PEO Report

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WWW.IBISWORLD.COM Professional Employer Organizations in the US July 2015 1

IBISWorld Industry Report 56133Professional EmployerOrganizations in the USJuly 2015 Ibrahim Yucel

Youre hired:Industry demand will grow in linewith the increasing number of US businesses

2 About this Industry

2 Industry Definition

2 Main Activities

2 Similar Industries

2 Additional Resources

3 Industry at a Glance

4 Industry Performance

4 Executive Summary

4 Key External Drivers

6 Current Performance

8 Industry Outlook

11 Industry Life Cycle

13 Products & Markets

13 Supply Chains

13 Products & Services

15 Demand Determinants

16 Major Markets

17 International Trade

18 Business Locations

20 Competitive Landscape

20 Market Share Concentration

20 Key Success Factors

21 Cost Structure Benchmarks

22 Basis of Competition

23 Barriers to Entry

24 Industry Globalization

25 Major Companies

25 TriNet Group Inc.

26 ADP LLC

27 Insperity Inc.

29 Operating Conditions

29 Capital Intensity

30 Technology & Systems

31 Revenue Volatility

31 Regulation & Policy

32 Industry Assistance

33 Key Statistics

33 Industry Data

33 Annual Change

33 KeyRatios

34 Jargon & Glossary

www.ibisworld.com | 1-800-330-3772 | [email protected]


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This industry provides HR managementand administration services through acoemployment relationship. Professionalemployer organizations (PEOs) areresponsible for employee administrationand serve as the legal employer while

employees work for the client on site.PEOs pay wages and associatedemployment costs in exchange for a fee,

which covers the expenses, plus a marginfor services, including payroll, taxremittance and benets administration.

The primary activities of this industry are

Employee-leasing services

Professional employer organizations (PEOs)

56111 Human Resources & Benefits Administration in the US

Office administrative service providers offer a range of day-to-day office administrative services to clients.They do not provide operational staff to clients in either management or operations.

56131 Employment & Recruiting Agencies in the US

Employment agencies list employment vacancies and refer or place applicants for employment. Theindividuals referred or placed are not employees of the agency.

56132 Office Staffing & Temp Agencies in the US

Temporary agencies supply workers to clients businesses for limited periods of time to supplement theworkforce of the client. The individuals placed are employees of the temp agency.

Industry Definition

Main Activities

Similar Industries

Additional Resources

About this Industry

For additional information on this industry

www.napeo.orgNational Association of Professional Employer Organizations

www.pacepeo.comProfessional Administrative and Co-Employers

www.census.govUS Census Bureau

The major products and services in this industry are

Co-employed payroll administration

Comprehensive PEO services for large businesses

Comprehensive PEO services for medium-size businesses

Comprehensive PEO services for small businesses

Other


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Revenue vs. employment growth

Products and services segmentation (2015)

45.7%Comprehensive PEO servicesfor medium-size businesses

25.5%Comprehensive PEOservices for small businesses

19.8%Comprehensive PEO services

for large businesses

7.5%Co-employed payroll

administration

1.5%Other


Key StatisticsSnapshot

Industry at a GlanceProfessional Employer Organizations in 2015

Industry Structure Life Cycle Stage GrowthRevenue Volatility Medium

Capital Intensity Low

Industry Assistance None

Concentration Level Medium

Regulation Level Medium

Technology Change Medium

Barriers to Entry Medium

Industry Globalization Low

Competition Level High

Revenue

$141.7bnProfit

$6.7bnWages

$109.3bnBusinesses

3,467

Annual Growth 15-20

3.9%Annual Growth 10-15

6.1%

Key External DriversNumber of employees

Number of businesses

Demand from humanresources and benefitsadministration

Corporate profit

Market Share

TriNet Group Inc.21.9%

ADP LLC19.2%

Insperity Inc.10.3%

p. 25

p. 4

FOR ADDITIONAL STATISTICS AND TIME SERIES SEE THE APPENDIX ON PAGE 33



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Key External Drivers Number of employeesThe number of employees refers to thesize of the nonfarm workforce in theUnited States. An increase in overallemployment leads to a rise in demand forthis industrys services, since industryoperators service clients across all sectorsof the economy. Additionally,employment growth causes some small

businesses to grow to a size at which theywould benet from outsourcing humanresource management. The number of USemployees is expected to increase over2015, presenting a potential opportunityfor the industry.

Number of businessesThe number of businesses refers to thetotal number of businesses in the UnitedStates with at least one employee on theirpayroll. Since small- to medium-sizeenterprises generate the majority ofrevenue for industry operators, an increasein the number of businesses is a key driverof industry revenue. The number of

businesses is expected to increase in 2015.

Demand from human resources

and benefits administrationThe Human Resources and Benefits

Administration industry (IBISWorld

ExecutiveSummaryThe Professional Employer Organizationsindustry comprises organizations thatspecialize in providing human resourcemanagement and administration servicesthrough a co-employment relationship.Industry participants are responsible foremployee administration, such as hiringand reimbursing sta. These companiesserve as the legal employers of theirclients employees, while the clientscontinue to manage their day-to-dayoperations. Overall, industry revenue isexpected to grow an annualized 6.1% over

the ve years to 2015, including growth of6.4% in 2015 and totaling $141.7 billion.

Over the past ve years, demand forprofessional employer organizations(PEOs) has increased dramatically asoverall economic activity recovered and thenumber of small businesses expanded. In

addition, corporate prot has reboundedquickly since 2010, driving new demandfor outsourced human resourceadministration from larger businesses. Inaddition, increased labor-related regulation

and compliance costs have encouragedmore small- to medium-size businesseswith limited resources or legal expertise tooutsource employment-related compliancetasks to industry operators.

Over the next ve years, the industry isexpected to continue performing well asthe number of businesses and employeesin the United States gradually increases.Furthermore, the ability of PEOs to oer a

broader range of services and benets,such as comprehensive retirement plansand health insurance coverage, will boost

the attractiveness of outsourced humanresources (HR) services to smaller

businesses. Overall, industry revenue isexpected to grow an annualized 3.9% to$171.9 billion over the ve years to 2020.However, rising barriers to entry, such asminimum capital and professional auditrequirements, will likely discouragenewcomers from entering the industry.Moreover, major players such as ADP andTriNet are likely to continue expandingtheir share of the market, driven by strongorganic growth and acquisition activity.

Accordingly, the industry is likely tocontinue consolidating, with the numberof enterprises expected to decline at anannualized rate of 0.1% over the ve yearsto 2020.

Industry PerformanceExecutive Summary | Key External Drivers | Current Performance

Industry Outlook | Life Cycle Stage

As the labor market improves, demand for PEOservices will increase


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Industry Performance

Key External Driverscontinuedreport 56111) provides specializedassistance with financial planning,

billing, record keeping and other tasks.This industry provides similaradministrative services and competesdirectly with professional employerorganizations. Accordingly, anincrease in demand from humanresources and benefits administrationincreases external competition andhurts industry performance. Thehuman resources and benefitsadministration industry is expected to

grow in 2015, presenting a potentialthreat to the industry.

Corporate profitCorporate prot refers to prot earned acrossall industries in the United States. Clients aremore likely to hire additional workers whenprotability is high. For organizations in thisindustry, higher corporate prot tends toraise the total number of worksite employeesunder management, which boosts industryrevenue. Corporate prot is expected toincrease in 2015.

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Economic drivers ofperformance

Driven by poor consumer spending andeconomic uncertainty in the immediatepostrecessionary economy, the numberof businesses in the United Statesdeclined during the rst half of theve-year period. In addition, the totalnumber of US employees continueddeclining through 2010, though thistrend has reversed course during thelatter half of the ve-year period. Overall,the number of US businesses is expectedto grow at an average annual rate of0.9% over the entire ve-year period,driven by strong rebounds in 2012 and2014. Similarly, the domestic labor forceis expected to expand 1.6% per year on

average during the same ve-year period,mostly due to strong gains in 2013 and2014. Since operators in the ProfessionalEmployer Organizations industry arereliant on an expanding workforce andan increasing number of businesses,these gains have helped boost industryrevenue from 2011 onwards.

Companies in the Professional EmployerOrganizations (PEO) industry providehuman resource (HR) management andadministration services through aco-employment relationship. In this kindof relationship, industry operators areresponsible for employee administrationand serve as the legal employer whileemployees work for the client on site.Industry operators also pay wages andassociated employment costs toemployees on behalf of clients. Over thepast ve years, the PEO industry has

experienced strong growth, driven byfalling unemployment rates and strongdemand from small- to medium-sized

businesses. Overall, industry revenue isexpected to grow an annualized 6.1% overthe ve years to 2015, including a 6.4%rise to $141.7 billion in 2015.

