HOW DOES PEO WORK AND WHAT BENEFITS IT GIVES TO CPA FIRMS

Chris: Alright! Good afternoon everybody. Thank you for taking time out of your schedule to join us today. Very excited, I have a special guest with me. He's the founder and CEO of PEO spectrum, Mr. Thomas Farrel. And thanks for joining us today, it's episode number 27 for us. And for our audience we're going to do something unique today is, how can you help your clients and this will be along the lines of the aspect of how does the PEO work, what are the benefits that they provide for CPA firms and the clients, and so we brought in an expert to talk about this. Thomas thank you for taking time out of your schedule to meet with us today. So tell us about yourself and how you got this company started and very interested to know so take it away. 

Thomas: Yeah, thank you very much Chris and thanks everybody who's tuning in. My name is Thomas Farrel. I am the founder of PEO spectrum and we are a comparison service and consulting firm that's 100 % dedicated to the PEO industry. So we help companies shop and compare PEOs, we help companies leave and get out of a PEO relationship, we help them reduce costs when they're in a PEO relationship. So literally we're the people that stay up on the weekends and like to study PEOs. 

I started the company about 10 years ago, I was a salesperson at a PEO prior to that. And I had this experience where I was I was liking what I was doing I was getting to understand the industry, I educated myself I started to learn that the PEO that I was working for at that time was just really not a great PEO, we didn't have the best offering, we didn't have great service, we were going through some issues on wall street with their stock and so we're letting a lot of service people go and my job as a salesperson was to continue to go out there and sell this.

And I really got to a point where I just couldn't passionately do it and so really like all great ideas they kind of come from me and from a client's desire so I had this epiphany moment with the client where I showed up to present my proposal to them. I drive three hours into New Jersey to do it and I get there and there's like three PEO sales reps already in the office waiting for their turn, the sign-in book was like eight PEOs have been there today and I am looking I am like what is going on here, like usually it's just me so I get in there and I am ready to do my big glossy presentation my PEO and why we're the best and the CFO and the CEO just sit me down say; tom thanks for coming in if you could just go to the back of your proposal leave us with your pricing for your medical and your administrative fees and we'll be back in touch with you meeting left with five minutes.

So I get in the car and I am all dejected and then I start to realize at that moment these guys are going to get a great deal they’re shopping multiple PEOs they have a system to do it, they’re shopping financials first so they're not going to fall in love with me and my sales pitch before they get the price and see what it's going to cost them and their employees to sign up and that was really like the aha moment I said if we can just replicate this CFO and CEO are very experienced and they've been around the block and I said if we could replicate this experience, this shopping process for your everyday entrepreneur, we're going to make sure that they get a better price they're not going to take we're going to reduce the time it takes to shop and we're going to help them make sure they end up with the right PEO and not the wrong one.

Chris: That's an awesome story, so you are working in the business right just for a company at the time and you just saw how this this whole process could be so much better and so that's an amazing story, however now you're taking it to the next level and so I mean there's going to be like hundreds if not thousands of different PEOs out there right?

Thomas: Yeah, so there's actually 900 PEOs throughout the country which is a really crazy number to me. Our firm works with about 100 and we work with pretty much the largest 100 firms. The five largest PEOs in the country have 42% of the market share and then the next 25 largest PEOs in the country have 23% of the market share so 66% of the market share is owned by the top 30 PEOs. 

And so even though we work with 100 PEOs we spend a lot of our time with those big brand names that people know like the large ones that really have the name recognition, ADP total source of course is the largest PEO in the country. You have Trinet which is a publicly traded PEO, you have Insperity, you have Oasis which was bought by paychecks a couple years ago. So those are the 4 big names that when we present to CPAs or to whoever those are the names that you're going to see whether you're in New York or California and they have a lot to do in this industry.

Chris: Got it, so essentially a business client of our audience can go and search for the best option but you kind of aggregate all this for them and give them the best solution. Now would it all be with one company or it could be the different services could be with several companies how does that work out?

