Startup Tech Co's - PEO or DIY?

  

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When faced with the task of setting up Payroll, Employee Benefits, Human Resources and Workers Compensation Insurance many startup Tech/Digital Media companies turn to Professional Employer Organizations(PEOs).  The concept is that, using a PEO, the company can outsource all of these items to another company and take advantage of economies of scale by participating in their larger group buying power.  And by using a PEO they can pass off unwanted administrative tasks and focus on their own business.  When working with a PEO the company pays the cost of the services plus a monthly, per employee, fee for the administration of the program.  The startup must take the entire bundled package from the PEO, which often includes HR services that they, as a small company, may never use (recruiting, workplace safety, training, etc.). 

But what would the cost be to do it yourself (DIY)?  Do the benefits of outsourcing really make financial sense?  And does it scale for a company that expects high growth, or will it create an unnecessary financial drain on much needed cash?

InnovationGuard has a Startup Package  that is available on an a la carte basis – meaning they choose only the services they need – including a full suite of Payroll and HR services.  We recently did a conceptual comparison for a startup who was considering a PEO for their company.  For illustrative purpose we used the same actual costs for the basic products/services such as workers compensation (for example, the cost is set by the State, so there should be no difference).  Then we added the PEO’s monthly per employee administrative charge.  (A PEO does not typically break out these costs in their bill – they simply charge a single all inclusive fee.)

Total Annual Cost PEO – $10,980 (plus each additional new employee will be another $1,800/year more than a DIY program)

Total Annual Cost InnovationGuard – $3,780

*includes direct deposit, UPS delivery, and option for paperless paychecks

Based on the Following:
3 Male Employees, Programmers – $240,000 annual salary
1 Female Employee, Exec Officer – $60,000 annual salary

Are there administrative costs associated with a DIY that do not appear here?  Perhaps.  But for tasks like filling out applications, gathering and submitting employee and payroll info – both will require some time on the company’s part.  Once all of these things are set up there is very little ongoing administration necessary.  A key missing piece to all this is Employee Medical insurance, an area where the PEO as an “employer” of potentially thousands of employees can get better rates from insurers.  While groups of over 50 employees can benefit with lower health rates, that is dependent upon the group’s overall claims history.  In the case of this company, for whom we did the conceptual, the PEO’s single rate was estimated to be $350/mo.  A small group rate from Oxford for an HMO in NY would be appx $400/mo…..and that is before increasing co-pays, deductibles, employee contributions, etc. to bring cost down.  Another thought – while there may be a financial advantage on the medical insurance, our experience is that most startups hire young healthy employees who rarely even use their medical coverage.

I obviously come at this issue from a biased perspective.  I would be interested to hear thoughts and feedback on other company’s experiences with PEO’s, including the pros and cons.