Steady growth in the number of small-to medium-sized businesses (SMBs) has

been the key driver of industryperformance during the past ve years. Inaddition, increased compliance costsassociated with workers compensation,

health insurance coverage and otheremployment or labor-related regulations atthe federal and state levels has boosted the

share of SMBs that choose to outsource allHR-related duties to PEO serviceproviders. Improving macroeconomicconditions over the past ve years have alsospurred industry growth, with the numberof businesses increasing and resulting inmore job opportunities for Americans.However, the industry is increasinglyfacing competition from a range of similarHR industries, including organizations thatprocess human resource tasks on behalf of

businesses, as well as HR consulting rmsthat help streamline businesses that

manage human capital. Externalcompetition is primarily driven by

businesses that want to outsource onlycertain responsibilities to outside agencies,rather than transfer the entire employeeadministration process to industryoperators. In particular, the industry facesintense external competition from HumanResources and Benets Administrationagencies (IBISWorld report 56111) andPayroll and Bookkeeping Services(IBISWorld report 54121b), both of whichare closely related to the PEO industry.

Indeed, many of the top operators in thisindustry, such as ADP, participate in allthree industries.

CurrentPerformance

Increased businessoutsourcing and strongereconomic activity helpedspur revenue


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Competition andstructure

Overall, industry enterprises are forecastto decline an annualized 0.9% to 3,467companies over the ve years to 2015. Akey driver of this contraction has beenincreased regulation of PEOs at the statelevel. As of early 2015, 43 states hadindustry-specic regulations, whichtypically require licensed PEOs to

undergo regular audits on their nancialstatements and maintain apredetermined minimum level of capitalin the event of tax-related liabilities orpenalties. Such regulations haveincreased barriers to entry over the pastve years, which has subsequentlydiscouraged new entrants from entering

PEOs operate in co-employmentrelationships with client businesses. Aclient business manages business-specicoperations and employees on a day-to-day basis, while the PEO is responsiblefor most if not all of the administrativetasks associated with employment. PEOsprovide a variety of services for theirclients, including payroll, benetsadministration, tax ling, HR guidance,401(k) administration, complianceservices and health insurance coverage.

Workers that are managed through a

PEO agreement are known as worksiteemployees. Industry operators earn aprot by charging a markup on the wagespaid to each worksite employee.

During the past several years, business-and labor-related regulations have becomemore complex across the business sector,

which has raised compliance costs formost small- to medium-sized businesses.In order to focus more eectively on coreoperations, smaller businesses withlimited resources have increasingly turnedto PEOs to manage these activities.

According to the US Small BusinessAdministration (SBA), small-businessowners that do not outsource thesefunctions use between 7.0% and 25.0% oftheir time doing HR-related paperwork.This factor makes industry servicesappealing to business owners, since PEOsgenerate eciencies and lower theadministration costs per employee.

In addition, working with a PEOservice provider typically oers smaller

businesses cost advantages, since larger

PEO providers can negotiate morecompetitive rates on health insuranceand other benets than small businesscan on their own. According to aSeptember 2013 report published by

industry trade organization, The NationalAssociation of Professional EmployerOrganization (NAPEO), HRadministration costs averaged $1,500 ormore per employee for independent

businesses, while these same costsaveraged $1,187 for PEO clients.

According to a more recent reportpublished by the NAPEO, small- tomedium-sized businesses served by PEOproviders had lower instances ofemployee turnover and were less likely tofail, relative to independent businesses.

Such advantages of cost saving andgreater expertise result in a situation

where small- to medium-sized companiessave money and receive better service,especially since local HR sta willunlikely have the same level of expertiseas a PEO. Furthermore, insurance andretirement plan coverage is typicallymore benecial through PEOs, since

worksite employees typically receivebenets that would otherwise only beavailable at larger corporations.

Benefits ofoutsourcing Small businesses haveturned to PEOs so they canfocus resources on coreoperations


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IndustryOutlook

The Professional Employer Organizations(PEO) industry is expected to experienceconsistent growth over the next ve years,as small- to medium-sized businessescontinue to outsource administrativeduties to PEO service providers. Inaddition, the national unemployment rateis anticipated to remain low during thenext ve years, as businesses take on more

employees to satisfy growing consumerdemand. As the national workforce andthe number of US businesses expand,industry operators will have access to alarger pool of potential clients. Lastly, assmall businesses with limited resourcesand lack of expertise face broader andmore complex business-relatedregulations, they will seek to reducecompliance costs and other administrative

burdens by outsourcing theseresponsibilities to industry operators.However, industry operators will continueto face mounting competition from

external industries, many of whichprovide similar services to businessclients, albeit on a smaller scale. Overall,revenue is forecast to grow an annualized3.9% to $171.9 billion over the ve years to2020, including projected growth of 5.2%to an estimated $149.1 billion in 2016.

Expanding businesses Over the next ve years, the ProfessionalEmployer Organizations industry isexpected to benet from improvements in

broad economic factors, such as thenational unemployment rate, corporateprot and the number of US businesses.

In particular, the number of businesses isexpected to rise at a faster annualized rateof 1.6% over the next ve years, while thetotal US workforce is expected to continueexpanding 0.9% per year on average overthe same period. As more businesses enter

the industry. In addition, several majorplayers, particularly TriNet, haveengaged in signicant merger andacquisition activity during this period,

which has subsequently boosted theirmarket share, but has also helped reducethe number of individual companiesparticipating in this industry.

On the other hand, total employmenthas experienced steady growth during thisperiod. Since industry employment asrecorded by the US Census also includes

worksite employees, total employment

has grown steadily over the past ve years

as more small- to medium-sizedbusinesses have decided to outsourceadministrative responsibilities to industryoperators. Overall, industry employmentis estimated to grow at an annualized rateof 2.5% to 2.0 million workers over theve years to 2015. This numberrepresents the total number of sta onPEO books, rather than the number ofactual corporate sta that are directlyinvolved in providing industry services.IBISWorld estimates that the number ofcorporate personnel has grown at a slow

pace during the ve years to 2015.

Competition andstructure continued

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the market, the number of potentialclients available to industry operators willincrease, which will help drive consistentrevenue growth over the ve-year period.

Industry growth will primarily be fromwhite-collar clients in the professionalservices sector because of the increasedcosts associated with insurancepremiums and the risks that accompany

businesses within the manufacturing

sector. Furthermore, industry operatorsthat primarily work with manufacturingclients will likely face a declining share ofthe market, as domestic manufacturingactivity is increasingly oshored.

Accordingly, the industrys professionaland technical services, nancial andinformation technology market segmentsare expected to grow as a share ofindustry revenue over the next ve years.

Expanding businessescontinued

The increase in businesses will becomplemented by a growing businesspreference for outsourcing. Companies inthe United States are expected toincreasingly focus on developingcompetitive advantages in theirrespective industries, which is possiblethrough the outsourcing of humanresources administration and focusing oncore functions. This is especiallyimportant for small- to medium-sized

businesses (e.g. companies with fewerthan 500 workers on their payroll), which

represent the vast majority of industryclients. According to the National

Association of Professional EmployerOrganizations (NAPEO), the industrysmain trade association, the average

workforce size among PEO clients is lessthan 20 employees. These small

businesses typically have a limited abilityto eectively manage typical HRfunctions, such as screening employees,managing payroll and navigating taxationand labor-related compliance issues.PEOs allow small businesses with limitedresources to focus on core operations

while outsourcing such administrativetasks to industry operators. In addition,outsourcing employment-related tasks

allows small businesses to providecompetitive retirement and insuranceplans to their workers that they wouldotherwise not be able to aord. NAPEOstates that more than 95.0% of PEOs

provide a comprehensive retirement planto their clients, though smaller businessclients with limited resources may stillchoose not to participate in these plans.In contrast, only about 16.0% ofcompanies with less than 10 workers and30.0% of businesses with 10 to 49employees oer similar retirement plans,according to estimates from theEmployee Benet Research Institute. Theprovision of benets such as healthinsurance and worker compensationcoverage has been a key driver of industryrevenue during the past ve years, and islikely to remain the key noneconomicdrivers of industry performance over thenext ve-year period.

Outsourcing trendsThe trend of businessoutsourcing is expectedto continue in thecoming years


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Over the next ve years, the industry islikely to face increased regulation asmore businesses outsource their payrollresponsibilities to PEO service providers.In particular, the recently ratied SmallBusiness Eciency Act (SBEA) willcreate a standardized, national regulatoryframework for the industry that includesa certication process for licensed PEOs,minimum capital requirements and otherstandards. The SBEA also recognizes aPEOs legal right to collect and remitfederal income and payroll taxes on

behalf of its client, while maintaining taxcredit eligibility for businesses that

choose to outsource their employmentduties to industry operators. The SBEAhas already passed Congress, although it

will formally go into eect at thebeginning of 2016. This framework islikely to encourage more businesses tooutsource HR duties to PEOs, although

these new federal requirements are alsolikely to raise barriers to entry.

