For PEOs, it's not about increasing the head count, but finding new ways to be more profitable and efficient.
The player to watch in the employee-service sector this year is the professional employer organization (PEO), which combines the services of a staff leasing company, an employee-benefits consultant and a payroll administrator. PEOs, which target primarily small to mid-size businesses, cover just 3% of the Florida workforce, about 270,000 workers. But it's a young industry, with a huge market to tap and projected annual growth of 20% to 30%.
Bradenton-based Staff Leasing, the nation's largest PEO, reported revenues of $680 million, a 12% increase, and gross profits of $33.4 million, a 16% increase, for the first three quarters of 1999.
In Florida the PEO industry posted a 27% increase in revenues in 1999. Adding more workers remains critical to revenue growth, but going into its second decade the industry focus is shifting to new ways to improve profits.
After a round of consolidation that began this decade, PEOs are finding bigger isn't always better. Over the last three to five years the industry's focus had been on increasing the head count, says Mercedes Sanchez, PEO industry analyst with Raymond James & Associates in St. Petersburg. Moving forward, however, she says, "investors are saying they don't care how many worksite employees you have; they care more about profit margins."
Sanchez points out the profit potential at AdvanTech Solutions, a recent entrant into the PEO field that has a new take on how to operate. The Tampa-based company, formed July 1999, already has enrolled 6,000 workers. It's a spin-off of Davis Baldwin Inc., also Tampa-based and the state's largest privately held independent insurance company. What sets AdvanTech apart is immediate access to potential clients through a key distribution channel: Davis Baldwin's 28 independent agencies serving 47 markets in Florida, Georgia, Texas and Alabama.
AdvanTech pays its independent agents a commission on each account and offers them equity partnership. With a motivated sales force, business relationships already in place, and a ready-made distribution channel that can shorten the traditional three- to five-month selling cycle and reduce operating costs, the company expects better profit margins. According to AdvanTech co-founder and CEO Chuck Davis, by leveraging a sales force already in place through Davis Baldwin, AdvanTech's cost of sales and marketing is a third of what it costs other PEOs.
Another potential cost-saving trend for the PEO industry is the Internet. Most of the state's top PEOs plan to roll out a variety of web-based services early this year, from payroll processing online to providing employees with Internet access to their benefits information.
To encourage web use, Staff Leasing, the first PEO in Florida to offer online services, has teamed up with Dell Computer on a computer system and Internet service package available at a discount to clients of Staff Leasing. Already about 16% of Staff Leasing's worksite employees have their hours reported via the Internet, an option which became available less than a year ago. "The industry lends itself well to the Internet," says Sanchez. "It should improve efficiency and that translates into improved profitability."
INDUSTRY NEWS
Liability Shield
The Florida Association of PEOs (FAPEO) successfully lobbied for a provision in the state Legislature's massive tort reform bill that gives PEOs protection against some lawsuits. The provision relieves the PEO of liability should one of its worksite employees become injured on the job, or injure someone else, or if work is performed improperly resulting in injury or property damage. The new law says that in a contractual co-employment relationship, the client, not the PEO, is responsible for the quality of work and the worker's actions.
Mandatory Reserves
The Governor's Board of Employee Leasing added another industry regulation in 1999. A PEO must now file a quarterly report showing that it is maintaining positive working capital and adequate reserves to pay all payroll taxes and workers' compensation and health insurance premiums.
Out of Favor
Business services stocks have fallen out of favor with Wall Street. Many are trading well below their highs, and analysts have lowered their recommendations. Warburg Dillon Read LLC downgraded its rating on Jacksonville consulting/recruiting company Modis Professional Services, saying the business continued to be vulnerable to a tight labor market. Jefferies & Co. downgraded Staff Leasing, citing weakened earnings potential due to worse than expected terms on a key workers' comp contract.
For Sale: Staff Leasing
Bradenton-based Staff Leasing is looking for a buyer and has hired Wall Street powerhouse Goldman Sachs to help. Last year, Staff Leasing received an unsolicited offer of $17.50 a share from Paribas Principal Partners, which Staff Leasing rejected because it believed a new workers' comp contract being negotiated looked favorable. The unsolicited bid looks pretty good now: The contract ended up increasing Staff Leasing's costs and has the company considering an outright sale or recapitalization.
Florida Regulates
Co-employment, the backbone of the PEO industry, can be a difficult sell. When PEOs first started making cold calls on prospective clients in the late '80s, "people would ask, is this legal?" recalls Richard Goldman, president of Staff Leasing. Co-employment is not only "legal," it's even covered by state statutes. Florida, in fact, is in the vanguard when it comes to regulating the industry, with more laws governing PEOs than in any other state. Nationally, industry watchers expect an increase in federal regulations, especially concerning how PEOs administer 401(k) plans.
IPO Possibility
Tampa-based Payroll Transfers changed its name to EPIX following its 1998 acquisition of Employee Management Inc. (EMI) of Woodbridge, N.J. The combined company expects to finish 1999 with 2,000 clients and 45,000 to 50,000 worksite employees in its Southeastern and Northeastern U.S. markets. With revenues closing in on $1 billion, it's the largest privately held PEO in the U.S. But it may not remain so. Company officials say a public offering is something they have considered from the beginning.
Up in a Downturn?
How well-insulated is the PEO industry from an economic downturn? The industry differs from the traditional employee recruiting/temporary staffing concept where often the last person hired is the first one laid off during tough times. PEOs offer the capacity of full-service human resource and accounting departments. "You've got to look at this business like the liquor business," says EPIX co-President Steve Rosenthal, "you drink liquor during down times; you drink during good times. Either way, we allow the employer to save a buck."
Major Merger
Coral Gables-based Vincam Group is part of ADP TotalSource -- a big part. In 1999, ADP TotalSource acquired Vincam, which now accounts for about two-thirds of its business. Vincam CEO Carlos Saladrigas has taken on the role of CEO of ADP TotalSource, with headquarters in Miami. It is the PEO arm of payroll processing giant Automatic Data Processing, based in Roseland, N.J.
Net's Not for Everyone
Online services on the Internet are the marketing buzz for the industry going into the millennium. But while PEOs tout their new Internet strategies, some clients are not hopping on the bandwagon. Says PEO client Bob Gonzalez Jr. of Ansley's Natural Marketplace in Tampa: The Internet "doesn't appeal to us at all. I just don't trust the security of the web; I prefer faxing (payroll) in."
Payroll Processing
Rochester, N.Y.-based Paychex Inc., one of the nation's largest payroll processors, has a PEO division, Paychex Business Solutions, based in St. Petersburg. The division comprises only a small part of Paychex's overall business, but PEOs were posing enough of a threat to market share in Florida that Paychex got into the business three years ago.