PEOs – Learn to Differentiate for Competitive Survival

There are so many threats right now in the PEO industry it is probably tougher than it is ever been. There are still opportunities out there, but the threats are in health care reform, regulation changes and definitely commoditization. The products are all starting to look the same and clients are very conscious about the price they are willing to pay when shopping PEOs. The big keep getting bigger, M&A activity, the lines are blurring, brokers are offering payroll, and you’ve got ADP and Paychex who are now brokers offering insurance. So there are lots of threats.

In the past there was enough wiggle room for smaller PEOs to be creative, but that is eroding. You’ve got high unemployment and unbundled billing, so revenue is eroding at the same time that there is confusion in the marketplace and regulation. Differentiation is a very tough and real problem.

To handle that, you need a mitigation strategy. Diversifying product is certainly a way for small PEOs to not only differentiate themselves, but to also mitigate the risks that are out of their control that they have no influence on. So diversifying product, whether it is offering your products in a non-PEO environment, whether it is offering benefits administration as a client wants to carve out their benefits instead of going on a master policy, whether it is offering your wonderful technology that you have invested in in a software service environment, all of those things need to be put on the table as a mitigation strategy.

CogNet can help you with that because CogNet can help you offer those services at a much lower cost to serve without distracting your core business. Between those two things you might be able to diversify easier than you think you could and we can help you with that.

Who Defines Good Customer Service?

Customer service as a differentiator is interesting in this industry because vendors overvalue customer service compared to what the clients tell us. Clients will leave due to bad service, but they won’t stay due to good service. So it’s an interesting line for people to walk, one that it is defined by the buyer as well.

As a result you have got this constantly moving bar where if you spend too much time on customer service it doesn’t get you additional revenue, but if you don’t spend enough on it you have clients leaving on droves. Customer service is also a changing landscape right now. You have got technology coming your way, so people want to text things to you, they want to instant message, they want e-mails, some of them want a human body and others say I don’t want to pickup the phone and call, that’s a waste of my time. So you have this constantly shifting landscape on top of a definition of what’s good and bad that’s defined by each client individually.

The biggest mistake the leader can make in regards to customer service is drinking their own Kool-Aid. So much of the time and energy of an organization is spent around servicing clients that you start to come up with this tribal wisdom and whoever is the loudest and the noisiest, be it sales rep, is correct. You have to be very, very careful that you are using the facts. In this case, data is your friend. You’ve got to spend the dollars to understand what customer service means to each of your clients, how you are going to deliver that in a very cost effective manner and you’ve got to look at the data on the cadence that is letting you see what the shifting tides are. You either spend the dollars to understand it or die – that’s it on customer service.

The Misalignment Meltdown

Aligning your business strategy to your market and to your customer is obviously critical to your success. So let’s talk about how it gets misaligned and why people fail at it. One of the biggest reasons companies fail is that you have put together a strategic plan where you know your monthly position, you know who you are going after and you know what your gaps are, but that strategic plan never gets operationalized in an operating plan that has the same intensities and the same drivers as the strategic plan.

So what happens is the daily whirlwind of what is urgent today overtakes what’s important tomorrow in terms of your strategic plan because you don’t have the operating plans, functions and processes that keep you on task with your strategic plan. Customer retention will tell you that you have failed because if you have customers leaving within 24 months of coming, whatever your strategic plan to get them to you was, it was not operationalized and therefore they are leaving.

A good example of a failure is when you spend hundreds of thousands of dollars to get computer uptime from 98 percent to 99 percent because someone convinced you that it was important to customer retention, but it really wasn’t. If you went back to your strategic plan and the gap analysis, it would tell you that. So you have spent all those dollars doing something that didn’t turn into revenue and retention and money.

At all times you have got to keep the strategic plan and the operational plan in alignment and, by doing that, all your work will go towards growing your retention and your revenue and you will succeed. It’s that exquisite focus between your operational plan and your strategic plan that keeps you on line to growing revenue.

More SMBs Are Going Global – What You Need to Know

It’s an interesting time for small businesses in the global economy. Big businesses have found a way to easily tap into labor arbitrage and vendors across the globe to make themselves more competitive. Small businesses struggle a little more with it. Part of it is due to the vendors themselves who just haven’t figured out how to allow small businesses to engage with them simply and inexpensively in the global economy. Another part of it is that the small business owners themselves just don’t know how to go out and engage that global workforce to their benefit.

As an example, as a small business owner myself several years ago, I wanted to outsource some work. So I went to some large vendors knowing who they were and by the time I got done with all their rules and regulations and how many heads did I have to do and all of this, I threw my hands up and decided to keep the work in-house. That wasn’t the right decision either, because I was still overpaying for that low value work, but it was just too hard to engage with the vendors. There are now vendors out there who understand small business and all the hats that a small business owner wears and that small businesses have just as many products to service.

