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Can you outgrow a PEO? Why middle market businesses partner with PEOs


Often middle market companies find that while the primary functions of their company have matured, the development of their human resources (HR) infrastructure has lagged behind.

Whether your goal is to become a publicly traded company, attract more investors or even sell to a larger business, a robust HR department is essential.


When your company matures into a middle market business, the challenges you face evolve in scale and complexity. At the same time, you may find yourself navigating whether to continue growing or sell your company.

Meanwhile, as employee headcount rises, your HR infrastructure must scale and become more specialized. Otherwise, everyday tactical HR functions will consume your team. These administrative tasks include addressing issues related to:

  • HR-related government compliance and reporting
  • Benefits and COBRA administration
  • Leave of absence compliance and support (FMLA)
  • Employee relations issues

If your HR department is tied up with those basic functions in a growing business, then they will have limited time to work on more strategic initiatives such as:

Ignoring strategic HR initiatives would be a mistake for many reasons, some of which may impact your bottom line.

Yet it can be a challenging and costly endeavor to build an internal HR team equipped with the specialized knowledge required for your company.

And by the time you realize your HR strategies aren’t optimized to meet your evolving needs, it might be too late to build out a robust in-house team. Finding the right specialists takes time and effort.

To sidestep those potential pitfalls, many successful middle market businesses seek out a professional employer organization (PEO).

The PEO value proposition for middle market

Working with a PEO and its team of specialists familiar with the HR opportunities and challenges that come with growing a business, you can equip your company with immediate, scalable HR infrastructure and capabilities.

These knowledgeable professionals (and the HR technology they bring to the table) can help support the business and help you achieve sustainable long-term growth.

With a strong, people-centered and budget-wise HR strategy, you can create a more robust company culture, one that attracts and retains top talent by improving your employer brand.

All of this can lead to operational efficiencies and real cost savings.

Why go it alone – and risk falling short of your long-term organizational goals with clunky, insufficient HR strategy and infrastructure – when you can work with individuals who’ve worked alongside other successful leaders and businesses?

HR challenges that middle market companies face

The term “middle market business” encapsulates a wide range of businesses in various stages of their life cycle. They tend to employ 150 to 3,000 employees and have annual revenues of at least $10 million, according to the National Center for the Middle Market.

While the companies in this size range vary greatly, there’s some common issues they tend to face.

1. Your HR team is embroiled in their transactional administrative duties

Does the majority of your HR department’s time get sucked into the reactive world of HR? Between compliance concerns, benefits questions and employee relations issues, these tactical HR tasks can be never-ending.

Perhaps your HR professionals have great, proactive ideas and skill sets – but never enough hours in the day to bring them to fruition.

Instead, forced to focus solely on the basics, your HR staff never realizes their collective, full strategic potential – limiting your HR capability to being a cost center.

Meanwhile, your bottom line never benefits fully from your team’s breadth and depth of knowledge.

2. You have disparate technology systems

Often a company’s employee information is spread among multiple technologies, such as:

  • Applicant tracking and recruiting
  • Employee onboarding
  • Payroll, and time and attendance
  • Benefits and COBRA administration
  • Performance management

Without proper integration, these disparate systems can create inefficiencies in workflows and hinder reporting capabilities.

3. Your health care costs are rising and becoming harder to forecast

As one of the most expensive items on your employer costs sheet (next to payroll), the cost of health benefits is inherently difficult to manage.

For your CFO, the inability to accurately forecast benefit costs for the next renewal is probably a major challenge.

Why middle market businesses partner with a PEO

With the right PEO partner, your middle market business can address those HR challenges and reduce and contain costs.

Yet, for many business leaders, PEOs are unfamiliar, or they think a PEO is meant for a smaller business. And there’s a lot of misperceptions about how PEOs function – and the size of business a PEO can serve.

So, let’s take a closer look.

A PEO enters into a service agreement with your company. Through this arrangement, the PEO contractually assumes certain employer-related HR functions, such as payroll and benefits, while you focus on running the business.

Consequently, middle market businesses and their employees gain certain benefits and advantages.

1. Your HR staff is relieved of many tactical, time-consuming HR tasks

With a PEO, benefits administration and many other transactional HR duties no longer fall on your in-house HR team. This can leave them with significantly more time to pursue strategic HR initiatives.

Under the PEO’s agreement with you, the PEO becomes a co-employer of your employees and assumes many basic HR administrative tasks and employer obligations.

2. You’ll inherit instant HR infrastructure

A well-established PEO will typically offer a human capital management (HCM) system that organizes and streamlines important employee data and related processes into one integrated system, which can also include predictive analytics and benchmarking.

This can result in more sophisticated reporting in areas such as:

  • Headcount
  • Turnover
  • Diversity and inclusion
  • Tenure
  • Compensation

3. You’ll have access to knowledgeable HR specialists

The HR practices that worked when you were a smaller company probably need to be upgraded or altered now that you’ve reached a certain size. Scale is required to enable future growth.

A PEO that regularly serves middle market companies can provide insights to HR-related growth challenges and establish best practices through subject matter expertise.

To put it another way, a PEO’s service team becomes an extension of your HR staff.

4. You maintain the ability to scale HR support up or down as needed

A PEO designed to support middle market businesses will offer services and infrastructure that grow alongside your business.

As headcount expands from 150 to 500 and beyond, a PEO not only provides scale but also speed of execution.

5. Employees get access to high-quality, PEO-sponsored employee benefits

Your employees get access to cost-effective, comprehensive PEO-sponsored benefit plans. As the plan sponsor, the PEO maintains responsibility for the administration and management of those benefit plans.

This means the middle market business no longer has to worry about:

  • Vendor selection and negotiation
  • Benefits enrollment and administration
  • Compliance with regulatory requirements

That translates to cost savings in terms of time, energy and money for the company.

6. Businesses can better predict their employer costs

Your company can contain employer expenses and establish budgetary certainty more effectively with a PEO.

PEOs often offer multiyear agreements that put caps on the PEO’s ability to increase its fee to offset the PEO’s costs in areas such as medical coverage and workers’ compensation insurance coverage. This allows for budgetary certainty over a multiyear period.

How a PEO works alongside your existing HR team

Although joining a PEO is a form of HR outsourcing, for middle market companies it becomes an HR “co-sourcing” relationship.

A PEO’s resources are meant to supplement and support your internal team.

This creates a scalable infrastructure and an enhanced capability to serve your employees, improve efficiencies and enable business growth.

The takeaway

If you’re a midsize organization that believes your people are your most important asset, then a PEO can help you:

  • Unburden your company from tactical and administrative minutiae
  • Inherit instant HR infrastructure that enables your business to scale
  • Become recognized as a top place to work
  • Achieve overall cost reduction, containment and forecasting over a multiyear period

To learn more, download our complimentary e-book: HR outsourcing: An essential guide for middle market businesses.