Defending Against the PEO Threat

Defending Against the PEO Threat

Defending your business against the PEO challenge A broker s roadmap to success, presented by expert John Kelly This webinar is to be viewed only by the webinar invitees and may not be distributed or furnished to any third parties. This presentation is for discussion purposes only.

John Kelly Director of Channels and Alliances Ceridian U.S. More than 30 years of experience as a benefits consultant Served as a vice president at a national PEO Professional actuary Adjunct professor Author of articles and textbook chapters on benefits administration 3

Who is Ceridian? Are PEOs really a Threat? The PEO value proposition What services do PEOs offer? Why do employers choose PEOs? How do PEOs compete with brokers? What PEOs deliver Forming a strong defense against the PEO challenge 4

Who is Ceridian? Ceridian is an industry-leading provider of business services ranging from HR/payroll to workforce management. Payroll administrator since 1932 Benefits administrator since 1986 Stored Value Solutions: Custom Gift Card Services Nation s largest COBRA administrator Partnering rather than competing with brokers for more than 20 years Our solutions help employers control costs, save time, optimize their workforce, minimize risk and grow their business. Comdata: Transportation & Payment Processing 5 HR/Payroll & Tax Services Workforce Management Benefits Administration Health & Productivity Solutions Talent Acquisition & Performance Management

PEO overview and value proposition 6

First, let s take a poll Have you lost any clients to PEOs in the last 24 months? No I ve lost one client to a PEO I ve lost more than one client to PEOs 7

What is a PEO? Professional Employer Organization Similar to employee leasing but uses a co-employment model 8

PEOs have recently been gaining traction PEOs have been in business for 30 years, but have been growing recently as a result of increasingly complex human resources and benefits laws. In 2010, the PEO industry grew a very robust 14% or $10 billion in a difficult economy, reporting $81 billion in gross revenues. Today, approximately 700 PEOs are operating in all 50 states, providing access to employee benefits for 2 million to 3 million employees. Source: NAPEO National Association of PEOs 9

PEO target: Small- to mid-sized companies The traditional sweet spot is the small market (10 to 100 EEs) Average client size: 40 employees 23% of businesses with less than 250 EEs currently use a PEO Nearly 80% of businesses using PEOs have less than one full-time HR resource PEOs are moving into the mid-market (500 to 500 EEs) Common industries include: hotel chains, lawn care, restaurant chains, retail, medical service providers (nursing homes, etc.) In situations with low employee density per location, lack of HR support Major PEOs now have a strategy to win larger engagements in the midmarket 10 Source: Aberdeen Study July 2011

Popular PEO services: HR/Payroll Because of limited HR internal resources, small- and mediumsized businesses seek a single-source vendor for common HR/payroll tasks: Payroll administration and tax services Risk management Recruiting Benefits administration Workers' compensation PEOs offer all of these services together as a bundle Average employer cost: $118 per employee per month (PEPM) 11 Source: Aberdeen Study July 2011

Some offer benefits directly as part of their solution ADP TotalSource, TriNet, Paychex, Insperity, etc. Others work with brokers Some focus on benefits as a core component of their value proposition Others offer services for employers that do not offer benefits Why not work with a PEO that works through brokers? Once you client moves to a PEO it is often hard to leave except to another PEO that may not be as broker-friendly! You give up PRIMARY client relation to the PEO! 12

The largest PEOs provide benefits via direct relationships with carriers ADP TotalSource via Aetna, UHC, etc. Paychex Business Solutions via Aetna TriNet (purchased Gevity) via Aetna Insperity (formally known as Administaff) via UHC Paychex is leveraging these relationships to move directly into the brokerage area. If your customer is also a Paychex client, your business is at risk A Paychex Inc. subsidiary has been named on Business Insurance magazine s 2011 list of the Top 100 Brokers of U.S. Business. * Paychex provides P&C as well as benefits insurance coverage inside or outside PEOs. They have licensed agents and 94,000 clients.** *Rochester Business Journal, July 20, 2011 **Paychex 2011 investor conference 13

I think Administrative Services Outsourcing, particularly in the middle and the low end of the market, is going to continue to explode. And I think we're going to do a bang-up job selling health care insurance and Workers' Comp into our base. * Gary Butler, CEO ADP - January 26, 2011 (in response to a question from David Grossman - Stifel, Nicolaus & Co., Inc) Percent Penetration of ADP Small Business Client Base** Workers Comp increased from 11.7% FY 08 to 18% FY 11 (YTD) Health Benefits increased from 0.5% FY 08 to 1.6% FY 11 (YTD) Penetration in health benefits has more than tripled in 3 years! the PEO benefits from about half of its sales coming from up-selling our PEO solution to our existing payroll clients. We are able to create substantial lead flow by leveraging the Small Business Services salesforce in addition to the direct PEO sales organization. *** *Automatic Data Processing's CEO Discusses Q2 2011 Results - Earnings Call Transcript ** ADP Financial Analyst Conference May 5, 2011 *** ADP Letter to shareholders September 26, 2008 14

Solutions Typical Broker PEO Limited plans & service Health insurance x Worker s compensation x x Benefits enrollment and administration x Payroll and tax administration x HR technology/employee self-service Termination processing Retirement benefits 401(k) Employee training (safety, sexual harassment, etc.) Compliance/legal services x x x x x

