What is the “Virtual PEO”?

We recently attended the NAPEO conference in San Antonio and found a common theme in many of the conversations, at the booth or the bar, about being a more virtual organization.

The timing is perfect because we recently added a PEO/HRO client who gets it, and together we are building the “virtual PEO”.

Let’s be real for a moment. A PEO/HRO has clients all over the place and has invested a great deal of money and technology to entice them to interact electronically. Come on man, your clients really don’t come to that nice office space, nor do you really want them. So let’s shoot straight for a moment about where you want to go, not where you are today.

You are in a business with a high cost of client acquisition (Sales, Marketing and Installation). Your average group has 18 employees and based on the recent financial report you make a whopping $2,320 of operating income per year on this client, or 0.35 percent of billings. Did you spend more than that getting the client? How many years do you have to keep them to break even?

You also spend 65 to 80 percent of your total operating expenses on labor and a place to put them. That dog will hunt for a season or two, but not much more.

Heck, you may have even gone half way there on being virtual, but only with your sales and service people working out in the field and from their homes logging a lot of dashboard time. But for some reason you stopped there. Why?

Our client realized all of this and we joined in a collaborative manner to get them to a new business model that is here to stay, the Virtual PEO. This is a change in business model, not just a tweak. It only takes the realization that your clients are remote and simply want you to not screw up their payroll and benefits, and when the time comes that they need some HR help there is someone available to help them.

What do you do? Focus your money on sales and service in the field to accomplish you objectives. A lower cost of transactional services leaves money available to hire another sales person, or use a HR consultant to help your clients when they are in need. Not hire another staff accountant to recon those benefit bills or enter some payroll hours into the system.

So let’s look at how the math could work out on average, shall we.

Let’s say you have 2,500 WSE and average $800 of gross margin per WSE, which means you do $2.0 million in revenue annually.
Average Operating Income is $129 per WSE so you put $322,000 a year in the bank.
The business requires one non-sales internal employee for every 125 WSE, so you have 20 employees running you business.

Those people on average “all in” including wages, taxes, benefits and overhead cost you $50,000 each or $1.0 million a year.

You let Cognet come in and show you the path to a virtual world. Maybe that means you keep your best ten employees who are customer or regulatory focused, and we step in to take the transactional roles offshore for you. What does that mean to you?

You reduce your labor by $0.5 million a year in the first six months with Cognet.
Net of what you pay us you save easily $320,000 a year.

You just doubled your profit and changed your business model. Now your best and brightest are worried about keeping ADP out of your accounts, not that spreadsheet with PTO hours in it. You also get ISO certified precisions, measurement, process expertise, accountability and reports out the wazoo about every facet of your business that you didn’t have before.

That is what one of our clients is doing today. They see the economic and systemic flaws in the business model and are willing to do things a different way, while doubling their profits. This has an impact on the next five budgets, in good times and bad, not just another tight year.

We are interested in the many ways that our small to mid-sized PEO friends wish they could improve their business models. So go to http://www.virtualpeo.com today and tell us what you think.

The national players will go here and have scale. What are you waiting for? If you are an awesome regional operator give us a call today, then tomorrow you can be even more client focused in your back yard.

We solve business problems, not just save you money.

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Congress can’t work together but we can.

A collaborative approach literally involves two parties “laboring together” to achieve an outcome. Cognet attempts to not only be collaborative once a transition is complete and in production, but also in the beginning during the sales and discovery phase to ensure that the relationship will work for both parties.

What kind of relationship works in an offshore and/or outsourced model?

Is it a Vendor? In most vendor relationships, a product or service is provided to the customer who may have several choices. The customer is “king” and can usually procure the product or service with price being the driving factor for vendor selection. This is not Cognet.

Is it a Partnership? Traditionally, partnerships share both a common equity interest and joint decision making. Many companies abuse the word “partner” to have that more kind and paternal spin on relationships, but the reality is that there is no strong ties of common cause and outcome. This is also not Cognet.

So what makes it a collaborative relationship?

The first step is admitting a couple of key things to yourself before you embark on a global journey, part of a twelve step program to get you past yourself. The first two are:

My current processes are imperfect, and quite possibly not documented or measured today.
My people make mistakes, even if they hide them from me and probably because they aren’t measured.
We all have these issues, hidden or in plain sight, and the common goal is to ensure that they don’t impact a customer and therefore our bottom line. This is exactly why you outsource, but you do it in the right manner. You will more than likely get documentation and measurement you didn’t have before, along with accountability and responsibility for delivery of that work. You let the ISO expert in the building not to point our faults that are already there, but to help improve them in the future through collaboration.

Your processes are just that, yours! However, the work performed crosses many swim lanes from client to departments in your company today. When you plug Cognet in you simply add a swim lane in the collaborative pool. The common goal remains increased customer satisfaction, but now there is now another party in that performance who is accountable at a whole new level.

Once you accept both the imperfections and desire to improve them, collaboration may enter the equation. Your vendor isn’t a vendor, or even a partner, but a part of the organization. They are an extension of your team who works in an integrated fashion with your employees as part of a process. Processes cross departments today in your organization, and in the collaborative model they cross organizations, but the members remain a team with a common purpose.