Thomas: Sure, so when you work with the PEO, the part of the value proposition is they are it's really the most comprehensive form of HR outsourcing for a small business and part of the value proposition is that everything is now under one roof, so for the most part if a company works with the PEO they’re definitely going to use them for payroll, they're definitely going to use them for HR services, they’re most likely going to use them for health insurance because PEOs are proven to save companies money on their health insurance, so they're most likely going to use their health insurance there's some reasons why you wouldn't. Workers compensation, again is kind of give or take a lot of clients will use it, if you are a low-risk industry like an accounting firm you're just going to use their own workers comp with the PEO you'll save 10-20% on it. But sometimes if you're a grey collar or blue collar and you're in some specialty group or something like that you'll retain your own workers comp and use the PEO for everything else. 

Chris: Got it! okay and so do you guys have any type of size of the business restrictions could it be a 10 person company? 1000 person company? How does that work out?

Thomas: Sure, it's interesting we used to say we can work with companies from two and up but really the industry is really trending towards really 6-7 employees is kind of the minimum, where the economics are going to make sense unless you're like a venture-backed company and you're going to have explosive growth and you're the founder and we can kind of make an argument to the PEOs like hey you going to bring this one-person company on because they're going to blow up in the next couple months and be 50 employees. 

Usually the sweet spot is really 10 employees to 150 employees or so and that's because when you hit 10 employees you're at the point where you're starting to hire strangers, people you don't know it's not such a closely held business all the time so you need to have your HR policies and practices in line you need to be compliant at that point you also need to comply with most of the HR regulations that are out there, and you're not so large where it justifies a full-time HR person. 

I mean even at 40-50 employees most of the time HR is headed up by somebody in the finance division either a controller or a CFO and so the PEO allows that person to basically delegate a lot of the heavy lifting with HR the benefit enrollment, the employee questions on payroll, answering the questions about your pet insurance program for the receptionist, whatever, a lot of that heavy lifting a PEO can take on and allow whoever is managing HR to really focus on the strategic, more strategic parts of the business which would be how do we retain our people, how do we, how do we build them whereas all the paperwork and stuff like that is taken care of by the PEO.

Chris: So this is an awesome service simply because the business owner themselves doesn't have to build their internal HR department. They can kind of outsource this to you guys and you guys find the best options for them and it takes away a lot of the headaches. So then is there like an average savings that the let's say a firm or a business of 20-30 people is or is it different if there's more employees. Can you talk about the savings that the core employee would work?

Thomas: Sure, so there's really two places that a PEO can save you hard dollar costs, number one is health insurance and health insurance nationwide which is one of our biggest line items as employers. On average through our service when we're vetting multiple PEOs we're on average saving companies up to 20% on their health insurance, then you have certain states that are little hot pockets, like New York has a regulatory body that if you're under 100 employees, health insurance carriers can underwrite you make a long story short in New York.

If a company's under 100 employees we're saving them 40 -50% on their health insurance through a PEO and that savings is typically paying for the PEO and sum. So those employers are basically getting a PEO saving net costs and now they have all these services that can help them run their business. But that's the health insurance argument and that's really the biggest line item that can really have a material difference and then you have workers comp, where on average 10-20% you can normally find with the PEO and then really the other side of it, those are like hard pure arbitrage cost savings then you have kind of the displacement savings. 

So if you have a company that has a vendor for HR, have a vendor for workers comp, they have a vendor for their benefits they have a separate, now you're basically taking all of those vendors, eradicating those bills and the PEO is displacing it. So often we find an HR department that has a lot of piecemeal services and piecemeal vendors and we're able to consolidate that and save money there and then really you could read all the napio national PEO studies that they national association of PEO studies that they do, and it is proven we saw it with the pandemic that PEOs; PEO clients grow more than other businesses they stay in business longer. 

