The first and most immediate strategy employers should employ as they look towards rebuilding their business in 2012 is reducing employment-related costs. As these costs continue to skyrocket, employers must review all human resources related expenses, including health insurance premiums, workers’ compensation costs, employment compliance, payroll/tax costs, salaries, and other overhead relating to employee administration.

One solution to effectively manage employment costs is to outsource human resources administration to a Professional Employer Organization. A Professional Employer Organization, or PEO,  helps small employers reduce costs in all of these areas utilizing the following two methodologies:

• Accessing the PEO firm’s Economies-of-Scale
• Consolidating vendors and streamlining operations

Economies of Scale.

Economies-of-scale is the method through which a PEO pools resources, thereby procuring discounted rates and passing those rates onto their clients. It is the primary method through which a PEO can reduce an employers’ HR-related costs. Small employers, those with fewer than 500 employees, have limited buying-power for purchasing workers’ compensation, are often limited in the variety and scope of health insurance plans they can offer their employees, and overall have less flexibility and expertise when it comes to administering these plans. The PEO pools hundreds, sometimes thousands of businesses, and is able to aggregate workers’ compensation insurance, health benefit plans, and retirement plans. The PEO establishes close working relationships with large regional insurance companies and is in the position to offer more robust plans, with lower premiums.

The PEO is also able to provide insurance carriers greater stability to their insurance plans.  The pooled employees come from a broad range of industries and geographic areas which serve to stabilize and diversify the risk and premiums over the long-term. This provides the PEO greater negotiating power at renewal, enabling them to keep renewal rates below market averages.

Beyond rates and vendor relationships, PEOs can successfully support health and wellness programs that can help maintain low insurance premiums into the future. Most PEOs offer Work/Life balance programs, health and wellness incentives, or discounts to health clubs and gyms. A healthy lifestyle in and out of the workplace can make significant, positive impacts on the utilization and expense of future health insurance premiums.

Vendor Consolidation and Streamlining Operations.

Another method through which PEOs help employers reduce human resources overhead is by helping them streamline their internal administrative operations. When businesses join a PEO, they in effect combine many vendors under one roof, thereby eliminating the need to maintain relationships with multiple vendors.

A full-service PEO can provide all of the following services, often at a reduced cost:

• Assistance with labor law and employment compliance
• Creating and reviewing employee handbooks & policies
• Payroll processing and tax services
• Risk management and safety consulting
• Workers’ Compensation insurance
• Health insurance plans & administration
• 401 (k) and Cafeteria 125 Plans
• Management Training
• Recruiting services

These combined services streamline the client’s internal operations and enable their existing staff to more efficiently focus on core business functions. A single individual within the client’s organization is usually all that is needed to liaise with the PEO which reduces the need for multiple employees to maintain multiple relationships with different vendors. Some companies experience such a drastic reduction in administrative overhead that they are able to reduce headcount, or reallocate resources to more valuable, revenue-generating tasks.

In our next post, we will analyze HR strategy #2: Reducing Employment Risks