Topic: FINANCE & OPERATIONS

As the economy and our industry continue to shift, PEOs are becoming even more attractive and important for many organizations. Through our leadership in the PEO space, we know our model enables companies to focus on the critical aspects of their business, while Human Capital Management (HCM) experts provide employee-centric services, including payroll and benefits, all while ensuring compliance requirements are met.  

An additional part of our responsibility is to deliver timely and accurate services. This is one of the reasons why running an efficient operation is important. While there are many ways this can be achieved, there is a methodology called “Lean” that has been used in manufacturing for over 50 years and can be adapted to accelerate your PEOs operational success.  

Lean is a framework that consists of five key principles, focusing on delivering higher quality products and services, while maintaining the right levels of operational efficiencies. Thanks to Toyota Lean was known in the industry. I’ve had the opportunity to leverage it in different spaces and businesses, and experienced transformational change. Let’s dive in.  

THE FIVE PRINCIPLES

Lean’s five principles are known as: 

1. Defining Value 
2. Mapping the Value Stream 
3. Creating Flow 
4. Establishing Pull 
5. Pursuing Perfection  

Let’s start with the first principle, defining value. PEOs must clearly understand what our clients need from the services we provide and which of those offerings bring the most value. To do this, it’s vital you define value through the eyes of the customer, because at the end of the day, that is what they are willing to invest in. This is an exercise I recommend completing quarterly to quickly re-prioritize what our clients need and deserve. For maximum effectiveness, be sure to define value with your full leadership team and cascade the outcomes across all associates to build transparency and shared common goals.  

The second principle, mapping the value stream, brings to life the tactical activities that support the value that you defined in your first principle. Mapping a process from this perspective helps you identify ways to streamline. This is where the fun begins! Based on your shared definition of value, and laying out your tactics, you can now clearly pinpoint and articulate which activities to eliminate or reduce from your process – generating efficiency and focus on delivering value through the eyes of your clients. There are many templates available that can be used to complete this step in its preferred method – with service associates.  

The third principle, creating flow, is where true transformation can take place. Once you understand your opportunities to streamline, you can begin looking at ways to re-organize your activities and leverage technology to create an optimized process that runs without delays and delivers faster services.  

Lean’s fourth principle, establishing pull, is the one that as I think can be a bit more challenging to apply to PEOs. Still, there are opportunities to leverage it. When you review your service operations with a “pull” mentality, you can adapt it by creating a “first in / first out” approach when assigning and managing the work to your team. By quickly addressing case management and client escalations, you will increase productivity and satisfaction amongst your associates and clients. Once you have established these four principles, it’s time to wrap up your Lean journey with the last principle, pursuing perfection. 

Pursuing perfection, is the most critical principle and the one that should become a part of your organization’s DNA. The mindset around this principle is that good is never enough, and there are always ways to improve and become better. While there are many tools available that can help your organization create a “continuous improvement” mentality, one of the most used (and one that I highly recommend) are “Kaizen events.” In a Kaizen event you link together with key subject matter experts and leaders to map your processes and identify opportunities to address in both short- and long-term timeframes. What really makes the difference with this tool compared to other activities and working sessions, is that you end with each action item having assigned owners and timelines, helping the team maintain focus and commitment. 

You may be asking, “Who has time to apply and follow Lean?” I’d challenge you to say, “Who doesn’t?” Once you and your leadership team agree Lean is right for your PEO operations, it naturally saves you time and becomes a part of your daily business culture. It can be applied throughout all operational processes, starting with implementing clients, transitioning them to service, and within the different teams that support payroll, benefits, talent, and other HCM services. 

Ultimately, it is up to each PEO business leader to determine the best approach to deliver their services. Lean is a framework to increase quality and efficiencies in your operation while concentrating on the services that your clients need. It is not only a simple approach, it is also process and industry agnostic, and will help reduce your operating expenses, giving you the chance to re-invest in new technologies that can enable you to be more proactive, and stay ahead and relevant in the marketplace.  

