Leaving a PEO
Systems, Processes, and People
A large HR and Payroll team, a PEO with a terrible platform, and more than 250 employees walked into a bar and disaster ensued.
The company’s COO reached out with concern after getting a renewal notice from their Professional Employer Organization (PEO). The PEO proposed a rate increase of about 30%. The COO had already been worried about overall costs associated with his HR and Payroll teams before the renewal. The COO also noted that their company grew in employee size from 75 to 250 people over four years due to the release of a new SaaS product that has grown the company’s revenue exponentially.
While the COO was excited about the revenue growth, he was worried about controlling the increase in costs. He reached out for partnership in solving his increasing costs problem.
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PEOs are usually great for smaller organizations with less than 100 employees. PEO services usually include payroll, comprehensive and affordable benefits, and some HR operational support. When companies grow their HR and Payroll teams, working with a PEO usually becomes troublesome.
Since the client already had an idea of what his problem was, we started collecting information at his suggested source, the HR and Payroll team. We interviewed seven team members all with a different idea of why costs were out of control.
After reviewing notes from each interview, we noticed a few common remarks in all the interviews.
Everyone agreed that costs were out of control.
Everyone felt like their processes were very manual and took so long that they needed to hire new people.
Everyone experienced terrible support and customer service from the PEO team.
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After compiling the interview notes, we requested several documents including their detailed general ledger, organization chart, current contract and agreement with the PEO and the proposed renewal from the PEO.
We analyzed those documents and compared them with typical costs of a Payroll and HR team for a company their size. We also compared their PEO service and costs with other PEOs for their same employee size.
We reviewed the service agreement and realized that the renewal included services that the Payroll and HR team added on throughout the term of the contract, to address the additional workload. The renewal was much higher than companies their size and in their industry.
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After reviewing the information, THA suggested that the company decline the renewal with the PEO. At 250 employees the new service fee proposed would represent an unsustainable increase in expenses. With a full Payroll and HR team in-house, the company had the capacity to handle the workload on their own.
In our proposal we detailed a restructuring plan for their HR and Payroll teams to handle the capacity required to manage their operations without PEO support. This plan included suggestions for new processes, procedures and systems. We also encouraged the company to invest in upskilling their current staff members. We estimated that upskilling their employees would cost about 5% of the annual cost of the PEO services.
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Exiting a PEO isn’t an easy project, and there are a lot of moving parts that could make or break the success of the exit. We provided the company with a comprehensive checklist and timeline that was tailored to their specific company needs. We also connected them with payroll and benefits providers with experience exiting a PEO to help support the transition.
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The company was able to cut payroll costs significantly with the exit. They ran into some issues implementing THA’s plan, but they used some of their payroll costs savings to invest more in training and upskilling employees.
