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Outsourcing booming as the economy cools

Sunday July 27, 2008

In today’s economy, the only people who will make money in the next four years are the business owners that know how to run their business efficiently and with growth in mind, said Milan Yeager, chief executive of the National Association of Professional Employer Organizations.

“You will never save enough money to be profitable,” Yeager said. “Businesses that want to succeed need to spend more time doing what they do best and making money at it.”

That’s why Hawaii’s Professional Employer Organization (PEO) industry, which provides backroom services to business that include everything from administering the payroll and paying employment-related taxes, to risk management, recruiting, providing health benefits, and securing workers’ compensation coverage, is one aspect of the economy that is growing—even in the down times.

Outsourcing PEO and other noncore functions allows Hawaii’s cabinet makers, landscapers, sausage makers, keiki tutors and other small to midsized service providers to concentrate on the aspects of their business that they love and that will make them money.

The Full Story >> By Allison Schaefers .(JavaScript must be enabled to view this email address)

“At least 15 hours a week of my time was dedicated to HR such as payroll, time sheets, payroll taxes, 401(k) forms,” Mukai said, adding that the demands stacked up higher when an employee scaled back hours after the birth of her child.

At the same time that Brett Hill Construction was trying to grow its business volume, the company also expanded from four to 30 employees, Mukai said. As time went on, it was increasingly more difficult for Mukai to keep up with labor laws, Occupational Safety and Health Administration legislation and HR regulations, he said.

That’s why Brett Hill Construction made the decision to join a growing number of Hawaii companies and small businesses that have decided to outsource human resource functions or any other service that is not core to their product delivery.

Hawaii’s cabinet makers, landscapers, sausage makers, keiki tutors and other small to midsized service providers did not go into business so that they could spend hours slogging through payroll, workers’ compensation, information technology or delivery services. Hawaii’s artists, manufacturers and service providers would prefer to concentrate on the aspects of their business that they love, but many find themselves in a quagmire of paperwork and nonprofit-generating activity.

Although outsourcing has been a trend in Hawaii since pre 9/11, it’s beginning to pick up more steam, said Dustin Sellers, president and chief executive of Pro- Service Hawaii, which processed close to 20,000 W-2s last year and handled employment administration, payroll processing, workers’ compensation insurance, risk management, and benefits administration services for nearly 1,000 Hawaii companies.

“There’s been consistent growth because Hawaii is a tough place to make a nickel, but since August we’ve seen even more interest from businesses who are interested in finding ways to extract costs out of the system,” he said. “The trend has been in place, but we’ve seen about a 15 to 30 percent increase in inquiries and a 10 to 15 percent increase in new clients.”

Here in Hawaii, a service industry state, the Professional Employer Organization (PEO) or employee administration industry is growing tremendously, with more and more small businesses, including white-collar ones, embracing the concept, Sellers said. Since co-owners Ben Godsey and Dustin Sellers took over the company in 2005, ProService has grown more than 100 percent, now serving more than 800 small businesses and representing more than 8,000 employees statewide, he said.

Now, with the island economy beginning to falter, outsourcing is one aspect of the business community that is gearing up for a boom. In a down economy, Hawaii’s businesses are focusing on streamlining business functions, cutting expenses and expanding their client base. Some businesses have found that outsourcing everything from courier and gofer services, to marketing, public relations, staffing and human resources, is a way for them to get top-notch expertise at a contained cost so that they can focus on tapping new revenue streams.

Judy Bishop, president of Bishop and Co., a Honolulu-based staffing company, said not only has she noticed an outsourcing trend among Hawaii’s companies but that she expects it to continue.

“In a challenging economy, usually businesses want more value for their dollar. They want people to bring in revenue or set up systems that save money,” Bishop said. “As the economy tightens, people are going to have to pay their way. There won’t be a lot of dead weight in companies.”

That’s one mantra that ALTRES, which is short for ALTernative RESources for business, has used to help carve out its niche. The company, which is headquartered in Honolulu, employs more than 130 full-time staff in six office locations and comprises two sister companies: ALTRES Staffing and ALTRES HR. Serving as the HR back office for hundreds of Hawaii businesses and nonprofits, the company provides services for thousands of employees across seven islands. It also provides staffing and recruiting services for employers that do not want or have the capabilities to perform these functions in-house.

“Restaurant customers don’t base their decisions on where they will dine based on how well that business handles its payroll,” said Barron Guss, president and CEO of ALTRES, Hawaii’s only Employer Services Assurance Corp. (ESAC) accredited PEO.

“Anything that your customer has high regard for, you probably should not be outsourcing,” Guss said. “But anything that does not contribute to the product that you are putting out or the customer’s experience is a function that you should remove from your business.”