So those small outsourcing vendors are out there and I think more small businesses that are outsourcers themselves need to drink their own Kool-Aid and go outsource that low value work. They just need to find the right vendor so that it is easy to do and saves them money that they can then put to growing their own business.

If You Can’t Measure It, You Can’t Fix It

CogNet’s governance begins right upfront when we are sitting down and talking about the contract and putting the Statement of Work together. We agree upon what the process looks like, what the units are going through it, what is the cost of that and how many hours will take you to that work. This way there are no surprises later on when we sit down once a quarter and have our governance meetings. Our simple axiom is that if you can’t measure it, you can’t fix it and you can’t improve it.

So it’s got to be measured. It’s right there in the contract. From there, once a quarter for every process that we have for you, we are going to sit down and look at those metrics.
Are we doing about the same amount of work that we thought we were going to be doing?
What is the cost on a per unit basis and otherwise of doing that work?
How productive are we? Are we just as productive as you were before, or less or more?

The bottom line is deciding whether or not we’re delivering what we said we would deliver to you as far as processing transactions and savings and having that conversation consistently so that nobody is ever surprised. It’s equally good to know whether we are exceeding those expectations, which we are always striving to do, or to know that we are not.

You can’t do process improvement if you haven’t documented and you don’t have numbers. So we can sit down and look at it and say, “Okay, great. What needs to happen here to make sure that we can deliver what we promised?”

The Importance of Process

CogNet’s process focus really comes from my personal experience of being in the HR services business and honestly just not having it. When you are a mid to small market player you don’t have the time, the money or the headcount to have a full time process person, so you look at your business and you look for costs and for improvement, but you haven’t measured it and you haven’t documented it. The bottom line of process improvement is you don’t know what you don’t know. If you can’t measure it, if you can’t look at it and feel it in a linear process on paper, then you don’t have the opportunity to really examine cost or figure out what the productivity in your business is today.

We try and process with the customers to just boil it down to the simple. Obviously, it’s very easy just to report a bunch of numbers to you and tell you how good we are, but we try to make it impactful to the business and report on what we sat down and agreed we would deliver originally.

Let me give you an example. We will typically just come back with units:
What we are processing for you by area?
What is it?
What is the measurement of it?
What is the cost of that?
What Is the productivity of that?

These are very simple measures. Once you have units and costs, you can divide them by each other and arrive at the bottom line. We sat down and we said we would save you so much money and are we doing that and are we delivering that? Without documenting process you really can’t have that conversation.

The end product of that is a governance process. So once a quarter we sit down with you and review those numbers and make sure that we are continuing to deliver – that productivity is going up and cost is going down.

No Greater Value Than Experience

CogNet delivers value in many ways. I think one of the biggest ways we do it is that my partners and I have personally walked in your shoes. For the last 20 years I have been an executive in the PEO space and the broader HR space in general. So I think our understanding – a keen understanding – of what you go through in a day helps tremendously. How we run the business, what we offer and how flexible we are to your needs are all qualities driven by that understanding.

In terms of CogNet specifically, we have a highly educated workforce that is very process driven. More importantly we do things the client’s way. That flexibility means not questioning you or making you fit into what we think the way you should be and that definitely is a plus for small business owners.

An example of that is we had a client who wanted us to do a data entry job where we were populating disparate systems, something many of you are probably familiar with. But what we noticed while we were doing that is that we were populating disparate systems off of different forms and the data was different on those forms. So we went into analyzing it for a little bit and then came up with a solution of how we could scrub the data before we actually input it. That actually solved the problem. It wasn’t a data entry problem at all. The problem was that the data going in was wrong. So even though at the end of the day on that one it was less work to CogNet on that particular function, we solved the root cause. We earned business from that client on many other processes and it was win-win for everybody.

Our value is that we understand the space, we are very flexible to what you need to do. In all cases we do it cheaper and in many cases we can do it better. So let us help you with that.

The Three Market Positions – You Must Choose One

First and foremost in dealing with growth you have to align with the needs of your customer, or your customer’s customer in the HR services industry. If you are not aligned with that you are not going to be able to grow, you’ve got to know what they actually want.

Second you have to be better, faster and cheaper. That’s what customers want from a transactional perspective, it’s a commodity and they want it better, faster and cheaper every year. Important also is to really recognize that customers do leave for mistakes, so the blocking and tackling is very important. It has to be done well, but it also has to be done at a much more efficient cost point than what you are doing today.