Increased regulation

Industry structure Like the current ve-year period to 2015,the number of industry participants islikely to continue declining over the nextve years, with rising barriers to entrypartially oset by strong incentives to enterthe rapidly growing PEO market. Morespecically, the number of enterprises isprojected to decline an annualized 0.1% to

3,442 companies over the ve years to2020. On the other hand, industryemployment is expected to continue risingsteadily as industry operators continue to

grow their client bases and take on moreworksite employees, in addition to hiringnew corporate personnel to manage clientrelationships. Overall, industryemployment is expected to grow 2.7% per

year on average to 2.3 million workers overthe same ve-year period. However, theindustry is likely to continue facing high

levels of competition internally, as well asfrom other industries that provide similarHR-related services to small and medium-size businesses.

The industry is likely toface increased regulatorypressure moving forward


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Industry PerformanceThe industry has consistentlygrown faster than GDP

Industry employment continues to grow steadily

Market acceptance of industryservices is rapidly growing

Life Cycle Stage

SOURCE: WWW.IBISWORLD.COM.AU

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15

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%Growthinshareofeconomy

% Growth in number of establishments

-10 -5 0 5 10 15 20

DeclineShrinking economic

importance

Quality GrowthHigh growth in economicimportance; weaker companiesclose down; developedtechnology and markets

MaturityCompanyconsolidation;level of economicimportance stable

Quantity GrowthMany new companies;minor growth in economicimportance; substantialtechnology change

Key Features of a Growth Industry

Revenue grows faster than the economy

Many new companies enter the market

Rapid technology & process change

Growing customer acceptance of product

Rapid introduction of products & brands

Human Resources & Benefits Administration

Financial Planning & Advice

Employment & Recruiting Agencies

Workers Compensation& Other Insurance Funds

Office Staffing & Temp Agencies

Professional Employer Organizations


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Industry Life Cycle The Professional Employer Organizationsindustry is in the growth stage of itseconomic life cycle. The industry ischaracterized by growth exceeding that ofthe overall economy, an increase in thenumber of industry players andincreasing market acceptance of industryservices. Over the past ve years, theindustry has experienced success in line

with improved macroeconomicconditions and strong recovery in small

business performance.Unlike most other growth industries,

the number of industry participants hasactually decreased during the past ve

years, and is likely to continue decreasingover the next ve years. This trend hasmostly been driven by substantial mergerand acquisition activity, as well as rising

barriers to entry in the form of newfederal and state-level minimum capitalrequirements. Furthermore, largeroperators have a signicant competitiveadvantage over their smallercounterparts, since large PEOs cannegotiate lower health and workers

compensation rates from upstreamhealth insurance providers. Accordingly,major PEOs such as Insperity or Tri-Netcan provide the lowest service rates fortheir clients, which trends to drivesmaller, less competitive operators out ofthe industry. Despite declining industryparticipation, the industrys four largestoperators have all experiencedimpressive organic growth during thepast ve years, which has helped propelthe industry forward.

Industry value added (IVA), which

provides a measure of an industryscontribution to the overall economy, isprojected to grow an annualized 4.2%over the 10 years to 2020. In contrast, theoverall economy is forecast to grow 2.5%per year on average over the same10-year period. Growth in IVA hasprimarily been driven by strong revenuegrowth and rising prot margins, asindustry services are becomingincreasingly popular with small tomedium-size businesses across a varietyof sectors.

This industryis Growing


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Products & Services Operators in the Professional EmployerOrganizations industry provide a widerange of comprehensive employerservices, including benets and payrolladministration; health and workerscompensation insurance programs;personnel records management; andtraining services. However, not all clientsuse every service that the industry oersand not all clients employees are giventhe same benets. For example, whilemany operators provide a 401(k)retirement plan, some employers mayexclude temporary or part-time sta fromthese benets. Similarly, some smallerPEOs with limited resources may simplyoer payroll and benets administration

without access to group health insurance.However, the majority of professionalemployer organizations (PEOs) provide acomprehensive selection of employment-related services to their clients.

Comprehensive PEO servicesThe bulk of industry revenue is generatedthrough full-service PEOs that providealmost all administrative employmenttasks, including payroll, insurance and

benets administration. This segmenthas consistently grown as a percentage ofthe total market, since a growing share ofcompanies, particularly small to mediumsize businesses, are outsourcing theseadministrative tasks as labor-relatedregulations continue to evolve. PEOs alsogenerate more revenue from this service

because the value-added nature ofco-employment services allows them tocharge a higher premium. Industryoperators engage with their businessclients through a client service agreement(CSA). This agreement transfers thepayroll, workers compensation, benetsadministration and most other employee-level duties to the PEO, while the

Products & MarketsSupply Chain | Products & Services | Demand Determinants

Major Markets | International Trade | Business Locations

KEY BUYING INDUSTRIES23 Construction in the US

Construction operators are a major client group for this industry because they can helpmitigate risks associated with workers compensation.

31-33 Manufacturing in the USCompanies in the manufacturing sector use this industry because it can help mitigate risksassociated with workers compensation.

42 Wholesale Trade in the USWholesale trade operators are a large client group for this industry.

52 Finance and Insurance in the USFinance companies use PEOs in order to obtain a cost advantage and to offer experiencedemployees competitive benefits.

54 Professional, Scientific and Technical Services in the US

Small professional services companies use PEOs for the cost advantages and to offerexperienced employees competitive benefits.

KEY SELLING INDUSTRIES

52393 Financial Planning & Advice in the USFinancial planners provide client employees with services such as 401(k) planning.

52519 Workers Compensation & Other Insurance Funds in the USPEOs must have workers compensation insurance for on-site employees.

54151 IT Consulting in the USSupply of payroll and other employee related software services for use and access by internetby the clients of operators of this industry.

Supply Chain


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Products & Markets

Products & Servicescontinued

employer (client) retains responsibility ofbonus and commission, and compliancewith day-to-day or company-specicresponsibilities, such as compliance withOSHA and EPA regulations.

IBISWorld expects this segment toaccount for a combined 91.0% ofindustry revenue in 2015. Within thissegment, PEO services for small

businesses with less than 50 workersaccount for an estimated 25.5% ofrevenue, while large businesses withmore than 500 workers on their payrollaccount for 19.8% of revenue. Medium-size businesses with 50 to 499 workerson their payroll account for 45.7% ofrevenue, thereby representing theindustrys largest service segment.

Payroll-only PEO servicesThe payroll, taxes and complianceservices segment is similar to the payroll,health and welfare benets segment withthe exception that it does not includehealthcare insurance and benetsadministration. The segment alsoincludes compliance, tax and workerscompensation services for clients.Businesses that strictly use co-employedpayroll services do not providecomprehensive or full coverage of theiremployees across all benets; many

companies reduce health benets as aneasy way to cut costs or requireemployees to pay the full cost themselves.PEOs do not generate as much revenuefrom this segment because there arefewer associated fees. In general, smaller

businesses with less than 50 employeesare more likely to seek payroll-only PEOservices in place of the more costly

full-service option.Despite stronger demand from small

businesses, this segment has declined asa share of revenue because of increasedcompetition from other industries. Forexample, the Human Resources andBusiness Administration industry(IBISWorld industry report 56111) oersmany of the same services, althoughoperators within this industry do notengage in a co-employment agreement

with clients. Similarly, operators withinthe Payroll and Bookkeeping Servicesalso oer similar HR services to small

businesses. Rising external competitionfrom these industries is likely to continueshrinking this segments share of revenueover the next ve years.

Other servicesPlayers in this industry also provideservices such as training andperformance management. While not a

Products and services segmentation (2015)

Total $141.7bn

45.7%Comprehensive PEO servicesfor medium-size businesses


for small businesses


for large businesses

7.5%Co-employed payroll

administration

1.5%Other



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Products & Markets

DemandDeterminants

Demand for oce services typically followseconomic trends, including demand forlabor and total number of people employed.Furthermore, small business growth can beshuttered with downturns in the economy.The recession resulted in a substantial dropin employment as businesses shed jobs to

cut costs and business bankruptcies causedthe pool of existing and would-be clients todecline. Many rms in the ProfessionalEmployer Organizations (PEO) industryexperienced a decline in demand for theirservices as their clients lay o sta. On theother hand, times of economic growth boostdemand for the industrys services throughincreased employment and the growth ofsmall businesses. In general, demand forindustry services is driven primarily by thenumber of new businesses and small

business growth, since these are the key

markets for co-employment services.When the unemployment rate declines,

industry performance improves becausethere is a larger pool of potential clientemployees. New business formation has apositive eect on industry demand becausethere are more potential companies thatneed its services. Likewise, the number of

businesses declaring bankruptcy increasesduring a recession, causing the number of

businesses using PEOs to decrease.Furthermore, some companies may stopoutsourcing payroll and administrationservices when the economy declines in anattempt to cut costs.

