Human Capital Management (HCM) Vendor Dynamics

There are three main HCM service provider types: Professional Employer Organizations (PEOs), Employer of Record (EORs), and Administrative Services Organizations (ASOs). This article focuses on the key aspects and differentiators between PEOs and EORs, which both present attractive investment opportunities. 

• Outsource all functions for all employees 
• Co-employer with clients, providing HR-related functions 
• Must absorb all the employment risk, including workers compensation. 
• In Stax's experience, investors have struggled to unpack the true business performance of PEOs as it relates to employment risk; this has increasingly been part of the investment decision-making process over the past few years. 

• Outsource all functions for some employees 
• Becomes the employer and enters into a services agreement with client 

• Outsource some functions for all employees 
• Does not engage in employment contracts, and employer remains the ‘employer of record’ 

Global employment platforms have emerged to address employer hiring needs, providing better technology and scale than incumbent legacy providers. 

• Traditional Staffing Firms handle any hiring and placement of employees on behalf of the client. Staffing firms are not typically involved with employment benefits, such as payroll administration. Global employment platforms differentiate from staffing firms by providing a faster and more transparent process hiring and onboarding international staff. 
• Global Employment Platforms act as the ‘employer of record’ - the legal entity that employs on behalf of the client, removing HR administrative burden from the client by assuming liability for the employees, holding the contract with the employees, and providing HR support in alignment with local laws and regulations. Additional services include contractor management, global payroll, and HR and benefits administration. 
• Local EOR Providers are regional firms that offer equivalent services to global employment platforms but focus on more localized/regional coverage (i.e., 1–2 countries). Employment platforms differentiate by providing more extensive coverage of international markets, greater access to talent, and simplification of vendor management. Employment platforms may partner or acquire these players to expand their geographic coverage. 

PEOs / EORs that serve a white-collar client base maintain diversified exposure across geographies and end-markets while providing lower cyclicality to investors. Scale advantages (e.g., brand recognition, proprietary technology, services, pricing etc.) will enable players to outpace the broader market. As the market matures, scale also provides investors with the opportunity to establish platforms and consolidate smaller, less competitive PEOs / EORs. 

Additionally, the PEO / EOR industry landscape is bifurcated, comprised of many small and regional PEOs / EORs and large providers (i.e., ADP, Paychex Oasis, Insperity, TriNet). Accordingly, current dynamics present consolidation opportunities for investors.



Lastly, PEO / EOR providers differentiate based on geographical footprint and the type of client base they are serving. International PEOs / EORs enable businesses to hire and manage employees overseas and serve as a global employer of record. 

The outsourced HCM services market is fertile ground for business automation efforts to improve a company’s bottom line and drive retention and high employee satisfaction. New players enable SMB customers to automate their HR operations and globally scale up and scale down headcount.