CEO's Notebook

CEOs give advice on adding star power to your board; the ins and outs of PEOs; venture capital's coastal bias; and the truth about Internet recruiting. Plus: "In a Former Life," with Jay Chiat, cofounder of Chiat/Day.

Hands On

Letting go in the right way

Outsourcing payroll and benefits may save money -- but can carry risks

BY ILAN MOCHARI

Show of hands -- anyone out there not worried about the cost of employee benefits? No? One option is to outsource the whole rigmarole to a professional employer organization (PEO) employee-leasing business. But that carries its own set of nail-biting anxieties.

Nancy Ruddy, president of $2-million, 20-employee Cetra/Ruddy Inc., an architectural and design firm in New York City, had never heard of PEOs until her insurance broker began stumping for her to use one two years ago. She was skeptical about ceding a function as detail driven as human resources to another company without first doing a thorough investigation. HR foul-ups, after all, could mean potential lawsuits and real discord among employees.

Ruddy performed six months of due diligence before she decided to make the switch. Her method is useful to anybody trying to decide whether (and which) PEOs are right for his or her business.

Her first step was to check insurance issues. Would her professional liability coverage still hold up if her employees belonged to the PEO and only were assigned to Cetra/Ruddy? Ruddy also wanted to be sure the licenses her company had to do design work in different states were still valid -- since under a PEO the employees doing the work wouldn't officially work for her company. She was reassured on both counts before signing with the PEO.

Next came the legal questions. After consulting her lawyer, Ruddy quizzed the PEO on its policies in the event of an employee lawsuit. Would the PEO cover legal costs? Would it stand as a codefendant? When checking the PEO's client references, she made sure she spoke with the law and accounting firms it served. Besides the technical knowledge they could share, those firms were structured in a manner similar to her company's. Talking to them made it easier for Ruddy to imagine what a PEO would be like for Cetra/Ruddy.

Ruddy also asked the PEO for the name of its biggest competitor and then had the rival give Cetra/Ruddy a proposal for comparison. The final result of her work: a smooth, albeit slow, switch to the PEO her broker had suggested. "When you do something like this, you don't want to make a mistake," she says.

HR consultants and other experts stress the need for such caution. "The PEO doesn't have the same vested interest in the employee that you do," says Alice Bourland of HRxpress, in Santa Barbara, Calif. She offers medical benefits as an example: a PEO may not duke out an employee's payment problem with an insurance company with the same vigor you would. "And then your employees may not feel so good about you," she says.

Duane Bazzett, an HR consultant in Claremont, Calif., adds that with a PEO, it's harder to tell when employees are dissatisfied. "You don't get to see the quality issues like you would if it were right under your nose," he says.

All of which are valid reasons to put PEOs through a thorough prepurchase screening process. As for Ruddy, she's now enjoying the cost savings that motivated her to check out PEOs in the first place, with health-insurance costs reduced by 25%. Ruddy has also saved money by consulting the PEO's on-staff lawyers on employment-law issues -- as opposed to her own lawyers at $300 an hour. And perhaps best of all, Cetra/Ruddy has improved its overall benefits package, using the PEO to offer a 401(k) plan for the first time. "In a hot job market, that makes us more competitive," she says, "and gives us an edge over other firms our size."

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To PEO or not to PEO?

Rates for health insurance vary widely, but here are the monthly premiums an employer in New York City pays to cover its workforce with a PHS/Guardian major medical plan purchased through a broker, compared with the cost through Epix, the largest privately held PEO in the country. -- Ilan Mochari

TYPE OF PLAN	PEO*	NON-PEO
Single	$194.29	$299.96
Employee with a spouse	$428.39	$659.92
Employee with a child	$371.71	$554.93
Employee with a family**	$567.86	$899.89

*Does not include fee for joining a PEO, typically $800 to
$900 per employee per annum.
** Spouse and any number of children

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Hot tips

It's a woman's world in the markets, says Theresa M. Welbourne, a University of Michigan Business School associate professor, in a working paper with the title "Wall Street Likes Its Women: An Examination of Women in the Top Management Teams of Initial Public Offerings." Welbourne is tracking 476 companies from the 1993 IPO class and finding that businesses with women on their executive management team had stronger IPOs and greater financial success over the long term. Stock price and earnings-per-share growth were the performance measures. "It might be that women are bailing from big companies and that start-ups are nabbing good talent," she says. -- M.H.