Productivity

Solutions

Talent Acquisition & Performance Management

Benefits Administration

Comdata: Transportation

& Payment Processing

Stored Value Solutions:

Custom Gift Card Services

Who is Ceridian? Ceridian is an industry-leading provider of business services ranging from HR/payroll to workforce management.

• Payroll administrator since 1932

• Benefits administrator since 1986

• Nation’s largest COBRA administrator

• Partnering rather than competing with brokers for more than 20 years


PEO overview and value proposition

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First, let’s take a poll…

Have you lost any clients to PEOs in the last 24 months?

No

I’ve lost one client to a PEO

I’ve lost more than one client to PEOs

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What is a PEO?

• Professional Employer Organization

• Similar to “employee leasing” but uses a “co-employment” model

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PEOs have recently been gaining traction

• PEOs have been in business for 30 years, but have been growing recently as a result of increasingly complex human resources and benefits laws.

• In 2010, the PEO industry grew a very robust 14% or $10 billion in a difficult economy, reporting $81 billion in gross revenues.

• Today, approximately 700 PEOs are operating in all 50 states, providing access to employee benefits for 2 million to 3 million employees.

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Source: NAPEO – National Association of PEOs


PEO target: Small- to mid-sized companies • The traditional sweet spot is the small market (10 to 100 EEs)

– Average client size: 40 employees

– 23% of businesses with less than 250 EEs currently use a PEO

– Nearly 80% of businesses using PEOs have less than one full-time HR resource

• PEOs are moving into the mid-market (500 to 500 EEs) – Common industries include: hotel chains, lawn care, restaurant chains,

retail, medical service providers (nursing homes, etc.)

– In situations with low employee density per location, lack of HR support

– Major PEOs now have a strategy to win larger engagements in the mid-market

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Source: Aberdeen Study July 2011


Popular PEO services: HR/Payroll • Because of limited HR internal resources, small- and medium-

sized businesses seek a single-source vendor for common HR/payroll tasks:

– Payroll administration and tax services

– Risk management

– Recruiting

– Benefits administration

– Workers' compensation

• PEOs offer all of these services together as a “bundle”

• Average employer cost: $118 per employee per month (PEPM)

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• Some offer benefits directly as part of their solution – ADP TotalSource, TriNet, Paychex, Insperity, etc.

• Others work with brokers

• Some focus on benefits as a core component of their value proposition

• Others offer services for employers that do not offer benefits

• Why not work with a PEO that works through brokers? – “Once you client moves to a PEO it is often hard to leave…except to

another PEO that may not be as broker-friendly!” – You give up PRIMARY client relation to the PEO!

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• The largest PEOs provide benefits via direct relationships with carriers

– ADP TotalSource via Aetna, UHC, etc.

– Paychex Business Solutions via Aetna

– TriNet (purchased Gevity) via Aetna

– Insperity (formally known as Administaff) via UHC

• Paychex is leveraging these relationships to move directly into the brokerage area. If your customer is also a Paychex client, your business is at risk

– “A Paychex Inc. subsidiary has been named on Business Insurance magazine’s 2011 list of the Top 100 Brokers of U.S. Business.”*

– Paychex provides P&C as well as benefits insurance coverage inside or outside PEOs. They have licensed agents and 94,000 clients.**

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*Rochester Business Journal, July 20, 2011 **Paychex 2011 investor conference


• “I think Administrative Services Outsourcing, particularly in the middle and the low end of the market, is going to continue to explode. And I think we're going to do a bang-up job selling health care insurance and Workers' Comp into our base.”*

– Gary Butler, CEO ADP - January 26, 2011 (in response to a question from David Grossman - Stifel, Nicolaus & Co., Inc)

• Percent Penetration of ADP Small Business Client Base** – Workers’ Comp increased from 11.7% FY’08 to 18% FY’11 (YTD) – Health Benefits increased from 0.5% FY’08 to 1.6% FY’11 (YTD) – Penetration in health benefits has more than tripled in 3 years!

• “… the PEO benefits from about half of its sales coming from up-selling our PEO solution to our existing payroll clients. We are able to create substantial lead flow by leveraging the Small Business Services salesforce in addition to the direct PEO sales organization.”***

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*Automatic Data Processing's CEO Discusses Q2 2011 Results - Earnings Call Transcript ** ADP Financial Analyst Conference May 5, 2011 *** ADP Letter to shareholders September 26, 2008


Solutions Typical Broker PEO

Health insurance x Limited

plans & service

Worker’s compensation x x Benefits enrollment and administration x Payroll and tax administration x HR technology/employee self-service x Termination processing x Retirement benefits – 401(k) x Employee training (safety, sexual harassment, etc.) x Compliance/legal services x


Poll: The employer attraction to PEOs Which is the most common reason employers switch to a PEO?

Control HR costs (eliminate need to hire HR resource)

Lower cost of health care benefits

Offer quality HR service to aid recruiting and retention

Need to focus on core business

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Poll: The employer attraction to PEOs Which is the most common reason employers switch to a PEO?

