An IDC study shows small businesses in the U.S. turning rapidly to outsourcing to manage human resources, including the complexities of regulatory compliance. Professional employer organizations (PEOs) are increasingly making a comeback as the HR outsourcing (HRO) service model of choice for some smaller organizations, buoyed by the improving small business economy.

IDC research shows the estimated value of the total addressable market for comprehensive HR outsourcing to the small market is a staggering $44 billion per year in potential recurring revenue in the United States, based on 2004 employment figures.

"It is difficult for small businesses to manage all facets of human resource administration associated with their workforces," said Lisa Rowan program manager for HR and talent management services for IDC. "There are an increasing number of options for comprehensive HR outsourcing services for the small market; the oldest of these is the professional employer organization (PEO) model, which actually is a precursor to and grandparent of HR business process outsourcing (BPO)."

PEOs assume responsibility for all facets of their clients' human resources function, including overall employee relations. As co-employer, the PEO pays the wages and employment taxes for worksite employees out of its own account; collects and reports taxes to state and federal jurisdictions; maintains a long-term relationship with worksite employees (WSEs) that is not temporary; and retains the rights to hire, fire, and reassign WSEs. Although some PEOs offer services to larger clients, the majority of PEO business is conducted with firms that employ 50 or fewer.

The majority of PEOs are small businesses themselves with fewer than 3,000 WSEs in five states or less. Despite the size of the average PEO, IDC finds that 5% of U.S. small businesses with 50 or fewer employees utilize a PEO for managing their HR administration.

The number of PEOs in the United States declined in 2003 over 2000 but made a dramatic rebound in 2006. The increase is attributable to improved business conditions, lower unemployment, and renewed vigor in the small business market in the United States, according to the U.S. Small Business Administration's 2006 study of the small business economy.

"As the U.S. economy goes, so goes the PEO market, with contraction and expansion that mirrors the ebbs and flows of the employment outlook," continued Ms. Rowan. "The opportunity is strong for HR services to the small market in 2007. Our latest analysis discusses the opportunities and challenges facing firms that are in the race to win new business."

About the market research study

The 18-page IDC Special Study, "HR BPO and PEO Outsourcing Options for the Small Market" (IDC #205128; January 2007), discusses comprehensive HR outsourcing services for small businesses with a focus on the professional employer organization market. This study includes the results of a comprehensive survey of the PEO industry conducted by PEO Network Inc. in the fall of 2006. The research concludes with a current and historical sizing of the PEO market based on censuses taken in 2000, 2003, and October 2006 by PEO Network, an independent consulting firm focused on providing vital information and guidance to the PEO market. Learn more about PEO Network by visiting www.peonetwork.com.

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