Poll: The employer attraction to PEOs Which is the most common reason employers switch to a PEO? Control HR costs (eliminate need to hire HR resource) Lower cost of health care benefits Offer quality HR service to aid recruiting and retention Need to focus on core business 16

Poll: The employer attraction to PEOs Which is the most common reason employers switch to a PEO? Control HR costs (eliminate need to hire HR resource) Lower cost of health care benefits Offer quality HR service to aid recruiting and retention Need to focus on core business Source: Aberdeen Study, July 2011 17

Why employers choose PEOs Companies who currently work with a PEO cite the following reasons for this decision (asked to select top 2) 18 Source: Aberdeen Study July 2011

Client pain High cost of providing health care benefits to employees Need to focus on core business Need quality HR services to aid recruiting and retention Control HR costs Gain promised by PEO Lower insurance costs if bundled with additional services Offer integration between multiple systems to reduce administrative burden Offer benefits typically found at big companies (401k, EAPs, etc.) Take over HR duties to relieve staff of administrative tasks 19

PEO sales strategy Use their vast network of current payroll clients to up-sell PEO services Attract strong sales professionals with broad HR and benefits knowledge and experience Actively seek companies that are looking to enhance their HR and payroll administration 20

What PEOs deliver 21

PEO agreements may contain hidden costs High administrative fees of $500 to $1,800 per employee per year, in addition to pass-through costs* Loss of tax breaks normally provided to small employers** Become subject to laws that apply to large employers Potential volatile insurance premiums due to other high-risk clients in their portfolio In some cases, significant annual price increases or renewals above trend * Average employer cost: $118 per employee per month (PEPM), Aberdeen Study, July 2011 ** PEO are seeking clarification, Senate bill1908 22

One size fits all approach is inflexible and forces clients to pay for services they may not need or use Often limited benefits options compared to the wide variety available from a broker in the marketplace Loss of underwriting history, making it difficult to procure separate group insurance later Potential loss of control of when and how to change benefit plans, if the PEO change their benefit offerings employers need to change plans offered to their employees We will send all participants a Defending against PEOs fact sheet that summarizes these key points 23

The PEO trap PEOs create stickiness, or difficulty in leaving (Even if service suffers or the cost increases) PEOs can charge steep termination fees Shopping for comparable services is complex, difficult and timeconsuming. All services must be replaced at the same time! Some benefits and services employees come to expect are difficult to obtain outside a PEO (employee self-service, etc.) Loss of underwriting history makes it difficult to obtain insurance outside a PEO 24

Defending your business against the PEO challenge 25

Recognize which clients are most vulnerable A client is at a higher risk to switch to a PEO if: ADP or Paychex provides you client payroll or HR/benefit services Your client is based in a PEO hotspot state CA, FL, OH, NY, MA, CO, GA, TX, MI, IL, MO, WI Your client has a high average salary Your client is a professional service firm (accountants, doctors, lawyers) Your client wants to change insurance carriers (especially to Aetna, UHC, Humana) or payroll vendor Your client is under new leadership (especially in finance or HR) 26

PEOs can t save money in medical insurance by increasing their pool size; they reduce rates by lowering or eliminating commissions or by providing administrative efficiencies for carriers. They also have higher administration fees and less flexibility PEOs must provide benefits via a fully insured insurance arrangement (self-funding is not a option) Most PEOs providing benefits do not allow for medical carve-outs As employers grow and evolve, a broker can offer the flexibility, stability and quality service they need 27

Neutralize the threat The best defense is a good offense. PEOs bundle a variety of services Clients pay for services regardless of whether they actually use them May not provide itemized invoices, placing burden on the client to figure out how much they pay for each service Partner with an HR/Payroll company that enables you to offer similar services as a PEO, but allows you and your clients to maintain control and flexibility 28

Two of the top three payroll providers compete against you! If ADP or Paychex is you client s payroll vendor, you already have a fox in the henhouse If a client is looking for a new payroll vendor your relationship could be in jeopardy Proactively work with you clients to understand their HR, Payroll and benefits administration concerns Loss of HR leader or spike in HR activity could pre a prelude to a PEO entry You need to be more strategic! Expand your benefits knowledge to also include HR 29

Small employers approached by a PEO can discover that the initial benefits cost savings soon disappear due to fees and aggressive price increases PEOs cannot offer the same level of choice and personalized service available through benefits brokers Your clients are increasingly interested in a single-source vendor for HR/payroll services You need a proactive partnership with a company that offers your clients and prospects many of the PEO advantages, without the one-size-fits-all and co-employment drawbacks 30

Questions?

Contact Information John G. Kelly, CEBS Director, Strategic Partnerships Email: John.G.Kelly@Ceridian.com Office: (786) 463-4644 Fax: (305) 675-2763 Mobile: (305) 710-3742 LInkedIn Profile: http://www.linkedin.com/profile/view?id=1 891544&locale=en_US&trk=tab_pro Connect with me on LinkedIn!

Connect with us: @Ceridian_us www.facebook.com/ceridiancorp www.linkedin.com/company/ceridian