The Manufacturer - June 17, 2002

The Cure for HR Headaches

By Matt Bolch

Matt Bolch talks to companies using professional employer organizations to remedy their HR inefficiencies.

Gene Baker didn't turn his love of guitars into a business to spend time dealing with paperwork and employee compliance issues. Yet those were the hassles the president of Baker Guitars soon found himself mired in after founding the Santa Maria, Calif.-based business that specializes in producing high-end guitars.

"The more we started going, the office work started to bog us down," said Baker. That's when he turned to Your People Professionals, one of the nation's estimated 1,000 professional employer organizations (PEOs). YPP handles such issues as workers' comp and I-9 paperwork, finding and screening new employees, and employee handbook creation.

That leaves Baker, who's worked in the custom shops of Fender and Gibson, more time to concentrate on making the best guitars he can. "It's not the cheapest," Baker said of the PEO route. "But it's great to know that our workers' comp is taken care of." After reflecting a moment, he added, "The money we spend [with a PEO] we save in other areas, so it's a wash."

Outsourcing certain functions like payroll or compliance issues has become commonplace for small and large companies alike as the global economy and increasing regulations make keeping up with the latest changes in tax and worker laws more cumbersome.

PEOs particularly benefit smaller companies that might not be able to afford health care coverage for their employees or face higher workers' comp premiums. In the PEO arrangement, the benefit provider becomes a co-employer and can leverage its buying power to cut deals on insurance as well as administer such functions as payroll, benefits management, and employee training.

Larger companies are turning to outsourcing firms not only for regulatory compliance, but also to shed non-core personnel and partner with an HR solutions provider on big-picture issues. "A company's size is the largest driver of needs," said Andrew Childs, senior vice president of marketing and business development at Automatic Data Processing in Roseland, NJ. "Industry is, too, but not as much."

Like many outsourcers, ADP has divided its business unit three ways: one for companies with fewer than 100 workers; a second for companies with between 100 and 1,000 employees; and a third for companies with more than 1,000 workers. As a company grows, its needs often change, and these divisions offer logical leaps between those needs, Childs says.

ADP also operates a PEO, ADP TotalSource, which has been in business for 10 years. Even for the largest companies, ADP offers a service that can handle a company's entire HR function, stopping just short of the co-employment agreement that marks a PEO.

A PEO allows even the smallest companies to have the HR benefits and services of a Fortune 500 company, says Alan Dodd, director of corporate communications at Administaff. The Kingwood, Texas company concentrates primarily on companies with between 10 and 100 employees in relatively low-risk areas in terms of unemployment and workers' comp insurance. Among Administaff's client base, 8% are in the manufacturing sector, according to company literature.

With Administaff's help, WaterBonnet Manufacturing was able to obtain health insurance for its workers at an attractive price, says Ken Roberts, president of the Casselberry, Florida-based maker of windshields and canvas tops for boats and windows for construction equipment and OTR trucks. The company also has a manufacturing facility in Springfield, Tenn. and 131 total employees.

"Our insurance carrier wouldn't even give us a quote when we were asking by ourselves," Roberts said. After contracting with Administaff for administrative and payroll services in April 2000, WaterBonnet added the health insurance component in October 2000.

The HR Outsourcing Group of Chicago-based Aon Consulting offers services to companies of all sizes, from one-off services to complete HR solutions, says Bernie Reynolds, group president. Those services include:

• Providing discreet services such as background checks and resume management.
• Taking total responsibility for a functional area within HR, like benefits, in every aspect except strategic benefit selection.
• Taking over a complete range of HR activities (both management and functional) that a company identifies and then transferring some or all employees who provide those services to Aon.

The choice between a PEO and an HR outsourcer, Reynolds says, lies in the range of services a company requires. PEOs work fine in payroll and insurance environments, while outsourcers shine in big picture, strategic issues, Reynolds maintains. "You want to look to a provider that will work in partnership that can paint a future for you," Reynolds advised companies.

PEOs started in the early '80s, mainly for senior management and their rich benefits packages before the concept expanded to encompass rank-and-file workers, explains Milan Yager, executive vice president at the National Association of Professional Employer Organizations, based in Alexandria, Va. It's now a $50 billion industry, according to NAPEO estimates.

"Manufacturers are good at their business, but not about their people," Yager said. "They lose sight of important efficiencies" that a PEO can address. The PEO environment allows companies to do what they're good at while letting someone else take care of the rest, he says.

That theory also applies to companies that provide other HR outsourcing services, as Pat Boyle can attest. Boyle is the vice president of HR at Gemini Industries, the Clifton, NJ-based manufacturer and distributor of consumer electronics accessories. Thanks to help from ADP, the company has grown from 250 employees in 1998 to nearly 500 in 2002 with no additional HR employees.

The relationship between ADP and Gemini started 20 years ago with payroll. Over the years, ADP also has taken over HR information systems, time and attendance functions, payroll taxes, and interfacing with the company's 401(k) provider. ADP is currently implementing a benefits tracking and enrollment system for Gemini.

Boyle estimates that her five-person HR staff would have to double to handle these services inhouse. "What's most important to employees are pay and privacy," she said. "They like to know the HR function is safe and is going to be reliable. It provides security to get their paycheck on time, and it's right and secure."

The Manufacturer can be accessed online at www.themanufacturer.com.

Reprinted with permission from The Manufacturer, June 17, 2002.