How tech savvy HR startups could disrupt the PEO industry

By Neal England
Practice Leader - Human Capital Management
and Brad Buttermore
Managing Director and Chief Financial Officer

We’ve watched with interest as technology-driven HR companies roll out easy-to-use HR software that could impact the PEO industry — perhaps in still-unforeseen ways.

These HR software companies aren’t necessarily in direct competition with professional employer organizations, but they may siphon off PEO customers attracted to the easy-to-use and often free cloud-based software.

Most of the recent news in this sector has surrounded Zenefits, the Silicon Valley HR tech startup founded in 2013 that has raised more than $580 million in its short lifespan. The company has already ballooned to a $4.5 billion valuation and a workforce of more than 1,300 employees.

Tech-based HR field draws competition and venture capital

Besides Zenefits, there are many more tech-based HR startups offering similar service offerings. As Workforce noted in a recent article, competitors such as BambooHR, Deputy, GoCo, Gusto, Justworks Inc., Maxwell Health, Namely Inc. and others are marketing their own HR technology for small and midsize businesses, including a handful with “freemium” services where the software is free but the company pays for certain features.

Zenefits competitor Justworks recently raised $33 million in Series C funding, bringing its total raise to $53 million, according to Venture Capital Dispatch. Gusto has raised nearly $118 million to date while Namely, which calls its offering “modern HR” has raised $110.6 million, according to Workforce.

These companies offer online platforms that are simple, flexible and easy to use, covering all of a company’s HR needs. Services range from a variety of health care benefits, carrier integration, to payroll administration and other personnel tasks.

Technology-based HR vs. PEOs

The small and mid-sized companies that both sectors are attempting to reach may have different reasons for choosing a PEO over a technology-driven HR solution, or vice versa.

Companies choosing a traditional PEO often want a co-employment situation in which the PEO handles all of its HR needs with a hands-on, relational approach. These companies want to outsource employee management tasks, such as employee benefits, payroll and workers' compensation and recruiting so that they can focus fully on the business’s core competencies. They may not have the time, expertise or the bandwidth to handle HR functions in-house and they appreciate the relational approach a PEO provides.

A company choosing a technology-driven HR software solution, on the other hand, is maintaining the HR function internally while promoting self-service utilization. Through the self-service utilization, employees are empowered to make many of their HR decisions themselves, at their desktops, laptops, or mobile phones, using robust software that may require fewer hands-on decisions by management.

What does the future hold?

Are these up and coming HR tech startups knocking on the PEO industry’s door?

Certainly, they are making some noise in the human capital management industry and are looking to capture business not only from small and midsized companies but also from larger companies who have built their own enterprise software programs that may not be as nimble.

These HR tech startups have the ability to respond and adjust their software functionality to take into account today’s changing and complex regulatory environment and compliance that exists under the Affordable Care Act (ACA). They are using their technology knowledge to exploit their SaaS capabilities.

PEOs, meanwhile, are also evolving to meet the needs of today’s business owner. PEO software is on a similar evolutionary track as tech-enabled HR startups with software applications that are becoming more technologically advanced. PEOs are improving their SaaS capabilities, offering more flexibility and self-service options and adding compliance assistance.

Conclusions

We don’t have a crystal ball that tells us where this is all headed, but the good news is that both industries are growing on somewhat parallel tracks that almost seem to be getting closer to one another. Is the gap narrowing? Will these two industries eventually converge?

 

Capital Alliance Corporation is a Dallas-based investment banking firm with an extensive international reach and a 40-year history of providing trustworthy advice to private company shareholders who want to sell their businesses. Our team has deep operational and M&A experience across broad human capital management (HCM) and technology sectors.

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