With revenue around $165 million, ALTRES is ranked among the state’s top 250 businesses. The company, which handled HR functions for some 500 Hawaii companies and processed about 8,500 W-2s last year, is projected to continue growing, Guss said.

“Generally, our inbound traffic is increasing as businesses look to outsourcing to create efficiencies and save money,” Guss said. “Every one of our customers will report that they are in a position to be more profitable than before because they are not focusing on non-revenue aspects of the business.”
Making the decision to outsource all company human resource functions to Altres freed Mukai’s time and allowed his co-worker to resign guilt free. It also allowed the company to downsize through attrition, he said.

“We cut $16,000 from payroll and benefits right off the top and our medical costs decreased by 3 to 4 percent,” Mukai said. “It was all gravy after that.”

Most companies, other than PEO providers, will find that they cannot make money off of their human resources administration, said Debbie Padello, HR director for ALTRES. In fact, some will lose money if they try to match the benefit packages of larger companies on their own, she said.

“That’s where we come in. We have the ability to form stronger partnerships with various carriers and we can find the best benefits for the best rates,” Padello said.

In addition to saving staffing costs, Brett Hill Construction’s long-term disability and unemployment premiums also dropped and they were able to begin offering employees lifestyle perks such as reduced-cost movie tickets and discounted gym memberships, Mukai said.

“As a small company, we would have never been able to offer our employees those kinds of perks,” he said.

But, best of all, the change freed up Mukai to concentrate on what he does best, said Brett Hill, president and CEO of Brett Hill Construction.

“Bryan is our CFO and to have him bogged down two days a week doing repetitive things didn’t allow him to go out and meet with clients and grow our business,” Hill said.

In today’s economy, the only people who will make money in the next four years are the business owners that know how to run their business efficiently and with growth in mind, said Milan Yeager, CEO of the National Association of Professional Employer Organizations.
“You will never save enough money to be profitable,” Yeager said. “Businesses that want to succeed need to spend more time doing what they do best and making money at it.”

Outsourcing PEO functions to SCI, a small PEO provider, is the business model that worked for Courier Corp. of Hawaii (CCH), said owner Seiji Aspengren. It freed up the company to diversify and expand into different market segments such as perishable deliveries, he said.

“A lot of small businesses have the mentality that they need to do everything themselves, but if they ever want to be larger, they have to get past that kind of mentality,” Aspengren said.

CCH also outsources its computer needs to an IT consulting company, he said.

“Anything that we need to have done that isn’t part of what we do, we’ll take a look at outsourcing,” he said.

Likewise, with the rise in gas prices, the courier company has picked up more delivery accounts from other businesses that once handled deliveries themselves, he said.

“We’ve noticed a real increase in small accounts, like law firms and accounting offices,” Aspengren said. “They realize that it’s cheaper for us to deliver once they have taken into account the cost of an hourly employee and factor in liability, wear and tear on the car and per-mile costs.”

These days, even the outsourcers are outsourcing functions, said Larry Heim, president of HONBLUE, which provides technology outsourcing and blueprint services for clients. The company also operates Blackbird, a computer technology division of HONBLUE.

It was a “no-brainer” for HONBLUE to make the decision to begin outsourcing PEO functions to ProService Hawaii earlier this year, Heim said.
“When things start backing off, businesses need to be as efficient and tight as possible,” he said. “Some businesses might consider laying people off the easier way to cut costs, but we try to keep everyone employed so we can focus on growing our revenues.”

Other Hawaii businesses seem to have similar thoughts, Heim said.

“Over the past six months, we’ve seen a 20 percent increase in queries from potential Blackbird clients,” he said. “We’ve also had about a 10 to 12 percent upswing in new clients.”

Nationwide, the Professional Employer Organization (PEO) industry grew by $10 billion in 2007 to $61 billion in gross revenue—a 15 percent rise. Small- and medium-sized businesses outsource to PEOs everything from administering the payroll and paying employment-related taxes, to risk management, recruiting, providing health benefits, and securing workers’ compensation coverage.

Source: National Association of Professional Employer Organizations (NAPEO)

As workplace regulations grow, businesses spend up to 20 percent more time doing regulatory paperwork than they did 10 years ago. And, the problems that they face are more extensive:

» According to the Workplace Violence Research Institute, on-the-job violence costs employers $36 billion each year, and the average award in a workplace violence lawsuit exceeds $1 million per case.

» One in six workers has a drug problem.(“Don’t Hire A Crook,” Dennis DeMay and James R. Flowers Jr., 1999 Facts on Demand Press)

» The American Management Association and U.S. Chamber of Commerce report that 30 percent of all business failures are caused by employee theft.

Source: ALTRES and ProService Hawaii

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