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When customers award a contract to IT vendors providing services to certain industries like petrochemicals and the federal government, they expect the service provider to ramp up staff in a hurry. But carrying staff to potentially service a big contract is as cost-prohibitive as maintaining a large human resources department.

Outsourcing all of HR except recruiting lets in-house staff focus on recruiting quickly when needed and lets the outsourcing provider handle all other HR tasks -- usually for less cost, as their processes are better and expertise broader and more granular. This was the situation facing EMCO Technologies when it hired PEO (Professional Employee Organization) Administaff in 2004. EMCO was particularly interested in how Administaff could pick up the load so the company could land more federal contracts and expand nationally.

EMCO's challenges

EMCO was a relatively small Louisiana information technology company providing desktop and network support, help desk, and other IT services. It did $13 million in annual revenues, had 120 employees and a two-person HR department. According to Janice Pellar, president, internal HR performed core HR activities but outsourced payroll to ADP.

But Pellar felt her time was being wasted in negotiating relationships with health insurance carriers and ADP regarding the details of things like regulatory compliance. Her health care premiums were also skyrocketing, and she wanted to expand her business nationally. Doing the latter would require her HR staff to at least master HR regulations in multiple states.

EMCO was also seeking a big contract that would grow revenues substantially. "If we got it," says Pellar, "we'd have to immediately respond. We'd have to apply the old HR mechanism to each state to do business there. That would be a protracted transaction and would put us out of the running if we were ever going to expand."

Administaff assumed all HR activities except recruiting and negotiated a health care plan that cut insurance costs. "Administaff could offer a better price for health insurance because they were costing across their buying power of thousands of their customers' employees," says Pellar. She also laid off one HR staff member and jettisoned ADP.

Winning new contracts

With Administaff's national presence, EMCO could scale up employees if they scored a big contract and go national with the PEO's HR expertise in all the states where they might do business.

For instance, when EMCO did in fact score a huge NASA subcontract from the prime, Lockheed-Martin, Lockheed tasked it with "flipping the employees" of four regional subcontractors onto EMCO's payroll. Not a small feat because it meant retraining about 330 employees in six weeks in 10 states, creating payroll and tax ID numbers in each state, and producing employee handbooks outlining the different states' employment laws.

Later in 2007, EMCO won another contract as a sub for Lockheed for the Corps of Engineers; it had to hire 50 new help desk and field IT technicians around Huntsville, Alabama. This time Administaff actually did the recruiting and initial interviews to identify the best candidates. It also brought in outside consultants to create a recruiting plan and got EMCO involved in local technology and security expos. Administaff filled all the positions within two months. Administaff then trained the IT staff using online courses and personnel to help get them certified as Microsoft Office Specialists.

A host of services provided

EMCO's HR person now serves as liaison to Administaff's HR team, whose members average more than 15 years' experience in payroll, HR, and benefits. Pellar says, "We have people dedicated to our account who are cross-trained to back them up in case they are out."

Pellar found out fast that Administaff's customer service was more responsive than its former supplier. Payroll is a bit complicated for EMCO because it's influenced by a number of factors -- multiple shifts, multiple employee groupings, etc. Administaff tailors its service to accommodate them. The PEO solves problems fast because a payroll expert is dedicated to EMCO's account and has complete control of the payroll process.

Administaff fully administers HR too. For instance, it has better hiring and termination processes and guides field managers around the U.S. on performance management issues such as employee attendance. Before addressing each case, managers call Administaff to get guidance on how to best handle it.

Administaff also provides disability and life insurance, a 401(k) retirement plan, and time off and sick leave benefits. It offers training in both local service centers and via a portal called the Employee Service Center, which offers thousands of online courses on software programs ranging from Microsoft Office to courses on soft skills like customer service by phone. Pellar explains, "we man a telephone help desk operation for a client and each employee must take a course in help desk telephone etiquette to do the job."

Smaller companies are deathly afraid of two things -- lawsuits and regulatory fines -- both of which can tank a business. HR regulations differ from state to state and require a learning curve that may slow business development and expansion. Administaff ensures EMCO complies with all types of federal HR-related regulations related to COBRA and the Family Medical Leave Act. It also ensures compliance with different state regulations (like how to treat sick leave payments) as well as OSHA safety compliance. For instance, the PEO does regular safety audits of EMCO working environments, like its petrochemical plants, with an EMCO manager.

To simplify delivery of services, Administaff provides the Employee Service Center where workers go for online information or e-mail consultations on a number of issues like best hiring practices. They can also access all previous payroll reports, look up worker's comp data to process employees so they get coverage for treatment quickly, research benefits information, access employee handbooks, and pull data from databases into reports (for example, on how many personnel were deployed at a client's site at a certain time of year) to satisfy federal government contract requirements for a prime contractor.

The bottom line: growth

With the help of Administaff, EMCO now does business in 11 states, has grown to over 400 employees, and is approaching $30 million in annual revenues. It pays Administaff 4.5 percent of total payroll each payroll period in fees. "For us, hiring Administaff was the exactly right move," Pellar says.

Lessons from the Outsourcing Journal:

• Professional employee organizations (PEOs) can help small to medium-sized firms grow their business fast by providing HR expertise nationally -- the PEO already understands the unique HR challenges of each new state where they already do business.
• Their national footprint also gives SMBs credibility on contract bids because often the national client knows the SMB can quickly hire many new employees with the required skill sets in the relevant geographic regions.
• Often PEOs can also cut costs by offering cheaper insurance premiums because they have the group purchasing power of all their clients' employees.

Publish Date: March 2008

Copyright © 2008 - Everest Partners, L.P.

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