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Trend to outsource HR work is giving area firms a boost

Dennis Clarke, president of Itasca-based Clarke Packing and Crating Co., has his hands full overseeing the construction of custom-built crates that can carry heavy equipment around the world.

Three years ago, he decided he no longer wanted any of his 15 employees to spend time dealing with human resources hassles. So he brought in a professional employer organization, or PEO, to administer the benefits plan, handle liability issues and make sure the business is in compliance with government regulations.

"One day you can have an all-consuming issue where you spend a lot of time and resources dealing with it," Clarke said, happy that now he pays someone else to worry about compliance with things like OSHA regulations and state labor laws and answer questions about benefits. Clarke said his business has grown to 28 employees today.

An increasing number of small and medium-sized businesses are choosing to outsource the duties typically performed by their human resources person or department, fueling a booming business among professional employer organizations.

These organizations comprise an industry with revenue estimated at $43 billion per year and growing at a robust average annual rate of 20 percent, according to the National Association of Professional Employer Organizations, a trade association representing 370 companies in the industry.

Locally, both large and small PEOs are posting sharp increases in business.

Lincolnshire-based Hewitt Associates Inc. owns the largest share of the market after its September merger with Exult Inc., a California-based provider of human resources for many large corporations.

Hewitt's total net revenue grew 11 percent to $2.2 billion in 2004 - fueled by 15 percent growth in its outsourcing business to $1.4 billion. The company and analysts project 35 percent growth in 2005, largely due to the merger with Exult.

Oakbrook-based Tandem Professional Employer Services Inc. grew 24 percent last year, expanding to cover 2,250 employees at 98 firms, according to Chief Executive Officer Bruce Leon. The seven-year-old, privately-held firm collected $2.1 million in fees last year.

"What keeps us with clients is that their employees, their people, are most important to them and we can help them get the most out of their people," Leon said. Tandem has a client retention rate of 97 percent, he said.

The typical business served by a PEO has between 15 and 75 employees - or just enough people on the payroll to complicate everyday operational tasks such as making sure the business is following government regulations or overseeing the company 401(k) plan, according to Edie Clark, spokeswoman for the national association.

Professional employer organizations also typically allow smaller businesses to access big-business perks.

At Clarke Packing & Crating, employees have access to flexible-spending accounts, long-term disability insurance and a credit union since the company signed on with ADP TotalSource Inc., a Miami-based professional employer organization.

"We can take a typical 40- to 50-person company and offer them a benefits package that a Fortune 500 company would be offering," said Thomas A. Shehan, the Midwest area president at ADP TotalSource.

Many PEOs say they can save their clients more than time, with some promising significant monetary savings.

However, outsourcing can lead to unexpected problems. PEOs operating off-site may not understand a firm's employees as well as one of its own executives would.

"In terms of employee relations stuff, compensation plans, merit pay, someone from the outside many not know the culture of the company," said Daniel J. Koys, a professor of management at DePaul University. "When it comes to actually dealing with employees face to face, it could produce problems no one anticipated."

Businesses "think it's going to save them money and sometimes it does," Koys said, but he adds that there's a lack of "hard evidence" of that.

"Sometimes they don't get the bang for the buck that they thought they'd get," he said.

Others contend businesses generally do save, because they gain access to a larger network with better buying power than they have on their own.

"For small companies, one of the biggest benefits here is just enormous economies of scale when setting up these systems," said Michael J. Gibbs, a professor at the University of Chicago's business school.

Note: By Alison Granito Medill News Service

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