When you are doing that right, they will stay for service. There is human error there, it’s always going to happen, but if you are able to take your resources away from those low value-added tasks while you are growing and put them into customer service and hands-on consultative tasks, you will keep those customers.

How do you deal with growth? There are essentially two ways to go in the services industry, specifically HR services:
Automate – change your technology, look for tools that are going to make you more efficient,
Look for labor arbitrage – readily available in this global economy.

But we don’t think that doing one or the other is the answer. We try to accomplish both at the same time. Technology doesn’t always fill every gap, so labor and technology together is the best solution.

For example, we have a new customer who is growing rapidly and is basically out of space. We sat down with him and told him that from the payroll perspective, he needed to build capacity because of the growth he was experiencing. He simply couldn’t keep up with it. There simply were not enough cubes. So in this case, changing technologies is the first step he has taken and we helped with that conversion because it’s double duty from this system to that system. Going forward as he grows, he is going to grow in an outsourced solution with us rather than continuing to hire low value-added task process performers.

The keys to growth in this industry are recognizing the difference between low value-added tasks and high value-added tasks. The only way you are going to grow is to focus correctly on those. For the ticket-to-play items, we like to call it “making sausage” because nobody cares if they don’t see it, they don’t know it’s there and they just expect it to happen. More importantly you don’t get paid for it, those tasks are an expectation, a bottom line expectation of the product.

I often will ask customer’s a simple question, “You want to grow, that’s great, but what happens when you double the size of the company? Are you going to double the size of your employee base or are you going to find new ways to solve the problem?”

The Product Quality Bar

The product quality bar is where you have a diverse set of products in your company sorted by company and by product type and by client type and you define exactly what the quality target you need to hit on those items is. If you took products in the HR industry, for instance payroll or workers’ comp benefits, the issue is not what clients say the quality needs to be, it’s the actions those clients take at different levels of quality. So the quality bar refers to what a client would leave for, what a client would stay for and what a client would pay for – all of which is organized by product line.

The best-of-breed clients segment their clients. It could be that you segment your clients by size, or by the type of business, or whatever makes sense in your client base to segment your clients. Then, within that client base, you take your products and define what is the quality bar you need to hit by client and by product, and then relentlessly measure what factors cause actions you desire and actions you don’t. Tracking things that way gives you exquisite focus around the current state, the desired state and what must be done to close the gap between the two. Best-of-breed companies manage to the gap in the quality bar at all times, which is why they have better client retention and why they retain revenue.

Drivers of Customer Turnover

Drivers of customer turnover are really a cornucopia of things. There are so many different moving parts in the HR services industry that any one of them in a combination and at the same time can cause turnover. Also it causes HR service providers to have the urge to expand. If you look at ADP, they just buy more product and expand more product, that will cover more bases and will bring up retention. That’s a double-edged sword though. If you are a smaller provider adding more product is great, it has a distraction or opportunity cost to it and it gives you more opportunities to screw up. You could really cause your own loss by going past what your organization can handle. Still, at the end of the day, you have to be able to deliver the low value- added tasks better, faster, and cheaper.

Let’s look at an example here in the PEO industry. What causes the complexities? If you look within the PEO space, the insurance decision drives around 70 percent of the decisions. It’s either health care insurance or workers comp when it’s appropriate. That’s the buying decision. It’s the economic decision for even looking at the product to begin with or looking at switching providers that you are currently with.

The negative, or flipside, of that is it creates more shopping opportunities. You’ve got a health renewal, you’ve got a comp renewal, and you’ve got taxes changing on an annual basis. Many different times of year that customer is getting an opportunity or reason to think about shopping. That creates its own distraction that you have to make sure that you have to manage along the way while being high value-add.

How do people in the industry reduce turnover? There are some events happening today that clarify where that’s going to go in the future. If you look at the behavior of ADP for example, they have bought and bought and broadened out product and now, not only them but Paychex as well, are starting to sell insurance. So they are infringing on a territory there. Also, big banks now own insurance brokerages or own payroll bureaus and broaden their product out and now those two are starting to bump together.

So the lines are really blurred as far as who the providers in the space are. Add to that, of course, the cloud, which is a bit overused, but it’s out there. Now you have a capability to offer all those services to any amount of customers, from 8 lives to 800 lives, and one of the biggest changes coming forward is that the sales and distribution of those products is where it’s all at. The people who are selling those products today could very easily be at the cloud. They could have a private label product, whether it’s payroll, benefits administration, insurance products, or insurance brokerage for example, and it’s very easy for them to enter the space and be providers who could provide that. I like to call it “entry without infrastructure”. I can get a distribution company into the business tomorrow of HR services in a private label setting without them even lifting a finger. That will be a huge impact to the market in the future.