And I think a lot of that is the type of company that decides they want to outsource and bring on this service specifically for the people that they're focused on their people, they're focused on benefits, usually those are the companies that are doing well. So the industry and the small companies that are working with the industry were really as the pandemic came by and a lot of those small companies were going under and we're not really the PEO clients, PEO clients have been doing pretty well throughout this, I don't know how much longer they can hold on but they got through 2020 for the most part. 

Chris:  So this is interesting because prior to our call I knew probably 5% of what PEO does and I just was looking into it and now as I am speaking with you I am learning a lot and how this is an awesome resource. Even for my father's company is in upstate New York and he started literally him and his brother it's a sheet metal fabrication shop and anything metal they make right they're even making ventilators, they got government contracts during the early part of the pandemic and it's amazing to see how he has grown because the two brothers running a shop, now they have over 100 employees they have an HR department everything and I haven't really dove into that with my father but I am thinking now I am like wait a second dad do you have a PEO service what I mean so it just makes me think outside the box.

Thomas: It really does and that’s our value proposition it's why it's a completely free service to use us because we want to make it easy for those business owners to just say sure I will take a look at it, I will get some quotes you're telling me, I can save 40% of my health insurance, yeah we'll have our controller get you some paperwork and let us know if that can happen and the way I look at our businesses if we can make that happen great there's savings now let's go on with the rest of the conversation and learn more about how the PEO actually works and right but if it doesn't save money. 

It's interesting to our clientele. These small business owners are pretty smart bright people. They've done it on their own; they've done it by themselves. For me to approach those people and say hey look you could be doing something better with HR and retaining your people, they don't they typically don't want to hear it. When you can tell those people hey that health insurance bill that went up 20% last year and 10% the year before. 

We can help you control that, that's when they start to open up and I think through the pandemic you have a lot of companies that prior to the pandemic they were in a good place and they don't have to change the status quo they can move on with their business as it was with the pandemic a lot of companies are saying we have no choice there's some way to cut costs somewhere and I don't have to let people go, I am looking into it all things are on the table and we're open to these alternative ways to do business which I am sure you guys are seeing the same. 

Chris: Exactly! and so now you're working with a company so how is the pricing structure work? Is this per employee, is this a monthly, or a flat rate. How is this structured for the client?

Thomas: Good question! So PEO the way they make their money is through administrative fees and they're typically going to charge per employee, so they will either charge a fee per each employee per month or they'll charge a percentage of payroll and let's the percentage of payroll is kind of hard to collect in your mind so let's talk about flat administrative fees per employee per month. They will range they will be more expensive for smaller companies than they are for larger companies. 

Let's say a 10 person company right now should have an administrative fee with their PEO anywhere from 1200 to 2000 $ per employee per year would be normal, for a hundred person company you're going to see fees anywhere from 600 to 1200 $ per employee per year and I think every PEO that we work with they would their value proposition would be we want to save you enough on health insurance enough on workers comp to see if we can make those fees be offset completely but that’s pretty much how it works it'll always be that administrative fee.

Chris: So now that they're working with you, are you after they settle on the company that they're working with? Are you part of the process anymore or now they're working with the PEO because of the benefits that you advise them on?

Thomas: Yeah, it's a great question and it's kind of an evolution of our company when we first got started, we really didn't have the capacity to service the accounts. Our mindset was we're going to do a really good job on the front end of the match making this relationship, setting up good expectations, setting a good price and now the PEO should do their job and they should make that client happy and they should retain them. 

10 years ago the industry wasn't as competitive and that was a pretty good strategy and we really didn't get too involved. Over the years with more competition out there and just more things going on we decided we can't really rely on the PEOs to be a hundred percent all over, sometimes it just doesn't work anymore sometimes the PEO gives them a health insurance, increase that they can't there's no other way to do it, just has to happen because of claims or the company's just outgrown the PEO. 

