You May Know Checkers, but the PEO (Professional Employer Organization) Business is Like Playing Three-Dimensional Chess. Starting a PEO from scratch is a major commitment by all parties involved - self, family, investors, bank, third party vendors - and don't forget, your first client.
So, let’s see if we can help you with a strategy to win this game! Many new PEO’s start with an empty desk, cell phone, and no clients, but have good contacts and relationships throughout their past business dealings. What you better have with that is a very good three-year business plan. This will take several months to develop and plan. This is a very painful process (especially for the entrepreneur) that includes all the above parties. The plan should include your corporate philosophy, market focus definition, budgets, financial projections and what you don’t want to become.
So, your business plan is written and you’re ready to go. Now, you have to establish a good working relationship with the various third party vendors that are necessary for running a successful PEO operation.… This is imperative, you need them as advocates - not just a vendor – that really understands and embraces your ideas.
For the PEO, the big question is: How can you get the commitment needed from the third-party vendor when you have nothing to offer? Remember, you have no employees to offer. This is your first real sales opportunity! Any of the third-party vendors you work with must be able to share a piece of your vision. A startup PEO may need to bend a little and allow the vendor to help shape the product and/or service offerings. As this relationship begins to develop, the vendor takes on some ownership of the program, and you have established an advocate.
Service Agreement with a Client
Prior to your first client, you must develop a solid agreement. Your service agreement should: (1) be an accurate reflection of how you are really doing business; (2) not be written to transfer risk back to the client; (3) be drafted by an attorney that has worked in the industry; (4) NOT be written by your corporate attorney; and (5) be reviewed on a state-by-state basis if you are doing business in more than one state.
The agreement is one of the foundations of your business. You may be asked to compromise - and from time to time you will (a little) - however, it is imperative the fundamental sections of your contract that establishes you as an "employer" does not change. If you allow your agreement to be watered down to get the sale, you may compromise more than your legal position.
Software Integration and Automation
This can make your head spin. There are many applications developed for the PEO industry. You really need to look at different applications and or go with advice from companies that have already done the trial and error. No reason to reinvent the wheel! You really want to make sure that your technology is integrated and all applications talk with each other, this is very important, it streamlines your process, and keeps your overhead down. Remember, software and technology always costs more than you budgeted because it takes twice as long as you planned.
Risk and Accounting…
Accurate GAAP accounting is one of the most critical factors in operating a PEO. A PEO typically means you operate with low margins. Low margins require high volume. High volume means more risk. Risk requires cash…which you will soon discover. You must be totally efficient in collecting, reconciling and accounting for your cash. Charging adequately for the risk is one of the primary reasons that PEO’s fail.
Now you’re up and running in your first year and doing great and say we almost have that first year behind us. The way the world changes, so does business. So be prepared to throw everything up in the air, see what has worked and what hasn’t, ask yourself what do we need to change to be more successful this year.
The Cycle Continues
It is a constant process of re-engineering and improvement. The professional employer business is one of the most dynamic business opportunities in which you can be involved. However, it is not a quick study or for the faint hearted. Becoming a good PEO operator is never a completed project. The best example I ever came up with to explain the complexity of the PEO business is this: Everyone knows how to play the basic game of checkers but - the PEO business is like playing three-dimensional chess. You must always keep learning and studying the game - there is always more to learn and another strategy.
Brent King, Director of Business Development, IntegreatHR Technologies
Brent has two decades of experience helping companies take care of their people. He brings extensive knowledge of HR and technology solutions to IntegreatHR.
Topics: PEO
