What sort of return could the average client expect on its PEO investment?  Although it is only one component of the overall value delivered by PEOs, it is still one of the most basic questions prospective clients have when deciding whether to use a PEO—will they experience sufficient cost savings to generate a positive return on their investment?

Research by NAPEO summarized here indicates that a conservative estimate of the expected ROI for PEO clients—based on cost savings alone—is 27.2 percent per year. This ROI estimate is almost certainly an underestimate and is based only on cost savings (it does not incorporate the other important benefits of using a PEO such as improving clients’ ability to attract, motivate, and retain employees, and enabling clients to focus on their core businesses while PEOs handle all HR)

The 27.2 percent estimate is based on calculating cost savings for PEO clients in the following five HR-related areas:

• HR personnel costs;
• Health benefits;
• Workers’ compensation;
• Unemployment insurance (UI); and
• Other external expenditures in areas related directly to HR services (payroll services, benefits, etc.)

What Does an ROI of 27.2% Mean?

Return on investment (ROI) is the net benefit of an investment divided by the cost of the investment. Cost is the key element in almost all ROI calculations. This is because cost savings are much more tangible and hence more readily quantifiable than value (benefits) created. As a result, most analytically-responsible ROI estimates tend to underestimate the true value of an investment (as is the case here). For a PEO client, the net cost savings benefit of hiring a PEO is equal to the savings that the client experiences as a result of using a PEO minus the cost of being a PEO client. Dividing that by cost yields ROI.

NAPEO calculated clients’ savings based on five different categories of HR-related costs and compared them to the average cost of being a PEO client (PEOs’ average gross profit per WSE from NAPEO’s 2018 Financial Ratio & Operating Statistics (FROS) Survey data). By far, the most significant savings that clients experience from using PEOs are in the areas of HR personnel costs and health benefits costs.
An ROI of 27.2 percent means that for every $1,000 spent on PEO services, an average client would save $1,272, yielding a net (cost savings) benefit of $272 for every $1,000 spent.

It is important to understand that the calculated ROI is an average drawn from all PEO clients in NAPEO’s research database. This means that roughly half of prospective clients would be expected to have an ROI greater than 27.2 percent, while half would be expected to have an ROI lower than that.

Prospective clients most likely to have ROIs even higher than 27.2 percent are those that have above average HR personnel costs and/or above-average health benefits costs per employee. It’s worth noting again that this ROI is based only on cost savings and does not incorporate the important benefits derived from improving clients’ ability to attract, motivate, and retain employees and enabling clients to focus on their core businesses, as documented in NAPEO’s prior research.

How Did They Do The Research

They offered organizations (both PEO clients and organizations that do not use PEOs) a free employee survey. To take advantage of this offer, each participating organization was required to complete a detailed enrollment form that included a variety of measures that could be used for purposes of our research comparing PEO clients to benchmarks for other organizations on HR-related expenditures as well as a variety
of other factors we also included in the enrollment form. The cost-based comparison served as the basis for the ROI estimate noted above.
A total of 132 PEO clients (represented by at least 10 different PEOs) submitted data as part of this survey/research initiative. They also received data from 44 organizations that are not PEO clients.

How ROI Was Calculated

The estimated ROI of 27.2 percent per year was derived by calculating PEO-related cost savings per employee (FTE) from the five expenditure categories noted above and comparing it with PEO-related costs per worksite employee (WSE) from the 2018 NAPEO Financial Ratio
& Operating Statistics Survey. The average cost savings from using a PEO is $1,775 per year per employee, while the average PEO cost per employee (gross profit per WSE in the FROS) is $1,395, yielding an annual ROI of 27.2 percent.

Below shows the percentage of annual savings per employee (FTE) by cost category for PEO clients:

• Internal HR salaries/benefits 54%
• Health benefits costs 37%
• Other external HR expenditures 5%
• Workers’ compensation costs 4%
• Unemployment insurance costs 0%+
• Total average cost savings: $1,775 per FTE

Savings on internal HR employees’ salaries/benefits was determined by comparing the number of HR FTEs among PEO clients (mean of 1.6
FTEs per 100 employees based on data we gathered through the research initiative) to the mean number of HR FTEs (2.6 per 100 employees) among businesses as a whole (based on a large survey of businesses conducted by the Society for Human Resources Management (SHRM) in 2017) and applying Glassdoor data for average HR salary/benefits in small businesses.

Savings in the three remaining categories—health benefits, workers’ compensation, and unemployment insurance—were calculated using questions from the enrollment form (using data from new PEO clients only).

They were also asked to provide the exact amount of the difference in costs, if they had that information available. Respondents provided sufficient data to determine exact savings for health benefits and workers’ compensation, but not unemployment insurance.

On the health benefits front in particular, it is important to note that, on average, PEOs are also able to provide a wider range of health benefits options to their clients, a benefit that is not reflected when focusing solely on cost savings. Savings in other HR expenditures were calculated using enrollment data for this research project, comparing reported external HR expenditures between non-PEO businesses and their closest comparison (determined by industry and size) business among PEO clients.

Additional Sources of Value PEOs Deliver to Their Clients

Enrollment submissions provided additional data that NAPEO used to complement research reported in previous NAPEO white papers on attracting/motivating/retaining employees and enabling clients to focus on driving core business success.

In many cases, NAPEO was able to use the 2019 enrollment information as an additional source of data on key value areas they had examined previously when using different data sources. Every time major findings are confirmed by different data sources, comparisons, or analytic techniques, the findings can be considered more solid and more definitive. Thus, they viewed the enrollment data as an excellent opportunity to re-examine previous areas of their white paper research.

In particular, their analysis revealed the following four important findings:

• There is notably lower employee turnover (both voluntary and involuntary) among PEO clients;
• There are higher rates of both employee growth and business revenue growth among PEO clients;
• Fewer PEO clients expressed moderate or major concern about hiring, retaining, and motivating employees; and
• New PEO clients often add a variety of new benefits for their employees, with life insurance, retirement plans, and health benefits the
  categories most frequently added by new PEO clients

Summary 

Findings from previous NAPEO white papers had pointed to the significant value that PEOs deliver to their clients in helping to attract/motivate/retain employees and deliver better business results. Many of those findings were confirmed using new data from this analysis. Most importantly, however, this analysis helped to fill in an important missing gap in the PEO value equation—cost savings.
This research found that the cost savings ROI on a PEO investment is conservatively 27.2 percent per year.

*source: NAPEO White Paper: The ROI of Using a PEO

Click here to view the full white paper.

Emplova is a unique Professional Employer Organization (PEO) that helps small to medium sized businesses grow and prosper by providing benefits, payroll, technology, compliance, and HR administration. To learn how we can create a winning HR strategy for your business contact us today.

Information in the is article is general in nature and not intended to replace legal advice in any particular matter.