Relative cost to downstream demandThe industry largely provides services for

small businesses, a market segment thatconstitutes organizations with limitedresources. Due to their limited resources,small businesses are less likely to establishor maintain ecient human resourcesdepartments. These businesses have a

greater tendency to outsourceadministrative tasks because it provides aless costly solution than hiring additionalsta to manage these duties. Therefore,demand for PEO services can largely bedetermined by the price of oceadministration relative to the cost of

establishing and operating their own humanresources and other oce administration.

Demand for PEO services tends to risewith the complexity of business legislationand associated regulations. In order toremain compliant with rules and regulationregarding employees, many companies optto use rms that specialize in those tasks.Consequently, businesses operating inindustries with a higher degree of legislationand regulatory supervision are more likelyto outsource. A change in regulatoryrequirements within an industry can

increase demand for PEOs becauseregulations add hurdles that small

businesses might not be able to overcome,or thoroughly understand, without outsidehelp. Accordingly, outsourcing of noncorefunctions has been on the rise over the pastfew decades as job-related regulations have

become more complex. Businesses alsooutsource administrative tasks to streamlinetheir operations and devote more resourcestoward actual business operations.

Demand for this industrys services isalso aected by other industries that oersimilar services. Industries that oer

businesses outsourcing solutions, such asthe Human Resources and Benets

Administration industry (IBISWorldreport 56111), are a key source of externalcompetition for this industry. However,most of the major players in this industry,including ADP and Paychex, oer servicesin both industries, so there can be amitigating factor for those operators.

Products & Servicescontinuedproduct or service, industry players alsogenerate revenue from professionalservice fees. IBISWorld estimates that

service fees and other sources of revenueaccount for the remaining 1.5% ofindustry revenue.


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Products & Markets

Major Markets

Firms operating as professional employerorganizations (PEOs) have a highlydiverse range of clients. The majority ofindustry clients are small to mediumenterprises with ve to 500 employees.

According to industry trade organizationNAPEO, the average client served by thisindustry has 20 employees. Firmsoutsource work to ensure they are

compliant with regulatory requirementsand to focus on core functions rather thanadministrative tasks. Industry operatorsalso tend to focus acquiring clients that

work in safe environments where there islow risk for injury and other employeeissues because of their lack of presence on

worksites. Since industry operatorsassume most or all employee-related risksfrom their client, many operators choosenot to provide PEO services to business

verticals with higher employee turnoverrates or risk of injury. Accordingly, thedistribution of industry revenue is moreheavily skewed toward service or retail-oriented businesses than the US small

business market as a whole.

Professional and technical services sectorThe professional services sector, whichincludes a wide range of service-orientedindustries, is estimated to account for23.3% of industry revenue in 2015. This

segment also involves a low level of risk tohuman capital and, therefore, is a popularmarket for PEOs. There are also a veryhigh number of small to medium sizedenterprises operating in this market,

which creates high demand for industryservices. Over the past ve years, thismarket has performed in line with theoverall industry and has represented a

stable portion of industry revenue.

Manufacturing, distributionand retail marketsThe manufacturing, wholesaledistribution and retail markets accountfor a combined 23.0% of industryrevenue in 2015. This segment primarilyrepresents small to medium sizedenterprises that require human resourcesmanagement and administration servicesthrough a co-employment relationship tofocus on core functions and reduceadministrative time. Over the past ve

years, this segments share of industryrevenue has remained steady, with

weaker domestic manufacturing andwholesale trade recovery oset bystronger recovery in retail sales.

Information technologyThe computer and informationtechnology market accounts for an

Major market segmentation (2015)

Total $141.7bn

23.3%Professional and technical

service sectors

23.0%Manufacturing, retail

and wholesaling

20.9%Other

19.8%Information technology

13.0%Financial



17/36


Products & Markets

International Trade Almost all players in this industry onlyserve the domestic market because of the

need to understand varying and complexemployment laws and the state-basedregulation and registration procedures.Furthermore, most of the clients of thisindustry are small businesses that do notoperate on a global scale. There is aconsiderably large market of small

businesses that have yet to beginoutsourcing domestically, so the

incentive to expand operations overseasis minimal. Despite the localized nature

of industry services, the majority of largeoperators, including ADP, Insperity andPaychex, have signicant operationsabroad. However, these internationaloperations are primarily concerned withPayroll and Bookkeeping Services(IBISWorld report 54121b) or HRconsulting (IBISWorld report 54161b),neither of which is PEO-related.

Major Marketscontinuedestimated 19.8% of industry revenue in2015. PEOs provide services to manysmall to medium size computer andinformation technology (IT) rms

because of their growing importance inthe US economy, their low human capitalrisk and business desire to focus on corefunctions rather than on administrativetasks. Industry operators are able to paysignicantly lower insurance premiumsfor these clients compared with morelabor-intensive jobs such as those inmanufacturing and construction.

Accordingly, the computer andinformation technology market hasgrown as a proportion of revenue overthe past ve years. PEOs are expected tocontinue to focus on providing services tolow risk industries and the growingimportance of the computer and ITmarket will result in this segment

growing as a portion of revenue over thenext ve years.

Financial marketsThe nance, insurance and real estatemarket is estimated to account for 13.0%of industry revenue in 2015. Similar tothe computer and IT market, PEOs preferto provide services to this market becauseof the relatively low risk to employees

while on job sites. Companies in thissegment include those specialized incommercial banking, life and health

insurance, and sales and brokerage ofreal estate. Over the past ve years, thissegments share of the industry hasincreased signicantly, although thisexpansion was driven primarily bypostrecessionary recovery as nancialmarkets rebounded and commercial

banks expanded their workforces.


18/36


Products & Markets

Business Locations 2015

MO1.3

VT0.1

MA1.3

RI0.2

NJ2.6

DE0.1

NH0.3

CT0.3

MD1.4

DC0.1

1

5

3

7

2

6

4

8 9

Additional States (as marked on map)

AZ3.1

CA8.8

NV0.7

OR1.1

WA0.9

MT0.5

NE0.3

MN1.2

IA0.5

OH4.7

VA1.9

FL11.1

KS0.5

CO1.6UT1.2

ID0.5

TX7.8

OK1.6

NC2.7

AK0.2

WY0.1

TN1.4

KY0.7

GA3.1

IL4.0

ME0.3

ND0.1

WI2.3 MI

15.5PA2.2

WV0.4

SD0.1

NM0.2

AR0.3

MS0.5

AL0.9

SC1.0

LA1.6

HI0.5

IN2.2

NY4.0 5

6

78

321

4

9


Establishments (%)

Less than 3%

3% to less than 10%

10% to less than 20%

20% or more


19/36


Products & Markets

Business Locations This industry is primarily concentrated inthe Great Lakes and Southeast regions ofthe United States. Regional spread can be

based on a variety of factors, such asproximity to client industries. Stategovernment legislation and regulationscan also have a signicant eect on thisindustrys regional spread. The increasingpopularity of outsourcing is expected tomake the industry more common acrossa wider array of client industries and inmore rural areas.

Demand for the industrys services is

largely from small to medium-sizebusinesses in the professional services,wholesale distribution and retailindustries, of which there is a largeconcentration in the Great Lakes region.Consequently, the region accounts for anestimated 28.7% of establishments.However, this region has a large numberof relatively small establishments, asevidenced by its relatively low share ofrevenue and employment compared tothe number of regional establishments.

With about 25.6% of industry

establishments, the Southeast has thesecond largest number of PEOs in theUnited States. The region has a largershare of industry revenue than itspercentage of oces, due to the size of

establishments in the region. Forexample, Florida has more than 20.0% ofthe establishments with more than 500employees. Floridas presence nationallyand regionally is dominating, accountingfor 43.8% of regional industry

establishments and 11.1% ofestablishments nationwide. Furthermore,Florida is home to the largest industryoces in the country and generates thelargest portion of industry revenue.

%

30

0

10

20

South

west

West

GreatLakes

Mid-Atlantic

NewEng

land

P

lains

RockyMoun

tains

Southeast

Establishments

Population

Distribution of establishments vs. population



20/36


Key Success Factors Proximity to key marketsTo be located close to client industries andregions that have an above averagetendency to enter into PEO arrangements.

Ability to quickly adopt new technologyTo be quick to adopt new payroll processing,tax payment and other benet processingsoftware and systems and delivery to clientsand employees via the internet to increaseeciency and productivity.