Control HR costs (eliminate need to hire HR resource)

Lower cost of health care benefits

Offer quality HR service to aid recruiting and retention

Need to focus on core business

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Source: Aberdeen Study, July 2011


Why employers choose PEOs Companies who currently work with a PEO cite the following reasons for this decision (asked to select top 2)

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Client pain Gain promised by PEO

High cost of providing health care benefits to employees

Lower insurance costs if bundled with additional services

Need to focus on core business Offer integration between multiple systems to reduce administrative burden

Need quality HR services to aid recruiting and retention

Offer benefits typically found at big companies (401k, EAPs, etc.)

Control HR costs Take over HR duties to relieve staff of administrative tasks

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PEO sales strategy

• Use their vast network of current payroll clients to “up-sell” PEO services

• Attract strong sales professionals with broad HR and benefits knowledge and experience

• Actively seek companies that are looking to enhance their HR and payroll administration

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What PEOs deliver

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PEO agreements may contain hidden costs

• High administrative fees of $500 to $1,800 per employee per year, in addition to pass-through costs*

• Loss of tax breaks normally provided to small employers**

– Become subject to laws that apply to large employers

• Potential volatile insurance premiums due to other high-risk clients in their portfolio

• In some cases, significant annual price increases or renewals above trend

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* Average employer cost: $118 per employee per month (PEPM), Aberdeen Study, July 2011 ** PEO are seeking clarification, Senate bill1908


• “One size fits all” approach is inflexible and forces clients to pay for services they may not need or use

• Often limited benefits options compared to the wide variety available from a broker in the marketplace

• Loss of underwriting history, making it difficult to procure separate group insurance later

• Potential loss of control of when and how to change benefit plans, if the PEO change their benefit offerings employers need to change plans offered to their employees

• We will send all participants a “Defending against PEOs” fact sheet that summarizes these key points

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The PEO trap

PEOs create “stickiness,” or difficulty in leaving (Even if service suffers or the cost increases)

• PEOs can charge steep termination fees

• Shopping for comparable services is complex, difficult and time-consuming.

• All services must be replaced at the same time!

• Some benefits and services employees come to expect are difficult to obtain outside a PEO (employee self-service, etc.)

• Loss of underwriting history makes it difficult to obtain insurance outside a PEO

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Defending your business against the PEO challenge

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Recognize which clients are most vulnerable

A client is at a higher risk to switch to a PEO if: • ADP or Paychex provides you client payroll or

HR/benefit services

• Your client is based in a PEO “hotspot state” – CA, FL, OH, NY, MA, CO, GA, TX, MI, IL, MO, WI

• Your client has a high average salary

• Your client is a professional service firm (accountants, doctors, lawyers)

• Your client wants to change insurance carriers (especially to Aetna, UHC, Humana) or payroll vendor

• Your client is under new leadership (especially in finance or HR)

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© Ceridian Corporation. All rights reserved. 27

• PEOs can’t save money in medical insurance by increasing their pool size; they reduce rates by lowering or eliminating commissions or by providing administrative efficiencies for carriers.

• They also have higher administration fees and less flexibility – PEOs must provide benefits via a fully insured insurance

arrangement (self-funding is not a option)

– Most PEOs providing benefits do not allow for medical carve-outs

• As employers grow and evolve, a broker can offer the flexibility, stability and quality service they need


Neutralize the threat

• PEOs bundle a variety of services

– Clients pay for services regardless of whether they actually use them

– May not provide itemized invoices, placing burden on the client to figure out how much they pay for each service

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• Partner with an HR/Payroll company that enables you to offer similar services as a PEO, but allows you and your clients to maintain control and flexibility

The best defense is a good offense.

© Ceridian Corporation. All rights reserved. 29

• Two of the top three payroll providers compete against you!

• If ADP or Paychex is you client’s payroll vendor, you already have a “fox in the henhouse”

• If a client is looking for a new payroll vendor your relationship could be in jeopardy

• Proactively work with you clients to understand their HR, Payroll and benefits administration concerns

• Loss of HR leader or spike in HR activity could pre a prelude to a PEO entry

• You need to be more strategic! Expand your benefits knowledge to also include HR


• Small employers approached by a PEO can discover that the initial benefits cost savings soon disappear due to fees and aggressive price increases

• PEOs cannot offer the same level of choice and personalized service available through benefits brokers

• Your clients are increasingly interested in a single-source vendor for HR/payroll services

• You need a proactive partnership with a company that offers your clients and prospects many of the PEO advantages, without the one-size-fits-all and co-employment drawbacks

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Questions?


Contact Information John G. Kelly, CEBS Director, Strategic Partnerships Email: [email protected] Office: (786) 463-4644 Fax: (305) 675-2763 Mobile: (305) 710-3742 LInkedIn Profile: http://www.linkedin.com/profile/view?id=1891544&locale=en_US&trk=tab_pro

Connect with me on LinkedIn!

http://www.linkedin.com/profile/view?id=1891544&locale=en_US&trk=tab_pro

http://www.linkedin.com/profile/view?id=1891544&locale=en_US&trk=tab_pro

Connect with us:

@Ceridian_us

www.facebook.com/CeridianCorp

www.linkedin.com/company/ceridian

Documents

Defending Against the PEO Threat - … · Defending Against the PEO Threat ... • The PEO value proposition ... – ADP TotalSource, TriNet, Paychex, Insperity, etc