Maybe their technology is antiquated really the biggest death sentence for a PEO and their client relationship happens to be just a new management team coming in. They hire a new CFO new HR person and now they bring all their vendors and they come in there they're like what is this PEO thing who are like I am bringing what I know and how to operate with and so that's where we launched PEO advocate which is a service that we offer our clients for after the relationship is made we're there to escalate any problems that they have we're there to basically use our influence in our weight. We send more business to the PEO industry than any other organization and so it's very simple business to take care of our clients or we're not going to send you any more clients. I mean that’s what gets most of the work done but we are there to help them with any technical issues they're having with their payroll processing of their benefits and so this has been really interesting because now we're living more with our clients as we move on and it's helping our retention numbers and it's helping the company.

Chris: Yeah! That's well said because you especially nowadays the small business client need as much help as possible and so the fact that you are able to set them up and then offer additional services. You want to feel comfortable and be out and have a go-to it's not like who do I call, what do I do, what's going on, so that's an awesome idea and I also like about your company is the fact actually I had done this this morning on the process of moving and I was looking up. Runners insurance it's required part of my lease so I am looking it up and I am like where do you start right and so then I found an aggregator for the best renters insurance and so that's a great place to go to you right and find the best PEO services I think those are very important because otherwise I am clicking on all these companies like here we're awesome, we're great, we're awesome but you are able to centralize it all and give the best services and then help the client all throughout the way so I think that provides a lot of value.

Thomas: It's the good old-fashioned middleman concept. We basically took it and applied it to an industry and I think if you look at where those middlemen are valuable it's usually at a point where the consumer when they start shopping for something they're either out of their league or they just don't have the time to do it the right way, like if you're going to go look for a mortgage, it's like what are you going to start calling chase bank and Bank of America to get a loan from them like come on right you need a middleman in that situation and after seeing kind of how clients were getting it wrong with the PEO I was working for it was like enough is enough like there needs to be something really at the time and even today we do our CPE driven course for us for CPAs and the community out there, it's still a very undereducated subject and most of the information that your business owner is going to get on PEOs. I hope they're watching stuff like this but the reality is where they're getting their information is from the sales person that's walking in the door. So if your source of information is the guy that's selling something, you have to be very concerned and very careful.

Chris: Yeah! That's exactly what we do right. That's why I was very intrigued to have you on today because that's what we're offering for the CPA firms right. They need the staff in order to do the clients work and you're able to help out their clients and the services that you offer. So it's the utmost value of what we do for our clients that's for sure. So this has been awesome. I learned myself quite a bit, hopefully our audience did too. Now any final thoughts or anything else you want to say before we wrap up this afternoon.

Thomas: Well considering the audience are CPAs, there was a study that ADP did and they asked CPAs out there What's the most important service of the PEO for you? and you would have thought that it would have been oh I love when you save my clients money on their benefits or workers comp or something like that, it wasn't anything to do with that. 

It was actually the part that was most important to the CPA s was the trusted advisor access they get into the HRA’s platform that the PEO provides so if the CPA needs to get year-end payroll information they can just like a bank they could get access to go in there get what they want, they don't have to wait outside the business owner's office and stock them to get that to get that payroll report that they were waiting for and it was surprising but that was the most important thing that they that they valued and where that really came into progression was with the with the PPP loan, with the application and also the forgiveness process PEO clients had it really easy all that data was there it was a canned report like sitting right smack in the middle with red around it PPP report and you're able to just grab it and get going with the rest of the process. So that was nice.

Chris: Making life easier I love it, I love it so much. So Tom thank you so much for taking time out of your schedule and informing us today I hope our audience really enjoyed this. I myself have been taking notes. I am going to talk to my father to see what he does and yeah I know this is a value and the audience needs to know that these resources are out there. That's very important about that. So everybody thank you for taking time out of your schedule this afternoon and we're going to be wrapping up #BKOT 27 we'll be back tomorrow at the same time 2 ‘o'clock with another episode talking about cyber security number 28, so look forward to seeing you guys tomorrow. Tom take care, thank you.

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