Ability to effectively manage debtorsTo eectively manage debtors andpayments from clients of payroll and other

benet charges on time and as required.

Ability to manage external

(outsourcing) contractsTo effectively manageoutsourced contracts for anyPEO arrangements, particularlyin relation to employees whoare employed underco-management arrangements.

Understanding government

policies and their implicationsTo have a thorough knowledge andunderstanding of state and federalemployment regulations as well aslegislation which directly affects thisindustrys operators.

Market ShareConcentrationThe Professional Employer Organizationsindustry has a moderate level ofconcentration, with the four largestoperators expected to account for 53.7% ofindustry revenue in 2015. Despite thepresence of a few national PEO serviceproviders, the industry as a whole isfragmented because of relatively low

barriers to entry and the need to be inclose proximity with workforce locations.Overall, the industry is characterized byfour large operators with a nationalpresence and hundreds of smaller

operators that operate regionally orlocally. According to industry tradeassociation (NAPEO), the averageindustry operator manages the payroll andHR functions of 6,200 worksite employees(WSEs). Major player TriNet managedover 288,000 WSEs in 2014, whilesecond-largest operator ADP managedover 340,000 WSEs in that year.

Industry concentration has increasedover the past ve years, as larger operatorssuch as TriNet and ADP have continued toacquire smaller competitors and outperform

the industry as a whole. For example, TriNetacquired Strategic Outsourcing Inc. in 2012,

followed by the acquisition of AmbroseEmployer Group in 2013, both of which

have signicantly expanded the companysshare of the market.

Over the ve years to 2020, new rmsare expected to continue entering theindustry to meet rising demand fromsmall businesses. On the other hand,larger operators will likely continue toacquire smaller competitors to increasetheir national presence. Furthermore,rising barriers to entry, such as minimumcapital requirements imposed by statelegislation, will likely discouragenewcomers from entering the industry.

Accordingly, industry market share isexpected to rise over the next ve years.

Competitive LandscapeMarket Share Concentration | Key Success Factors | Cost Structure Benchmarks

Basis of Competition | Barriers to Entry | Industry Globalization

Enterprises by employment sizeNo. of employees Share (%)

0 to 4 27.4

10 to 19 9.6

20 to 99 26.5

100 to 499 17.2

Total 100.0

SOURCE: US CENSUS BUREAU COUNTY BUSINESS PATTERNS

Level

Concentration in thisindustry is Medium

IBISWorld identifies250 Key SuccessFactors for abusiness. The most

important for thisindustry are:


21/36


Competitive Landscape

Cost StructureBenchmarks

The cost structures of rms in thisindustry can vary based on a variety offactors, including the size and number ofclients. In comparison to other industries

within the professional business servicessector, this industry is characterized by

very high wage costs, low rent and utility

costs and very low depreciation costs.Wages account for the greatest sharebecause industry operators by denitionassume their clients entire range ofpayroll responsibilities. In contrast, thelabor-oriented nature of industry serviceskeeps depreciation costs down.

ProfitIndustry prot, dened as earnings

before interest and taxes, is expected toaccount for 4.7% of industry revenue in2015, up from 4.5% in 2010. Industry

prot has increased over the past veyears, as demand for PEO services hasrebounded strongly and a greaterpercentage of small to medium size

businesses have become more willing tooutsource HR-related duties to industryoperators. However, prot margins have

been constrained by intensifying externalcompetition from other industries andrising compliance costs associated withthe rapidly evolving labor-relatedregulatory environment.

During the rst half of the ve-yearperiod, a lack of small businessdevelopment has led operators to competemore intensely over existing users of theindustrys services, oering lower prices inan attempt to take market share fromcompetitors and driving down margins inthe process. However, these trends havereversed in later years, with the number ofsmall businesses rising 1.5% in 2014 andan estimated 2.0% in 2015. During the

next ve years, increased compliancecosts, particularly those associated withthe Aordable Care Act, will likelyencourage more businesses to outsourceemployee management and otheradministrative tasks to industry operators.In turn, strong demand for industry

services will allow operators to oer abroader range of value-added PEOservices, thereby boosting industry protmargins over the ve-year period.

WagesThe payroll of client employees is by farthe largest cost that industry playersmust take into consideration. In additionto remitting payroll, industry operatorsdirectly pay other employee-related costs,including payroll taxes (social securityand Medicare taxes), other retirement

benet costs and workers compensationexpenses. In 2015, wage costs associated

with worksite employees are expected toaccount for 73.1% of total industryrevenue. Although costs associated withemployees wages and benets are

variable, they tend to be relatively stableand have little impact on prot margins;however, the industry has had to manageincreasing workers compensation andhealth benet costs for the past decade.

In addition, operators pay salaries andcommissions to corporate workers,although these costs constitute arelatively a small portion of industryrevenue. Sta at large industry operatorsoften include sales, legal, nance, IT,

benets and administrative supportpersonnel. In 2015, IBISWorld expectsthat corporate employee wages and

benets account for just 4.0% of industryrevenue across all operators. Combined

with all other labor-related costs, total

Key Success FactorscontinuedAbility to pass on cost increasesSuccessful companies have contractualarrangements that allow them to

easily pass on workers compensation,health insurance and other costincreases to clients.


22/36



Basis of Competition Internal competitionIndustry operators primarily compete onthe basis of service quality, scope,technical capacity, reputation and to alesser extent, price. The provision ofsuperior choices and higher quality

benet plans to leased employees playsan important role for companies

considering dierent PEOs. In addition,industry players must have the capacityto research and understand how existingor upcoming employment regulationsaect their clients businesses. The size ofindustry players can also provide acompetitive advantage. For example,larger operators are typically able to

Cost StructureBenchmarkscontinued

wages add up to 77.1% of averageindustry expense in 2015.

Other costsOther operating expenses include rentalexpenses related to the lease of salesoces and client service centers,marketing expenses and otheradministrative fees such as miscellaneouslegal, consulting and accountingexpenses. Relatively small premises arerequired because co-managed employees

are located on the clients premises.Accordingly, rent and utilities expensesare expected to account for just 1.5% ofindustry revenue, while depreciationcosts represent a tiny 0.1% share.Operators also engage in marketing tocapture new business and dierentiatethemselves from other companies in theindustry. Marketing costs are expected toaccount for 2.0% of revenue in 2015. Allother expenses account for the remaining11.6% of industry revenue.

Sector vs. Industry Costs

nProfit

nWages

nPurchases

nDepreciation

nMarketing

nRent & Utilities

nOther

Average Costs of

all Industries in

sector (2015)

Industry Costs

(2015)

0

20

40

60

Percentage

ofrevenue

80

100


6.6 4.7

11.61.5

2.0 0.13.0

77.1

17.7

4.42.32.1

15.7

51.1


23/36



Barriers to Entry Barriers to entry are rising due to anincrease in state and federal governmentregulations; furthermore, many states arenow requiring operators to be licensed. 43states currently require licensing,registration and certication for PEOs,though this number is expected to rise in the

coming years due to the recently passedSmall Business Eciency Act (seeRegulation and Policy section). Industryoperators must have extensive knowledge ofstate and federal employment legislationand regulations in order to ensure thateective employee insurance and other

benet payments are provided and allemployment regulations are being adheredto. These laws, which vary by state, arecontinuing to change based on various courtcases and their interpretations. Accordingly,the variance in laws among states can makeit dicult for existing PEOs to enter newregions. Over the next ve years, state andfederal governments are expected to passmore industry-specic regulations to ensurethat workers compensation, retirement andother benets are being provided and that

reserves are adequate. These factors willultimately limit the number of entrants intothe industry because they pose an additional

barrier to entry.Another barrier to entry may also arise

in nding insurance brokers to provideadequate and suitable workerscompensation and other coverage,particularly in areas such as healthinsurance. This factor can be particularlytroublesome for PEOs that oer theirservices to higher-risk industries, such asdurable goods manufacturing or theagriculture sector.

Basis of Competitioncontinuednegotiate better rates on retirement andinsurance plans from upstream sellingindustries (e.g. Workers compensationand insurance funds), which allows theseoperators to pass o these savings totheir clients in the form of lower servicefees. Lastly, the provision of software as aservice (SaaS) and other technology-driven service platforms may giveoperators a competitive advantage overoperators that still rely on traditional

benets administration methods.

External competitionThis industrys primary source of externalcompetition is from in-house HR

departments. The industrys primaryclients are small and medium sizedcompanies that are too small to support afull-time HR sta. As a result, the larger thecompany, the less likely they are to usePEO services. External competition to thisindustry also occurs from operators inindustries that provide similar outsourcedservices, such as the Human Resources andBenets Administration industry(IBISWorld report 56111). Externalcompetition is primarily driven by

businesses that want to outsource only

certain responsibilities, rather than transferthe entire employee administration processto industry operators.