As you begin your Lean journey, remember good is never enough and you should always want to deliver an epic experience, while running an efficient PEO operation. Because, at the end of the day, you are taking care of your clients most important asset, their people. 

When entering the intricate PEO landscape, understanding the multifaceted operational tasks required to ensure compliance, efficiency, and effective management of human resources and payroll functions for client companies is paramount. The cornerstone of prosperity lies in crafting a well-structured operations plan. Below is a checklist to help guide you through this complicated process. 

REGULATORY COMPLIANCE: NAVIGATING THE LEGAL LANDSCAPE

A fundamental pillar of PEO operations is mastering regulatory compliance across federal, state, and local levels. The intricacies of employment and labor laws, especially when operating in multiple states, demand meticulous attention. Obtaining licenses or registrations in each state of operation is crucial. Your NAPEO membership can serve as an invaluable resource in untangling this web of regulations.  

Given the rise of remote workforces, extended geographical reach requires adherence to specific PEO licensing and registration requirements in various states. Even if your PEO doesn’t actively market in a particular state, clients with employees working there might necessitate compliance which can be burdensome and costly. State-specific unemployment regulations further accentuate the complexity, with reporting norms varying significantly. For instance, while Florida permits PEOs to elect how to report, other states prescribe either client or PEO reporting. 

INSURANCE: SHIELDING YOUR VENTURE

Appropriate insurance coverage forms the backbone of safeguarding your PEO venture. Beyond standard general liability and workers’ compensation insurance, the growing prominence of cybersecurity threats calls for dedicated cybersecurity insurance. Cyber attacks can assail businesses of any size, and fortifying your defenses is imperative. 

Employment practices liability insurance (EPLI) warrants careful consideration. This coverage extends not only to your internal employees, but you may also extend coverage to your clients. EPLI offers protection against claims related to employment practices, encompassing discrimination, wrongful termination, and harassment. 

Navigating the complexities of workers’ compensation insurance, mandated by each state, necessitates an insurance broker well-versed in the PEO industry. Given the intricate nature of PEO operations and the myriad workers’ comp codes they manage, a broker experienced in this sector is invaluable. 

OPERATIONS: THE BACKBONE OF YOUR PEO ENDEAVOR

Client Contracts: Solidifying Agreements 

Crafting a robust client service agreement is a pivotal component of your PEO’s offerings. This document delineates service scope and responsibilities while establishing a legally binding co-employment relationship between your PEO and your clients. Legal counsel, well-versed in the nuances of the PEO industry, is indispensable for drafting comprehensive contracts that incorporate specific state PEO provisions. 

Human Resource Information System (HRIS): Powering Your Processes 

Selecting a suitable HRIS is a decisive step in streamlining payroll and HR functions. This choice should reflect long-term viability rather than short-term convenience, as system transitions can be arduous. Formulate a comprehensive list of business requirements, to aid in system comparisons that align with your goals. 

An optimal HRIS should: 

• Maintain accurate records of employee data, payroll details, and compliance documentation. 
• Facilitate client level payroll processing, tax withholding, and reporting in adherence to legal requirements. 
• Remain scalable to accommodate exponential growth. 
• Contain streamlined, user-friendly workflows to increase efficiency.  
• Offer a seamless onboarding platform for worksite employees, encompassing forms, benefits enrollment, and compliance training. 
• Include a robust billing system that accommodates multiple billing scenarios. 

Payroll & Tax Administration: Ensuring Accuracy and Compliance 

Staying abreast of payroll tax regulations is imperative to guarantee accurate and timely tax filings. Core to the co-employment relationship is your PEO’s responsibility for federal, state, and local tax withholding, remittance, and reporting under your PEO’s tax identification numbers. 

PEOs oversee a wide array of payroll cycles and varieties, necessitating a system capable of accommodating numerous data elements tailored to diverse industries. These encompass pay codes, deduction categories, PTO policies, and a multitude of state and local wage and taxation regulations. 

