Strategic Insights - The ROI of a PEO

In today’s rapidly changing business environment, companies need to balance cost efficiency with operational effectiveness. One highly effective strategy for achieving this balance is partnering with a Professional Employer Organization (PEO). By leveraging the expertise and services provided by a PEO, businesses can streamline HR management, reduce costs, and focus on core business functions.

Why Choose a PEO?

A PEO allows businesses to outsource critical HR functions, including payroll, benefits administration, workers’ compensation, and regulatory compliance. But what really sets a PEO apart is the immediate impact it has on cost savings and employee satisfaction. Businesses that partner with a PEO often have access to a broader array of benefits for their employees, resulting in higher employee retention and satisfaction. In fact, companies using PEOs report significantly lower employee turnover—almost 20 percentage points lower than national averages.

Moreover, PEO clients report faster business growth, with employees more likely to describe their company as innovative and competitive compared to non-PEO counterparts. This boost in growth is critical for businesses looking to scale sustainably while maintaining a strong internal culture.

The Cost-Saving ROI of a PEO

From a purely financial standpoint, the research is conclusive. Businesses partnering with a PEO enjoy an average annual return on investment (ROI) of 27.2%. This figure, which is based solely on cost savings, underscores the powerful impact a PEO can have on an organization’s bottom line. The ROI calculation considers key areas where PEO clients experience cost reductions:

• HR personnel costs: PEO clients typically employ fewer HR staff (1.6 HR full-time equivalents per 100 employees) than businesses without a PEO (2.6 per 100 employees), resulting in savings of $965 per employee annually.

• Health benefits: PEOs offer access to more competitive health plans, allowing businesses to save an average of $654 per employee each year.

• Workers' compensation: By leveraging economies of scale and enhanced risk management practices, PEO clients save approximately $66 per employee.

• Other HR-related expenses: PEO clients benefit from streamlined services such as payroll processing and benefits administration, saving an additional $90 per employee annually.

When these savings are combined, the total average cost savings per employee is $1,775 per year, while the cost of being a PEO client averages $1,395 per employee. This leads to the 27.2% ROI—meaning that for every $1,000 spent on PEO services, businesses save an average of $272.

Methodology Behind the Findings

The methodology used to calculate this ROI is based on data from 132 PEO clients and 44 non-PEO businesses who participated in a comprehensive survey. The research focused on five primary areas of cost reduction: HR personnel, health benefits, workers’ compensation, unemployment insurance, and other HR services. By comparing costs in these categories between PEO clients and non-PEO companies, the researchers were able to estimate the annual savings per employee.

The research was supported by detailed enrollment forms, where participating businesses provided data on their HR-related expenses, employee turnover rates, and business growth. The sample size was robust enough to offer a representative view of how PEOs affect different types of businesses. Additionally, the data was cross-verified with industry benchmarks from sources like the Society for Human Resource Management (SHRM) and Glassdoor to ensure accuracy.

One particularly conservative aspect of the methodology is that the ROI calculation focuses solely on cost savings and does not account for other major benefits of working with a PEO, such as increased employee engagement, reduced turnover, and enhanced business growth. This means that the actual ROI of partnering with a PEO could be significantly higher when these additional factors are considered.

Beyond the Numbers: Strategic Advantages

While the financial savings are clear, the true advantage of a PEO lies in the strategic flexibility it provides. Businesses that work with a PEO gain the freedom to focus on core competencies while ensuring their HR needs are expertly managed. This creates an environment where companies can grow faster and innovate more effectively, without being bogged down by administrative challenges.

Furthermore, PEO clients tend to experience faster revenue growth and higher employee retention, both of which are critical to long-term success. The streamlined HR processes and enhanced benefits packages offered by PEOs also improve employee satisfaction and reduce hiring and retention challenges.

Tailored to Your Business Needs

Every business is unique, and PEOs recognize this by offering customizable solutions that align with each client’s specific goals. Whether your business is struggling with high employee turnover, rising health benefits costs, or the complexities of compliance, a PEO can offer targeted solutions that deliver results. This partnership evolves as your business grows, ensuring continuous value and efficiency gains over time.

Conclusion

Partnering with a PEO is more than just a cost-saving measure—it’s a strategic investment in your company’s future. The 27.2% ROI demonstrates the financial benefits, but the real value extends to business growth, employee retention, and operational efficiency. In a world where businesses must constantly adapt to stay competitive, working with a PEO offers a powerful advantage. For companies looking to streamline operations, reduce costs, and focus on what they do best, a PEO is an invaluable partner.

This paper was adapted from a 2019 report prepared by McBassi and Company