Barriers to Entry checklist

Competition High

Concentration Medium

Life Cycle Stage Growth

Capital Intensity Low

Technology Change Medium

Regulation & Policy Medium

Industry Assistance None


Level & Trend

Barriers to Entryin this industryare Medium andIncreasing

Level & Trend

Competition inthis industry isHigh and the trendis Increasing


24/36



IndustryGlobalizationIndustry globalization is low and steady,mainly due to complex employment lawsand regulations that vary across countriesand are not easily transferable or readilyadministered by a global operator.Consequently, the industrys largest playersare all based in the United States. Although

some operators, such as ADP and Insperity,have a presence abroad, their respectivePEO divisions are primarily concerned withdomestic operations. Accordingly, thelocalized nature of industry servicesensures that industry globalization willremain low over the next ve years.

Level & Trend

Globalization in thisindustry is Low andthe trend is Steady


25/36


Player Performance TriNet is a leading PEO andcomprehensive provider of other humanresource management services to small-

and medium-sized businesses in theUnited States and Canada. Initiallyfounded in 1988 as a small, family-ownedHR services rm, the company nowoperates in all 50 states and serves

businesses across all sectors. Thecompany generated total service revenueof $2.2 billion in 2014 and employed2,057 corporate personnel. In 2014,TriNet completed its initial publicoering after operating as a privatelyowned company for most of the ve-yearperiod. Like most of its competitors, the

company serves its clients through acloud-based software as a service (SaaS)platform that allows clients to managetheir employees payroll and benetsremotely through an internet browser orsmartphone app.

TriNet has outperformed the industryas a whole during the past ve years,driven primarily by several major

acquisitions and some organic growth.For example, the company acquiredStrategic Outsourcing from the privateequity rm Clarion Capital Partners inlate 2012, which added over 66,000

worksite employees to the companysportfolio. Earlier that year, the companyacquired AccordHR, which furthersolidied the companys presence in theSoutheast. These two acquisitions

boosted the companys share of themarket signicantly, with industry-relevant service revenue rising an

impressive 61.3% in 2013. More recently,the company acquired AmbroseEmployer Group, which added anadditional 13,000 worksite employeesand 1,000 business clients to thecompanys customer base. The company

Major CompaniesTriNet Group Inc. | ADP LLC

Insperity Inc. | Other Companies

48.6%Other

TriNet Group Inc. 21.9%

ADP LLC 19.2%

Insperity Inc. 10.3%


Major players(Market share)

TriNet Group Inc.Market share: 21.9%

TriNet Group - financial performance*

YearSales

($ million) (% change)Revenue

($ million) (% change)

OperatingIncome


2010 9,406.2 N/C 906.2 N/C 37.1 N/C2011 8,740.4 -7.1 840.4 -7.3 57.3 54.4

2012 11,019.1 26.1 1,019.1 21.3 67.5 17.8

2013 19,244.3 74.6 1,644.3 61.3 56.2 -16.7

2014 27,793.5 44.4 2,193.5 33.4 47.5 -15.5

2015 31,094.5 11.9 2,521.2 14.9 58.2 22.5

*Estimates; Sales refers to gross billings, which include wages paid to worksite employees

SOURCE: ANNUAL REPORT AND IBISWORLD


26/36


Major Companies

Player Performance Founded in 1949 and headquartered inRoseland, NJ, Automatic Data Processing(ADP) is the largest business outsourcingrm in the United States. The company

oers a broad variety of oceadministration services, including payroll,talent management, HRM, retirementservices and benets administration. ADPprovides services to business clients of allsizes, although the company derives thelargest portion of its sales from large

businesses. In 2014, the company served435,000 small clients (businesses with anaverage workforce of 10 employees),55,000 mid-market clients (businesses

with an average workforce of 200employees) and more than 200 largeclients (businesses with an average

workforce of 4,000 employees). Across allbusiness segments and geographic areas,ADP served 637,000 business clients in125 countries and generated total netsales of $12.2 billion in 2014. Despite arapidly expanding global presence,domestic operations have representedover 80.0% of annual revenue during thepast ve years.

For most of the ve-year period, ADPoperated through three businesssegments: employer services, professionalemployer organization services and dealer

services. In late 2014, the companyannounced plans to spin o its dealerservices segment, which providedcomputer software for automotive,motorcycle and heavy machinerycompanies, in order to focus moreeectively on its other two segments.Similar to other industry players, ADPgenerates a large portion of its revenuefrom payroll and benets administrationoperations, which are not industryrelevant. Although the company providesits services to employers worldwide, thePEO services segment only operates in theUnited States. With client serviceagreements with over 350,000 workplaceemployees nationwide, ADP is the largestPEO rm in the United States in terms ofclients served.

Financial performanceService revenue from ADPs PEO servicessegment is expected to rise an annualized

Player Performancecontinuedcurrently serves over 11,000 businessclients and co-employs 288,000 worksiteemployees across all 50 states. Thecompany had gross billings of over $25.0

billion in 2014, up from just $9.4 billionin 2010.

The company segments its operationsinto two broad categories: professionalservices and insurance services. Revenuefrom both segments is industry-relevant,since the company provides both servicesas part of a comprehensive PEOagreement with its clients. In 2014, net

sales of professional services (e.g. payrolland retirement plan administration)accounted for 16.0% of service revenue,

with insurance services (e.g. healthinsurance and workers compensation)generating the remaining 84.0% share.

Financial performanceTriNets service revenue from industry-relevant operations, which is measuredas gross billings minus wages paid to

worksite employees, is expected to growan annualized 22.7% to $2.5 billion overthe ve years to 2015. As mentionedabove, strategic acquisitions were the keydriver of strong company performanceduring this period, although the companyhas also experienced strong organicgrowth in line with rising demand forindustry services from small businesses.

In 2015, total gross billings are expectedto reach $31.1 billion, up from just $9.4

billion in 2010. TriNet is the industryslargest PEO provider in terms of gross

billings, accounting for a 21.9% share ofindustry revenue in 2015.

ADP LLC

Market share: 19.2%


27/36


Major Companies

Player Performance Founded in 1986, Insperity Inc. is aTexas-based human resource and

business solutions provider withoperations nationwide. Headquarteredin Kingwood, TX, the company currentlyhas 57 US oces and employs more than2,300 corporate personnel. In early2011, the company changed its namefrom Administa to Insperity to addressclient concerns that it operated as atemporary stang agency instead of aPEO service provider.

Insperity was one of the rstcompanies to provide comprehensivePEO services to US business clients,although the company has gradually

broadened its service portfolio in recentyears. Insperity provides PEO servicesthrough two major brands, Workforce

Optimization and WorkforceSynchronization. In addition to itsfull-service PEO segment, the companyalso oers per-service human capitalmanagement solutions, payroll services,recruiting assistance and employmentscreening. The company provides theseservices to an additional 100,000

business clients that represent twomillion employees. However, revenuefrom these non-PEO services account fora relatively small portion of totalcompany sales.

The company primarily serves small-to medium-sized businesses in theprofessional services, nancial andinformation technology sectors. Its

web-based employee service centerprovides automated services and links to

Player Performancecontinued15.0% to $2.7 billion over the ve years to2015. ADP has consistently outperformedthe industry as a whole during the ve-

year period, driven primarily by organicgrowth and relatively little acquisitionactivity. In particular, the company hasundertaken an aggressive expansion andsales strategy, which has boosted thecompanys worksite employee count from

just 211,000 workers in 2010 to over

340,000 workers at the end of 2014. In2014 alone, the company experienced animpressive 15.0% increase in worksiteemployees and clients, which boosted PEOservices revenue by 15.1% in that year. In2015, industry-relevant revenue isexpected to continue rising impressivelyas the company continues to gain newclients and increases its worksiteemployee count.

ADP (PEO Services segment) - financial performance*

YearSales



OperatingIncome


2010 13,315.1 N/C 1,316.8 N/C 127.2 N/C

2011 15,874.3 19.2 1,543.9 17.2 137.3 7.9

2012 18,287.7 15.2 1,771.4 14.7 171.1 24.6

2013 20,166.9 10.3 1,973.2 11.4 199.7 16.7

2014 23,925.7 18.6 2,270.9 15.1 234.3 17.3

2015 27,171.0 13.6 2,651.1 16.7 307.9 31.4



Insperity Inc.Market share: 10.3%


28/36


Major Companies

Player Performancecontinuedits clients, regionalized data processingfor payroll and benets transactions fromfour main oces. In 2013, the companylaunched an automated recruitmentmanagement solutions system that helps

businesses track, sort and organize jobapplicant information.