The result, which may take a while, is that the teams form relationships and ISO, Six Sigma and Continuous Process Improvement become a shared objective of the team. Sure, there may be initial finger pointing of “the vendor screwed up” or “those people don’t know what they are doing”, but when the unemotional focus on improving that process from mistakes catches on, the return on investment is high.

There are certain skills that are required to manage in a collaborative model, as well as roles such as liaisons. The skills can be infectious and mainly include the acceptance of critical or process based thinking. Looking at the numbers and process and solving the problem becomes the common interest, not laying blame. This takes a combination of data and relationship building skills, as well as a willingness of your employees to upgrade their job skills now that they have help, or desire more customer contact. They may not, so you have to choose carefully.

In the end, a collaborative provider is managing your stuff. The combined team of your employees and an outsourcer are simply trying to take what you already have to another level by applying skills and tool sets that you may not have in-house today. They collectively own the process and impact to clients as a team, and the objective is to put the right work in the right location and increase attention to client facing activities in your company. It may not work for everyone and people may leave because of it, but in the end your bottom line and customers will notice the difference, and increase your company’s chance of survival over the long-term.

What your business budget and the Federal Budget have in Common

“We’ve got to cut the budget.”
“The deficits are way too high”
“We must get spending under control”
“We need to raise revenues”

Unless you’ve been living in a box for the past year or two, there’s no doubt you’ve been hearing a lot about the Federal budget. Political candidates across the ideological spectrum have been discussing it, the cable news shows have covered it endlessly, and your business associates and neighbors have probably expressed their opinions.

But this is not political commentary and we don’t have a dog in this political fight (we are followers of the great Groucho Marx who said “I would never belong to a club that would have me as a member”). This is about making money. We like making money. And if you do also…read on.

So we’ll put you in charge of the Federal Budget. The voters are demanding cuts…significant ones. What will you cut?

The $4 billion dollar “Legislative Brach Discretionary Programs”? Sounds like pork in the district of their esteemed colleague to me?

The $2 million dollar research grant dedicated to learning the impact of disco music on monkeys?
Get real! We are talking about a $4.1 trillion with a “t” budgeted outlay and only $2.4 trillion in tax revenue coming in the door, so we only need to whip out the credit card for $1.7 trillion to keep the lights on. That’s chump change and won’t make a dent in the Federal deficit. Sixty cents of every dollar in 2010 goes to Social Security, Unemployment and Medicare/Medicaid. And that’s why the politicians only nibble around the edges when they get around to cutting budget items.

So what does this have to do with your business budget? Everything!

Managing a business budget over the past few years hasn’t been easy – or fun. You’ve almost certainly had to cut and deal with the reality of flat or decreased revenues, just like the boys and girls in Washington DC. And this year’s budget cycle is probably no different. More cuts. And if you had to make a bet about next year given the political and economic environment would you bet against further cuts?

So what have you been cutting?

Probably many small items have come off the spreadsheet quickly – like the few thousand dollars dedicated to the off site company meeting and those little employee and manager perks that seem so innocuous in good times.

Many companies have also tried to find savings by reducing marketing expenses and terminating the low performing sales reps.

And for all your effort and good intentions your result is exactly like the politicians who wrestle with the Federal budget. You are only nibbling around edges.

And if you remain on your current trajectory you will repeat this process year after year until a more agile and flexible competitor steals your market share.

If you want to make real cuts you have to go where 65 – 70 % of your costs are – your labor expense. And that’s the dilemma. How can you reduce your labor costs and still get your work done? You’ve probably already went through a round or two of staff reductions.

Here’s your answer: Cognet – we can get your work done cheaper, better and faster.

Cognet is the leading provider of offshore Business Process Outsourcing (BPO) services to companies in the Human Resource Services business. For example, if you are in the Payroll or Benefits Administration business today we can support your “back office” tasks in a Global setting, freeing you to direct your time and money towards your clients.

Here’s how we do it:

We document everything at the start. To ensure the business process is fully defined and understood.
We do your work on your system. We leverage the Internet to perform your tasks exactly the way you want – only faster, better and cheaper.

We measure everything. We must to continually optimize and comply with our contractual standards.
Your business result is a permanently reduced and permanently lower cost structure. And rather than investing in another Staff Accountant you can hire a good Sales Rep to help grow your business.

The politicians can fix their structural budget problems by raising taxes. You don’t have that luxury. But you can permanently lower your operating costs.

Talk to Cognet.

Virtual PEO

As a result of several conversations with many of you at the global booth, we are proud to introduce the launching of our “Virtual PEO” product at www.virtualpeo.com. We heard you and now we want to hear from you.

We really believe in the power of the PEO. It delivers an awesome product to the people who need it the most, and even those people are trying to be more virtual and global in their businesses. You should ask your clients how many compete globally, or have virtual offices. It may surprise you.

