3 Reasons Small Business Owners Outsource to PEOs

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Explore three advantages small businesses gain with a PEO solution: gaining peace of mind, improving productivity and profitability and managing complexity with data.

A small business owner who follows their passion may not realize at the start how complex their business can become in just a few years. That's why many entrepreneurs and small- to mid-size companies turn to a professional employer organization (PEO) to provide much-needed support and agility with their human resources management.

PEOs offer invaluable assistance with payroll, benefits, compliance and other HR services. They can be especially helpful during uncertain economic times when people want their businesses to thrive instead of just survive. In recent years, organizations have struggled through unpredictable events, from a global pandemic to a changing labor market and now a potential recession. But small businesses that worked with a PEO are 58% less likely to have closed for good and 82% more likely to have their businesses already running back to normal or better since the pandemic.

That's the real benefit of a PEO: Small business owners can spend more time running the overall organization while they have experts to help them handle the HR side of business operations and growth. Partnering with a PEO lets small business leaders have more bandwidth by delegating essential functions with the assurance their employees' compensation, benefits, career development and other needs are in good hands. It can also help the business mitigate risk by having a go-to expert available to help make sure they're following labor laws, properly handling employee situations and more.

Here are three critical advantages small businesses can gain when they partner with a PEO solution.

1. Gaining peace of mind

Small business owners opt to outsource to a PEO in areas where they aren't specialists, such as payroll and benefits or keeping up with continual HR-related changes in the industry. Working with a PEO gives business owners confidence that they have someone looking out for their interests who's up-to-date on what they need to know. As a result, owners and operators can focus on running and growing the business.

"When you're in small business, you kind of get your blinders on looking at the situation in front of you," says Dr. Jonathan Cargo, owner of Cargo Eye Care in Las Colinas, Texas. "Having access to our PEO partner's perspective of how things work in other industries and companies gives us peace of mind because I know that, from an HR perspective, I'm not making mistakes as we grow."

2. Improving productivity and profitability

Small business owners often have a mindset to do more with less, as their organizations tend to be driven by a lean team with a big vision. But many find they need to expand in some way if they want to thrive rather than merely survive year to year. Growth, however, usually means increased time and talent demands as well as more expenses.

With a PEO, you can share employment responsibilities while mitigating some of the costs and liabilities associated with being an employer. Owners and executive leaders can then put less energy into managing HR details and more into pursuing high-level growth plans while also having more predictable labor costs.

"There's something for everyone to love about the PEO industry, and that's the story we're telling during National PEO Week," says Pat Cleary, President and CEO of the National Association of Professional Employer Organizations. "Small businesses that use a PEO grow faster, have lower turnover and are less likely to go out of business," he notes.

Part of what allows that to happen is a time tradeoff. Tony Reid, Director of Human Resources at JMT Consulting, says that working with a PEO for HR and benefits administration support freed up 25%–35% of his time. This has allowed him to focus on more strategic initiatives, such as HR processes and staff development.

3. Managing complexity with data

As you achieve important milestones in your small business, your operations will grow in complexity. Your to-do list will require more time, attention and energy. Working with a PEO allows small business owners to move forward while knowing they have an HR partner who will scale with them and handle the changes taking place.

PEOs can also help employers make the most out of collectible information that might otherwise not be used to its greatest potential.

"The ability to use your employee-related data to make better business decisions is becoming even more important and a competitive edge," says Kristen Appleman, Senior Vice President for ADP TotalSource. "Without a PEO, data-driven visibility into a workforce can be a company's largest expense. But with a PEO, a business can tap into information that helps them make decisions about their workforce and align talent strategies that will positively impact their bottom line."

Appleman offers an example: A small organization using analytics offered by a PEO might access its turnover rate in a dashboard and instantly identify a problem area. Together, they could determine probable reasons and plan changes for an accurate and swift remedy. In fact, businesses with a PEO partnership grow 7%–9% faster, have 10%–14% lower turnover, and are 50% less likely to go out of business than businesses without one.

The role of a PEO is to take on the complexity of HR functions and empower small business owners to focus on what they do best: run the business. By understanding the details of your organization's needs and helping you stay on top of those details, a trusted PEO partner frees up owners and HR leadership to stay focused on high-level growth strategies for the business itself as well as its employees.

Learn more about ADP's award-winning PEO solution.

This article was updated in May 2023.