Ask Questions to Avoid Hiring a Shaky PEO

newsobserver.com

David Ranii, Staff Writer

The Castleton Group, which shut down last month, was operating as a professional employer organization -- even accepting new clients -- though it wasn't licensed. The Raleigh company was able to do that because it had operated as a PEO before the enactment of a 2005 law that required PEOs to be licensed. Under that state law, Castleton was permitted to continue operating as long as it was pursuing a license. That pursuit included its legal appeal of the Insurance Department's decision to deny Castleton a license.

Some former Castleton clients insist that the Department of Insurance fell down on the job for failing to notify Castleton clients about the company's problems. The Insurance Department position is that it went public as soon as it could -- when it denied Castleton's license in early December. Insurance Department spokeswoman Chrissy Pearson said no other PEOs are in the situation Castleton was: operating as a PEO in North Carolina without being approved by regulators.

But it's still important to do your homework before hiring one. PEOs provide vital services such as payroll and health insurance to small and midsize businesses, so businesses must make sure the company they hire is financially sound and a good fit for their organization.

Here are some questions to ask and things to check.

* Is the PEO accredited by the Employer Services Assurance Corp.? This nonprofit group, better known as ESAC, has tough financial standards, one reason only 25 of the nation's more than 700 PEOs are accredited. Nine in North Carolina are.

Accredited companies must meet operational and ethical standards and are backed by $6 million in performance bonds. That money is available to reimburse clients, their employees and tax authorities if the PEO defaults on obligations.

* Is it licensed by the state?

Companies can be denied licenses for failing to meeting the state's financial standards.

The Insurance Department's Web site lists the 90 companies licensed to do business in the state. Its "listing of active PEOs" is accessible at www.ncdoi.com/FED/SE/ fed_se_home.asp.

If a company isn't on the list, it can't accept new clients. However, more than 40 companies that don't have an office in North Carolina and aren't on the list are authorized by the state to work with existing clients. If your PEO isn't on the state's list of licensed companies and you want to check whether it falls into this category, you can contact the Insurance Department at (800) 546-5664.

* Ask to see an audit.

To get a state license, a PEO must provide the Insurance Department with an independent audit of its finances. You should be able to get an audit from the company, or you can request it from the Insurance Department.

* Find out whether a PEO's health insurance plan is self-funded or if it's providing insurance underwritten by a licensed insurer. The distinction is important.

Licensed insurance companies are required by the state to pay into a fund that can be used to pay claims if the insurer becomes insolvent; self-insured companies face no such requirement.

The vast majority of PEOs don't have self-funded health insurance plans, said Ron Ennis, an Insurance Department manager.

Strategic Sourcing: From Periphery to the Core

Key ideas from the Harvard Business Review article by Mark Gottfredson, Rudy Puryear, Stephen Phillips.

The Idea in Brief

Almost nothing a company does can't be outsourced anymore--even functions as critical as engineering, marketing, and manufacturing. Yet only 6% of the companies that outsource are satisfied with the practice. Why? Too many managers make outsourcing decisions piecemeal. They focus on incremental cost improvements rather than taking a strategic view of capability sourcing.

With strategic capability sourcing, you don't assume that your company's most vital capabilities must remain in-house. Credit-card giant American Express, for example, outsourced its crucial transaction processing function when it no longer provided proprietary advantage.

To source capabilities strategically, you must also decide which partners can best perform which capabilities. Rather than selecting suppliers based only on cost, for example, Chrysler consolidated component purchases with several suppliers it believed could sustain competitive costs, high quality, and efficient delivery.

And if your company's the best at a particular capability, consider making it an entirely new business--as UPS does by providing logistics management to other companies.

The right capability sourcing strategy can translate into industry dominance: Strategic outsourcer 7-Eleven consistently beats other retailers in same-store merchandise growth, revenue per employee, and inventory turn rate.

The Idea in Practice

To develop your capability sourcing strategy, apply these steps:

Identify your business's "core of the core". These are activities your company does better and cheaper than rivals. For 7-Eleven, they are product ordering and in-store merchandising--the pricing, positioning, and promotion of ready-to-eat food, gasoline, and sundries for car-driving consumers.

Decide what to outsource. Consider two factors:

Proprietary value: A capability has high proprietary value if your company executes it in a way that generates measurably more value than competitors could, and if your company would suffer major strategic damage if rivals imitated the capability.

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Commonality: A capability has high commonality if outside suppliers can achieve scale or other advantages by providing it to many others in your industry.

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Your strongest candidates for outsourcing? Capabilities that have low proprietary value and high commonality.

7-Eleven decided to outsource human resources, finance, IT management, logistics, distribution, product development, and packaging to outside partners with greater expertise and scale in these capabilities.

Decide what to insource. For capabilities your company excels at, consider "insourcing"--turning them into new businesses by performing this function for other companies. FedEx positioned itself at the leading edge of the $225 billion logistics-outsourcing industry by planning and managing inbound transportation for more than 1,500 product suppliers into 26 General Motors power train facilities.

Decide how to outsource. Compare each of your outsource-worthy capabilities' cost and quality to those of top-performing rivals or suppliers. Use these comparisons to define outsourcing relationships:

• Outsource high-cost and unnecessarily high-quality capabilities to low-cost providers--even if that means some reduction in quality.
• Outsource high-cost, low-quality capabilities to partners who can reduce costs and boost quality.
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Also structure each outsourcing partnership differently, depending on each capability's importance to your company's competitive distinctiveness.

7-Eleven has outsourced all routine capabilities (such as benefits administration and accounts payable) to providers that can consistently fulfill cost and quality requirements. For more strategic capabilities, it makes more complex arrangements. For instance, the firm outsources gasoline distribution to Citgo but maintains proprietary control over gas pricing and promotion--activities that could differentiate its stores if done well.

Workplace Accidents on the Decline

Tougher regulatory enforcement is curbing on-the-job fatalities and injuries, the government says.

Despite a rise in violations, tougher enforcement of workplace regulations has reduced the number of on-the-job accidents in recent years, according to the Occupational Safety and Health Administration.

Last year, the agency conducted 39,324 workplace inspections, citing 88,846 violations of standards and regulations, a six percent increase from 2006, the agency reported. These included 67,176 serious violations, up nine percent from the previous year, and 2,551 repeat violations.

"The significant increase in citations for serious and repeat violations documents OSHA's focus on identifying and eliminating severe hazards in the workplace," Edwin Foulke, the assistant secretary of labor for OSHA, said in a statement.

Despite the increase in citations, fatality and injury rates continued to decline, the agency said. For 2006, the agency reported a record-low workplace fatality rate of 3.9 per 100,000 employees. Injury and illness rates also dropped to an all-time low of 4.4 per 100,000 employees.

Among other factors, the agency credits a "strong, fair and effective enforcement program" on reducing workplace risks.

By Angus Loten

From Inc.com