So we want to offer the same opportunity to the industry and our ears are open. Please visit the site above and provide us your input on the services that you would like to see in a “Virtual PEO” setting. The only way we can give you want you want is to listen. We also may bring some of our other Associate Members, like sales training, along with us if that is what you want.

It is all about you and we want to deliver, so tell us what you wish you had and we will find a way to do it.

Thanks so much for attending this year and we look forward to offering our help to building your businesses. We don’t just do your crap, we are here to make your company better any way we can.

NAPEO Insights

We enjoyed exhibiting at the NAPEO Conference in San Antonio this year as an Associate Member and supporter of the industry that helped us get our start. We have been serving the PEO industry since 2007, but many on our team began this journey many years ago and appreciate the innovation and resourcefulness in the space.

We consider ourselves lucky to have grown up in such a diverse HR Services environment, one that offers literally all of the services normally provided a la carte in a buffet of products. We understand as much as you do the intricacies and challenges of offering a wide array of value-added services to your clients. It is a vital contribution to the lifeblood of the global economy, the small business.

We specialize in the HR Services industry and this year’s gathering contained a theme consistent with others we serve, from payroll to benefits. Oh sure, we may be more worried about health care reform than a straight up ASO or HRO provider, but the common thread of the recession runs through all of our customers and friends. How do I focus more of my hard earned assets on sales and service?

We had a fancy flash presentation at our booth sharing the statistics, but since there wasn’t a test, let us offer a quick review. PEOs spend 80 percent of their operating expenses on labor, and the lion’s share of that is in operations. Both EBITDA margins and the percent of gross margin spent on Sales and Marketing followed the same suit. You are spending less and less on keeping the hard earned clients you have and bringing in new ones, while you spend the same to more on the processing and transactional parts of your business.

That graph tells you to change your model and make a change to your five year financial plan, not just another whack to the 2011 budget.

There are many business models that are shifting to a more virtual environment, and PEO is a perfect candidate. Do you use a vendor to do your background checks, or even provide FSA accounts? Of course you do. Yet you have people pounding away in operations and accounting on spreadsheets and reports that may never see the light of day, or increase your margin.

So consider a few facts for a moment:

•Your clients are all over the country and rarely come to visit the home office.
•Most of you encourage your clients and work site employees to self-serve over the web.
•Sales and marketing is very expensive given the average size of your client, so investment in it is a scarce and valuable resource.
•Service always matters, but price is becoming more and more important to your clients.
The reality is that your clients care about value for their dollar. They want payroll to be right and on time, insurance coverage to be administered correctly, taxes to be paid accurately, and HR that evokes the least amount of noise from their employees., The economy is bringing about a shift in customer desires. If you don’t react, your competition will.

Let’s face it, the big boys are getting bigger and seeking scale for a reason. There are two ways to reverse the margin trend we are seeing, get bigger or do it differently. We offer a bridge to becoming more of a “virtual PEO”. Oh sure, it may be the Seven Mile Bridge and you can walk if you like, but the fact is you are on it either way.

Technology allows you to have people working from home, sales people in markets with no brick and mortar, service people working at your clients’ sites, and all the early indications of a virtual business. But, you still have that office full of process, finance, technology and functions in the fish bowl. Think outside that tank and let us put our industry expertise and knowledge of both sides of the world to work making you more productive, financially and strategically.

5 Big Questions

The following are the five most-asked questions from the conference while we were “in our booth at the NAPEO 2010 Marketplace Conference”. We want to share them with you.

Q: “How do you say “Cognet”?”

A: First of all it is Cog (like in a wheel) and net (like in your hair). It derives from the word Cognitive, which basically means the process of thinking.

Q: “What do y’all do exactly?”

A: First, thank you for allowing me to practice my ever-changing elevator speech. So, let me try another one after all those versions. We have an offshore team that knows your business. Instead of spending 24 hours on a plane and a lot of money, we will let you borrow them. Your work will get done more efficiently, and even while you sleep if you want. You save money, we make you look good. We do your work on your system, no different than your remote employees today. Oh yeah, we are also freaks about process and guarantee not only cost savings, but increased productivity and focus on sales.

Q: “Do you run a call center like that show on NBC called ‘Outsourced’?”

A: No, never. We might do the occasional email from a generic account when it makes sense, but we learned long ago what we are good at and what you really want. We don’t have anyone named John Smith either, maybe a nickname or two like “Sam” for Sampath. By the way, he goes by Sam in India, too.

Q: “How much do you know about the PEO industry?”

A: Lots! I spent eleven years in the PEO space, and all of our owners have done their stretch at one time or another. Our core management team has been in it since 2004 and has something invaluable, domain expertise. We don’t just key in data, we know why we are doing it and if we should get on chat with your best people to ensure it gets done right. There is a difference between someone who can follow instructions and says they are “in the industry” and those that truly know.

Q: “Is there any size limit to who you can help?”

A: Not really, we have the experience and process down cold, so if you want five or fifty seats we can help. Of course there are differences in how those engagements are managed, but we will get the work done, measure it, improve it, and do what we do either way. Virtual knows no size limit!