HR Outsourcing Report Shows Continued Industry Growth

Apr 10, 2018
| Michael Altiero
HR Outsourcing Growth

HR is routinely cited as one of the biggest challenges facing small and medium-sized businesses (SMBs) today. Rising employee benefit costs, changing compliance and employment laws, and the time needed to accurately manage HR responsibilities make this important function extremely difficult.

The challenges surrounding HR has led many small employers to outsource some or all of these tasks over the last decade.

A recent report from PrismHR, the 2018 Human Resource Outsourcing (HRO) Trends Report, further showed the growth human resource outsourcing (HRO) is currently experiencing. The results from this survey reveal some very fascinating data about HRO, as well as some that are specific to PEOs.
 

Report Details, Top Outsourced Services, and Growth Trends

The survey was sent to HR services provider professionals in late 2017, and sought to learn about key business issues and trends. Almost 300 HR professionals from more than 145 HR service organizations participated in the survey and shared their thoughts on the HRO industry.

The first interesting finding from the report showed the top five HR services that are most commonly outsourced by small business clients:
 
  • HR Consulting
  • Benefit Administration
  • Time Tracking
  • Payroll
  • ACA Compliance

When taking into consideration that most PEO clients are between 5 and 150 clients, you can understand why these solutions are commonly outsourced by smaller employers. This is especially true for ACA compliance, as it is only becoming more complicated and complex for smaller employers to keep up with the latest regulatory changes around ACA laws.

The next area of the survey explored growth trends within the HRO industry. The results showed yet another strong year, as HR service providers reported an average 22% growth in 2017.

This number is even higher for smaller providers – HROs and PEOs with less than 1,000 employees saw average growth of 35%.

The data in this part of the report coincides with findings from a recent National Association of Professional Employer Organizations (NAPEO) survey, which was exclusive to the PEO industry. This report showed that 72% of PEOs reported revenue growth in Q3 of 2017, compared to Q3 of 2016.
 

Future Outlooks, Market Data, and Client Acquisition

The next part of the PrismHR survey explored future growth and profitability within the HRO industry. These were also listed as the top two most important objectives according to executives who took the survey.

To find out 2018 growth expectations, the survey asked participants about projected 2018 worksite employee (WSE) growth:
 
  • Less than 5% growth – 3%
  • 5%-10% growth – 20%
  • 11%-25% growth – 43%
  • 26%-50% growth – 22%
  • More than 50% growth – 10%
  • I don’t know – 2%

From this data, HRO and PEO executives are very optimistic about growth potential in 2018, as 75% of participants expect at least 11% growth. Additionally, 32% of executives expect to grow at least 26% this year, which is an increase of 28% from last year.

Next, participants were asked about their profit margin expectations over the next 2 to 3 years:
 
  • Decreasing – 3%
  • Decreasing slightly – 13%
  • Staying the same – 12%
  • Increasing slightly – 43%
  • Increasing – 27%
  • I don’t know – 2%

With 70% of executives surveyed expecting an increase in profit margins in the next few years, this is yet another exciting finding from the report about the potential of the HRO and PEO industries.

The next part of the report provided data about the target market for HRO companies. This was done by looking at the targeted Prospective Customer Size (WSEs):
 
  • Less than 15 WSEs – 2%
  • 16-50 WSEs – 50%
  • 51-100 WSEs – 27%
  • 101-250 WSEs – 3%
  • We don’t have a target size – 18%

Another interesting finding is that 18% of HR service providers are targeting larger organizations than they have previously.

The survey was also able to uncover how HROs and PEOs acquire new clients. The top 3 sources of new clients are:
 
  • Customer referrals
  • Networking
  • Prospecting
 

Small Business Challenges, Why Choose HR Outsourcing, and How Well do SMBs Know PEO?

In addition to data about HR outsourcing companies, the survey was also able to gather information that pertains to small and medium-sized businesses.

The report found that the top three challenges facing SMBs today are:
 
  • Staying compliant with local, state, and federal employment regulations
  • Managing the cost of employee benefits
  • Managing payroll

The report also provided information on the top 3 reasons why small employers decide to become HRO or PEO customers:
 
  • Cost savings
  • Elimination of HR tasks
  • Better benefits

Working with a PEO provides clients with a solution to their top 3 business challenges, while also addressing the key drivers to move to an HR outsourcing model. But just how well do small business owners know PEO?

The survey asked participants to rank how familiar prospective clients are with the PEO business model:
 
  • Never heard of it – 16%
  • Have heard the name but do not know what it is – 33%
  • Have a vague understanding of what it is and how it works – 43%
  • Are familiar with the PEO model – 8%

These results show that more than 50% of respondents believe their potential clients have some understanding of PEO and how it works.

However, an opportunity still exists for PEOs and benefits brokers to further educate potential small business clients around PEO, co-employment, and the benefits this type of partnership can provide.
 

Small Businesses Looking to Grow Can Explore HR Outsourcing and PEO Solutions

We have written before about the benefits a PEO solution can provide to small business clients. However, PEOs don’t just help clients, they can also assist benefits and insurance brokers. This is even more true of PEOs that work exclusively through brokers, which can help protect a book of business while also adding new clients.

As HR outsourcing and PEOs continue to grow in the coming years, both brokers and small employers can grow by partnering with a professional employer organization!

What’s the difference between co-employment and employee leasing? Check out our eBook, Co-Employment vs. Employee Leasing: The Differences Brokers (and Clients) Should Know, to learn more about how different they really are!

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