The Bottom Line: What's the ROI of a PEO?

Return on investment, better known as ROI, is a performance indicator used by organizations to determine profitability. It seems simple enough — ROI is calculated by dividing the net benefit of an investment by the cost of the investment

Companies of all sizes are always searching for ways to get the most value for their money, on top of maintaining employee satisfaction and growing their business. When looking to implement new tools or solutions, ROI is the acronym on everyone's mind. While it certainly isn't the only factor, looking out for the bottom line is crucial for budget-conscious leaders.

If you have a small to medium-sized business, you may be curious about the ROI of leveraging a Professional Employer Organization (PEO).

Here's what you'll want to know.

Remind Me… What is a PEO?

A PEO, or Professional Employer Organization, helps small businesses by streamlining many administrative functions, including payroll, HR, benefits, and compliance. By outsourcing these tasks to a PEO, business owners free up their time to focus on what's important to them — namely, growing their business.

Since PEO solutions offer access to health insurance benefits and other perks like 401(k), a PEO can be an excellent option for small companies looking to reduce costs while providing better amenities to their employees.

For small businesses with employees in multiple states, the PEO relationship can be especially valuable. Compliance support for things like state taxes and state unemployment insurance saves employers from countless headaches.

3 Ways a PEO Creates Positive ROI

Let's get to the big question on every small business owner's mind: is a PEO solution worth the price tag?

Compelling data provides evidence that yes, using a PEO generates positive ROI. According to a report by the National Association of Professional Employer Organizations (NAPEO), the ROI of using a PEO is 27.2%, on average.

Where do these cost savings come from? Here are three common ways a PEO can show a return on investment:

1. HR Personnel Costs

Many of the features of a PEO are built to help small businesses with tiny HR teams — or no HR team at all. PEO solutions often have robust HR tools for tasks like onboarding new employees, approving and tracking PTO, and building customized reports.

This makes handling HR easier, which means you might not need to hire another HR employee after all. That's money in the bank. Plus, the HR team you do have can focus on more important things within your company.

2. Employee Health Insurance Benefits

Offering health insurance to your employees is a must-have in this competitive hiring environment. These benefits help your business attract more applicants, improve employee retention, and keep your workforce healthier and happier. Of course, health insurance is often a high-cost line item for many small businesses.

Partnering with a PEO gives you access to a whole host of health insurance options you may not have on your own. That's because PEOs can leverage economies of scale for negotiating rates for benefits. This often means access to large group plans, which can mean richer plans at better rates for you and your team.

Some PEOs also offer access to additional health and wellness perks, like on-demand primary care, mental health benefits, and more. These have the potential to provide even more value, and a greater ROI.

3. Workers' Compensation

Similarly, A PEO can help you save on workers' comp costs. Joining a PEO's master workers' comp policy may be more affordable than securing coverage on your own. According to the NAPEO data, businesses saved 4% per employee annually on workers' comp costs.

Being covered by the PEO's workers' comp policy can also help you stay compliant and avoid fines, since many states require such coverage for small businesses — and may penalize those who don't have it.

The Added Value of a PEO

The ROI of a PEO is a common calculation that everyone wants to know. But bear in mind that there are many other ways that PEOs add value to small business owners.

Since a PEO solution pulls many functions into one platform — such as payroll, benefits administration, time tracking, and more — it eliminates the need for multiple systems. This can be a cost savings, but there's also value in the time saved for admins and employees alike. Having that time back to spend on more strategic builds more value for your small business.

Another way a PEO adds value is by helping small businesses not only attract but retain talent as well. The cost savings can allow employers to invest money back into their teams. Maybe this takes the form of adding more perks accessible through the PEO, such as subsidized fitness memberships or commuter benefits. These desirable perks help small businesses to be more competitive in the hiring market and build happier teams.

Programs like these can also help reduce employee turnover. Employee turnover can be a major expense and headache. Every time you have to hire a new person, you spend money and time on recruiting, onboarding, and training. The employee turnover rate for companies who use a PEO is 10 to 14% lower per year than companies who don't use a PEO.

Perhaps most importantly, companies that work with a PEO grow 7-9% faster and are 50% less likely to go out of business.

How Justworks Can Help

The ROI of a PEO, and the added value on top of that, make a strong case for small businesses to partner with a Professional Employer Organization. Justworks is an IRS Certified & ESAC Accredited PEO, backed by 24/7 expert support for both employers and their teams. Our platform streamlines payroll, benefits, HR administration, and other backend functions, freeing up time for you to spend on supporting your people and growing your business.

If you want to discover whether our PEO is a great fit for your small business, learn more about Justworks or get started now.