Financial performanceInsperitys service revenue fromindustry-relevant operations, which ismeasured as gross billings minus wagespaid to worksite employees, is expected

to grow an annualized 8.4% to $2.4billion over the ve years to 2015.Performance during this ve-year period

was driven primarily by strong organicgrowth and expansion into new markets.In particular, Insperity served an averageof 130,000 worksite employees permonth in 2014, up from an average of107,000 workers per month in 2010.Furthermore, average monthly gross

billings per worksite employee increasedfrom $7,919.00 in 2010 to over$9,044.00 in 2014. In 2015, industry-relevant gross billings are expected toreach $14.6 billion, up from $9.6 billionin 2010. Gross billings include all wages

paid to worksite employees, and aretherefore the most appropriate measureof performance for this industry.

Insperity Inc. (industry-relevant operations) - financial performance*

YearSales



OperatingIncome


2010 9,608.1 N/C 1,719.8 N/C 37.1 N/C

2011 10,999.7 14.5 1,976.2 14.9 57.3 54.4

2012 12,153.5 10.5 2,158.8 9.2 67.5 17.8

2013 12,530.6 3.1 2,256.1 4.5 56.2 -16.7

2014 13,172.4 5.1 2,357.8 4.5 47.5 -15.5

2015 14,634.1 11.1 2,432.1 3.2 64.1 34.9




29/36


Capital Intensity The Professional Employer Organizationsindustry is characterized by an extremelylow level of capital intensity. For everydollar spent on labor in 2015, industryrms are expected to invest just one-tenthof a cent in capital. In fact, depreciationaccounts for just 0.1% of industry revenue,since rms require only basicadministrative equipment such ascomputers, printers and othercommunication tools such as phones toparticipate in this industry. Meanwhile,

wages to worksite and corporate employees

are estimated to account for a combined80.5% of industry revenue, since industryoperators pay all labor expenses on behalfof their clients, as well as paying standardsalaries and commissions to their own salesand administrative workers.

Over the past five years, industrycapital intensity has remained stable,although capital expenditures on

Operating ConditionsCapital Intensity | Technology & Systems | Revenue Volatility

Regulation & Policy | Industry Assistance

Tools of the Trade: Growth Strategies for Success


LaborIntensive

CapitalIntensive

Change in Share of the Economy

New Age Economy

Recreation, Personal Services,Health and Education.Firmsbenefit from personal wealth sostable macroeconomic conditionsare imperative. Brand awarenessand niche labor skills are key toproduct differentiation.

Traditional Service Economy

Wholesale and Retail.Relianton labor rather than capital tosell goods. Functions cannotbe outsourced therefore firmsmust use new technologyor improve staff training toincrease revenue growth.

Old Economy

Agriculture and Manufacturing.Traded goods can be producedusing cheap labor abroad.To expand firms must mergeor acquire others to exploiteconomies of scale, or specializein niche, high-value products.

Investment Economy

Information, Communications,Mining, Finance and RealEstate. To increase revenuefirms need superior debtmanagement, a stablemacroeconomic environmentand a sound investment plan.

Human Resources & Benefits Administration

Financial Planning & AdviceEmployment & Recruiting Agencies Workers Compensation &Other Insurance Funds

ProfessionalEmployerOrganizations

Capital intensity

0.5

0.0

0.1

0.2

0.3

0.4


Dotted line shows a high level of capital intensity

Capital units per labor unit

ProfessionalEmployer

Organizations

Admin., BusinessSupport & WasteMgmt. Services

Economy

Level

The level of capitalintensity is Low


30/36


Operating Conditions

Technology & Systems The Professional Employer Organizationsindustry has undergone a moderate level

of technological change over the past veyears. Improvements to technologyinclude software and other processesused to track payroll and other employee-related expenses. This includes thedevelopment of software as a service(SaaS), which has become increasinglypopular with industry clients. Indeed, allmajor players with more than a 2.0%share of the industry have alreadydeveloped and heavily marketed theseplatforms to their clients during the pastve years. In addition, most operators

have developed or are developingproprietary analytics and data storagesystems. These systems are used to tracktrends in employment and labor-relatedcosts, which can help businesses lowercosts and comply more eectively withchanging regulations.

Technological advancements have madePEO operators more ecient by reducingthe amount of time spent on paperworkand direct face-to-face interactions withclients. While many PEOs have invested in

developing their own software, others haveacquired companies to improve their

technology systems. For example, industryplayer Insperity (previously known as

Administa) acquired HRTools.com,which develops a variety of cloud-basedHR services and packaged software forsmall businesses.

Software as a serviceSaaS, also known as on-demandsoftware, is a software delivery modelthat allows data to be hosted on the cloudand then accessed by human resourceand benets administration personnel.

Professional employer organizations havetaken advantage of these systems todecrease labor costs, since SaaS allowsclients and employees to access ormanage their information remotely

without the need for direct interaction.SaaS is most commonly accessed through

web browsers on regular computers orsmartphones apps. However, thedevelopment and maintenance of thesesystems requires signicant investmentsin computer and network infrastructure.

Capital Intensitycontinuedcomputer and networking equipmenthave increased. In particular, largeroperators such as ADP and TriNet havedesigned and marketed cloud-based,software as a service (SaaS) solutionsto their business clients. Thedevelopment and maintenance of thesesystems requires a significant level of

capital investment, particularly in datacenters and other networkinfrastructure. However, these trendsare unlikely to have a major effect onthe industrys capital intensity level,since worksite and corporate wagecosts remain the dominant expense forall industry operators.

LevelThe level ofTechnology Changeis Medium


31/36



Regulation & Policy This industry is currently subject to amoderate level of regulation, althoughindustry-specic regulation is expected torise over the next ve years as the newlyratied Small Business Eciency Act(SBEA) comes into eect at the beginningof 2016. The SBEA will create astandardized, national regulatoryframework for the industry that includesa certication process for licensed PEOs,minimum capital requirements and otherstandards. In addition to solidifying anationwide standard for PEOs, the SBEAformally recognizes a PEO serviceproviders right to collect and remitfederal income and payroll taxes on

behalf of its client, while allowing thePEOs business client to claim standardtax credits.

As of early 2015, 43 states havealready passed laws that provide forlicensing, registration and otherregulatory requirements covering thisindustrys operations. These regulationspertain to specic areas such as the PEOreserving the right to hire, terminateand discipline client employees andsecure workers compensation insurancecoverage. The laws also provide formonitoring the scal responsibility ofPEOs and licensing, in some cases, theircontrolling ocers.

Since industry operators are bydenition the legal employer of theirclients workers, they are responsible forall labor-related taxes and laws, as wellas any penalties or insurance claimsarising from employee-related

Revenue Volatility The Professional UnemploymentOrganizations industry is characterizedby a moderate level of revenue volatility.During the past ve years, industryrevenue has grown as much as 8.6% in2014 and as little as 3.6% in 2011.Overall, industry revenue is expected touctuate 4.3% on average over the ve

years to 2015. Since industryperformance does not depend on any

single sector or type of business, demandfor industry services uctuates relativelyin line with overall economic conditions.During the next ve years, revenue

volatility is likely to remain low as overalleconomic conditions continue to stabilizeand a greater share of small to medium-size businesses choose to outsourceemployment and administrative duties toindustry operators.


Volatility vs Growth

Revenuevolatility*(%)

1000

100

10

1

0.1

Five year annualized revenue growth (%)

30 10 10 30 50 70

Hazardous

Stagnant

Rollercoaster

Blue Chip

* Axis is in logarithmic scale

A higher level of revenue

volatility implies greaterindustry risk. Volatility cannegatively affect long-termstrategic decisions, such asthe time frame for capitalinvestment.

When a firm makes poorinvestment decisions itmay face underutilizedcapacity if demandsuddenly falls, or capacityconstraints if it risesquickly.

Professional EmployerOrganizations

Level

The level ofVolatility is Medium

Level & Trend

The level ofRegulation isMedium and thetrend is Increasing


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Industry Assistance The industry does not receive any directform of government assistance. However,industry operators benet from a varietyof national and regional tradeassociations, including the National

Association of Professional EmployerOrganizations (NAPEO), which is thelargest and most inuential industryorganization in the United States.Founded in 1984, the organization

currently represents 350 professionalemployer organizations nationwide. The

NAPEO publishes technical andregulatory resources, sponsors nationalPEO-related events and advocating on

behalf of industry operators for favorablelegislation. In particular, the organizationplayed a pivotal role in moving thefederal Small Business Eciency Act(SBEA) through congress in 2014. Inaddition to the NAPEO, the EmployerServices Assurance Corporation acts as a

private certication and accreditationorganization for the industry.

Regulation & Policycontinuedoperations. While this may seemburdensome, it is the primary reasonsmall to medium-size businesses work

with industry operators; forming aco-employment agreement with a PEOallows businesses to focus on their

business rather than compliance issues.

