I’ll admit something. As an entrepreneur, I hate human resources, or “HR” as it’s almost universally known (to me, HR stands for “hellish requirements”). The amounts of time and money smaller companies spend on transactional HR and related compliance confounds me. Nothing about the HR compliance basics is even remotely strategic for a growing business compared to minding the top-line or engaging with suppliers in creative ways. Nothing.
Let me register my disgust with HR based on how much it costs me. The parent company of Spend Matters spends more on healthcare, benefits, and related areas than any other part of the business. Except payroll, HR is our cost center. It’s a staggering sum, but even more important, the hassle factor for a growing organization is as bad (or worse) for owners and management than the direct costs involved in staying in compliance and funding employee benefits.
For example, don’t get me (or our trusty CFO) started on employee onboarding in different states, even when you have a payroll company that supposedly handles it for you. They don’t (at least not at the level they should or promise to). After successfully doing all the paperwork for a new employee in California, we actually gave up on Massachusetts, a state that makes it all but impossible for a small business located anywhere else to onboard new employees without dozens of hours invested. After keeping track of 25 hours involved, we simply quit.
Our experience simply trying to get an employee in Massachusetts paid legitimately (rather than as a contractor) led us to investigate options for outsourcing HR entirely – including not just payroll, but benefits, compliance, and related areas. In the end, we selected a personal employment organization (PEO) where our employees become co-employees of another company. This arrangement might sound sketchy, but it’s not.
Through this co-employment arrangement with a PEO, we (almost entirely) wash our hands of all the time spent administering the non-strategic aspects of HR. This, in theory, will leave our internal team time to focus on what really counts in the human capital equation: recruitment, culture, and retaining key performers. There’s a not-so-subtle procurement overtone in this: we’ve done a “make vs. buy” on the part of our business that’s not only a huge cost center, but has been the biggest distraction for management since starting. And in the end, “buy” became the overwhelming preferably approach, for many reasons.
In addition, besides getting rid of the administrative hassle of HR (in theory), PEOs offer two other key benefits, which are worth it alone for a fast growing business. First, they can often save you a significant amount on healthcare (through allowing your employees to enroll in their larger pool). In fact, in our case, our healthcare savings will likely offset much of the per employee cost of the PEO each month. And second – and arguably even more important for many start-ups than healthcare costs – is that you when you join a PEO, all HR liability is transferred to it.
Got a COBRA issue? That’s the PEO’s problem. Want to sell your company and worried about HR due diligence surfacing something less than kosher? The PEO will absolve you of all (current) compliance sins – and fix those in the past.
It almost sounds too good to be true. Yet when we set out to do our research on PEOs, there was very little available that put the benefits of working with one in a truly executive context. I’ve got to give kudos to HR analyst Goddess Naomi Bloom, who patiently explained to our CFO and me what it was a PEO could do for us.
After this call with Naomi, everything became clear in a way that no article and no research we could put our hands on could relay or explain. For this reason, after we made the decision to engage a PEO, I decided to keep a journal of my experiences and write about it in hopes of educating other fast growing SMBs of the benefits of getting HR off their plate.
As our PEO journey continues – we’re just getting started this month – I’ll share our experience, including walking through our selection process and the initial engagement and on-boarding for all employees (which still takes quite a bit of time, and in our case, was a few weeks of late nights for our CFO given the failure of our past payroll company to do its job).
Stay tuned as our PEO story unfolds. I’ll try to write something at least two Fridays a month on our experience absolving ourselves of the HR menace.