Employee Benefits: Nurturing Competitive Advantage 

Remaining competitive in the PEO domain mandates offering comprehensive employee health and supplemental benefits to clients and their workforce. This array spans health, dental, vision, life insurance, disability insurance, and supplementary options. Benefits can be structured as PEO master plans or client-sponsored plans, requiring collaboration with an insurance broker well-acquainted with PEO nuances. 

As you embark on your journey, it’s wise to consider whether offering a future master health plan aligns with your goals. It’s worth noting that most health insurance providers stipulate a minimum enrollment threshold for considering a group as eligible for a master plan. Hence, for startups, it might be prudent to initiate client-sponsored health plans to gradually build up enrollment numbers. While these client-sponsored plans typically involve more administrative efforts compared to master plans, they can also prove advantageous as part of your marketing strategies. 

Supplemental plans, on the other hand, are typically structured as PEO master plans. This arrangement allows these plans to be extended to all qualifying worksite employees and, depending on plan specifics, might not necessitate an employer contribution. 

Your PEO’s approach to administering client-sponsored plans will determine the course of benefit management. Some opt to fully handle the administration for their clients, while others might credit employee deductions back to the client, who then undertakes administration responsibilities. Conversely, master plans are administered by the PEO. 

Another avenue to attract and retain employees is through retirement plans. A common choice for many PEOs is sponsoring a multiple-employer 401(k) plan. This type of retirement plan empowers clients to adopt the plan and offer it to their worksite employees. Notably, the multiple-employer plan streamlines administrative processes for the PEO, simplifying overall management. 

HR Support & Compliance: Guiding Clients Through Complexity 

Your PEO’s role extends to providing HR support and ensuring client compliance with employment laws. Navigating both federal and state regulations is essential and requires frequent client communication. Subscribing to a service that maintains federal and state regulatory data can be immensely beneficial in staying informed. 

Incorporating these components into your operational blueprint sets a strong foundation for a successful start-up PEO journey. Educating yourself about regulatory nuances, fortifying your insurance coverage, optimizing your operations, and providing robust client support will guide you toward becoming a trusted partner in the PEO landscape. 

Employee turnover poses significant challenges to PEOs, affecting their productivity, financial stability, and overall success. In this article, we will delve into the various costs associated with employee turnover, providing a detailed analysis of the expenses involved and the detrimental effects on organizational performance. 

The article provides some simple guidance for streamlining operations (thus reducing selling, general, and administrative (SGA) costs) and increasing gross profit contribution from their existing client base. For the purpose of this article, we are only exploring pricing strategies that affect client profitability and operating efficiency items that impact select SG&A cost categories. Business development and organic growth are excluded from this discussion.  

If you asked someone in the PEO space what he or she thought of actuarial science a positive response might be reserve analyses or accruals. A negative response might be collateral calls or rate increases. Naturally, the varied reactions stem from whether there is positive or negative news coming from the work of the actuary. Yet, one of the most helpful projects an actuary can perform for a PEO, eliciting either positive and negative reactions, is a client-level financial analysis.  

General ledger reconciliation is a key control to help maintain timely and accurate financial statements in any business. If you speak to accounting or finance professionals in the PEO industry, they will agree that general ledger balance sheet reconciliations are the most telling and critical tools in analyzing a PEO’s fiscal position. Failure to reconcile balance sheet accounts timely and accurately can lead to material losses to the PEO. Let’s explore the 5 W’s of PEO ledger reconciliations.  

Among the many determining factors in PEO transactions, profitability is one of the most important. I like to call these factors “Pieces of the Puzzle” in this very complex 2023 world of M&A. Let’s go through some basic concepts first.  

General ledger reconciliation is a key control to help maintain timely and accurate financial statements in any business. If you speak to accounting or finance professionals in the PEO industry, they will agree that general ledger balance sheet reconciliations are the most telling and critical tools in analyzing a PEO’s fiscal position. Failure to reconcile balance sheet accounts timely and accurately can lead to material losses to the PEO. Let’s explore the 5 W’s of PEO ledger reconciliations.