Taxation issuesDepending on the relationship withclients, PEOs are liable to pay all wagesand salary costs and all or most federaland state employment taxes. Federal

employment taxes to which the industrymust comply include withholding ofincome tax requirements, the FederalUnemployment Tax Act and the FederalInsurance Contributions Act Tax (FICA),the latter of which includes funds forSocial Security and Medicare. Statetaxes vary between states but ofteninclude unemployment workerscompensation taxes. Industry playersare responsible for ling payroll taxes on

behalf of their clients and are generallyheld liable for noncompliance.

Level & Trend

The level ofIndustry Assistanceis None and thetrend is Steady


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Key StatisticsRevenue

($m)

IndustryValue Added

($m)Establish-

ments Enterprises Employment Exports ImportsWages($m)

DomesticDemand

Unemploy-ment %

(%)

2006 94,813.7 77,324.8 5,456 4,543 1,929,137 -- -- 73,721.9 N/A 4.6

2007 98,252.8 88,830.2 5,519 4,582 1,983,451 -- -- 81,461.3 N/A 4.6

2008 100,275.4 89,755.9 4,761 3,825 2,069,045 -- -- 84,742.1 N/A 5.8

2009 98,297.3 83,467.4 4,676 3,706 1,917,637 -- -- 80,420.1 N/A 9.3

2010 105,435.8 87,628.9 4,492 3,634 1,790,302 -- -- 82,673.4 N/A 9.6

2011 109,192.4 89,278.0 4,328 3,491 1,780,904 -- -- 87,203.4 N/A 9.0

2012 117,267.1 101,928.7 4,170 3,365 1,948,897 -- -- 95,596.3 N/A 8.1

2013 122,672.4 107,901.3 4,172 3,465 2,001,857 -- -- 102,503.7 N/A 7.4

2014 133,189.0 110,780.0 4,281 3,499 2,005,694 -- -- 105,052.9 N/A 6.2

2015 141,707.6 116,106.4 4,371 3,467 2,027,425 -- -- 109,304.5 N/A 5.6

2016 149,135.9 120,576.4 4,548 3,535 2,104,467 -- -- 113,130.1 N/A 5.4

2017 155,899.3 125,259.0 4,528 3,524 2,192,855 -- -- 117,542.2 N/A 5.3

2018 161,709.7 127,188.4 4,432 3,474 2,232,326 -- -- 118,952.7 N/A 5.4

2019 168,553.3 129,790.0 4,306 3,457 2,276,973 -- -- 121,331.8 N/A 5.5

2020 171,924.3 131,818.0 4,140 3,442 2,315,681 -- -- 123,030.5 N/A 5.5

Sector Rank 2/57 1/57 28/57 26/57 2/57 N/A N/A 1/57 N/A N/A

Economy Rank 75/1375 20/1375 573/1375 545/1375 12/1375 N/A N/A 11/1375 N/A N/A

IVA/Revenue(%)

Imports/Demand

(%)

Exports/Revenue

(%)

Revenue perEmployee

($000)Wages/Revenue

(%)Employees

per Est.Average Wage

($)

Share of theEconomy

(%)

2006 81.55 N/A N/A 49.15 77.75 353.58 38,214.96 0.53

2007 90.41 N/A N/A 49.54 82.91 359.39 41,070.49 0.60

2008 89.51 N/A N/A 48.46 84.51 434.58 40,957.11 0.612009 84.91 N/A N/A 51.26 81.81 410.10 41,937.08 0.58

2010 83.11 N/A N/A 58.89 78.41 398.55 46,178.47 0.59

2011 81.76 N/A N/A 61.31 79.86 411.48 48,965.81 0.59

2012 86.92 N/A N/A 60.17 81.52 467.36 49,051.49 0.66

2013 87.96 N/A N/A 61.28 83.56 479.83 51,204.31 0.69

2014 83.18 N/A N/A 66.41 78.88 468.51 52,377.33 0.69

2015 81.93 N/A N/A 69.90 77.13 463.84 53,912.97 0.70

2016 80.85 N/A N/A 70.87 75.86 462.72 53,757.13 0.71

2017 80.35 N/A N/A 71.09 75.40 484.29 53,602.36 0.71

2018 78.65 N/A N/A 72.44 73.56 503.68 53,286.44 0.71

2019 77.00 N/A N/A 74.03 71.98 528.79 53,286.45 0.70

2020 76.67 N/A N/A 74.24 71.56 559.34 53,129.30 0.70

Sector Rank 1/57 N/A N/A 45/57 1/57 1/57 14/57 1/57Economy Rank 11/1375 N/A N/A 1225/1375 4/1375 11/1375 590/1375 20/1375

Figures are in inflation-adjusted 2015 dollars. Rank refers to 2015 data.

Revenue(%)

IndustryValue Added

(%)

Establish-ments

(%)Enterprises

(%)Employment

(%)Exports

(%)Imports

(%)Wages

(%)

DomesticDemand

(%)

Unemploy-ment %

(%)

2007 3.6 14.9 1.2 0.9 2.8 N/A N/A 10.5 N/A 0.0

2008 2.1 1.0 -13.7 -16.5 4.3 N/A N/A 4.0 N/A 26.1

2009 -2.0 -7.0 -1.8 -3.1 -7.3 N/A N/A -5.1 N/A 60.3

2010 7.3 5.0 -3.9 -1.9 -6.6 N/A N/A 2.8 N/A 3.2

2011 3.6 1.9 -3.7 -3.9 -0.5 N/A N/A 5.5 N/A -6.3

2012 7.4 14.2 -3.7 -3.6 9.4 N/A N/A 9.6 N/A -10.0

2013 4.6 5.9 0.0 3.0 2.7 N/A N/A 7.2 N/A -8.6

2014 8.6 2.7 2.6 1.0 0.2 N/A N/A 2.5 N/A -16.2

2015 6.4 4.8 2.1 -0.9 1.1 N/A N/A 4.0 N/A -9.7

2016 5.2 3.8 4.0 2.0 3.8 N/A N/A 3.5 N/A -3.6

2017 4.5 3.9 -0.4 -0.3 4.2 N/A N/A 3.9 N/A -1.9

2018 3.7 1.5 -2.1 -1.4 1.8 N/A N/A 1.2 N/A 1.9

2019 4.2 2.0 -2.8 -0.5 2.0 N/A N/A 2.0 N/A 1.9

2020 2.0 1.6 -3.9 -0.4 1.7 N/A N/A 1.4 N/A 0.0

Sector Rank 9/57 22/57 30/57 49/57 41/57 N/A N/A 18/57 N/A N/A

Economy Rank 184/1375 357/1375 496/1375 1104/1375 856/1375 N/A N/A 329/1375 N/A N/A

Annual Change

Key Ratios

Industry Data



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Jargon & Glossary

BARRIERS TO ENTRY High barriers to entry mean thatnew companies struggle to enter an industry, while lowbarriers mean it is easy for new companies to enter anindustry.

CAPITAL INTENSITY Compares the amount of moneyspent on capital (plant, machinery and equipment) withthat spent on labor. IBISWorld uses the ratio ofdepreciation to wages as a proxy for capital intensity.High capital intensity is more than $0.333 of capital to$1 of labor; medium is $0.125 to $0.333 of capital to $1of labor; low is less than $0.125 of capital for every $1 oflabor.

CONSTANT PRICES The dollar figures in the KeyStatistics table, including forecasts, are adjusted forinflation using the current year (i.e. year published) asthe base year. This removes the impact of changes inthe purchasing power of the dollar, leaving only the

real growth or decline in industry metrics. The inflationadjustments in IBISWorlds reports are made using theUS Bureau of Economic Analysis implicit GDP pricedeflator.

DOMESTIC DEMAND Spending on industry goods andservices within the United States, regardless of theircountry of origin. It is derived by adding imports toindustry revenue, and then subtracting exports.

EMPLOYMENT The number of permanent, part-time,temporary and seasonal employees, working proprietors,partners, managers and executives within the industry.

ENTERPRISE A division that is separately managedand keeps management accounts. Each enterpriseconsists of one or more establishments that are undercommon ownership or control.

ESTABLISHMENT The smallest type of accounting unitwithin an enterprise, an establishment is a singlephysical location where business is conducted or whereservices or industrial operations are performed. Multipleestablishments under common control make up anenterprise.

EXPORTS Total value of industry goods and services soldby US companies to customers abroad.

IMPORTS Total value of industry goods and servicesbrought in from foreign countries to be sold in theUnited States.

INDUSTRY CONCENTRATION An indicator of thedominance of the top four players in an industry.Concentration is considered high if the top playersaccount

Documents

PEO Report