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Know the Difference: PEO vs HCM

May 26, 2023
Know the Difference: PEO vs HCM

PEO vs HCM: Understanding the Differences.

You may be familiar with professional employer organizations, or PEOs, but you may be less familiar with vendors or platforms that assist with “human capital management”, or HCM. While the two are related in subject matter, they are not one in the same.

Let’s illustrate the main differences—a PEO provides outsourced human resources services that can include HCM functions, while HCM is a pure human resource platform or software concerning the current and future strategy for managing employees and employee growth.

While PEOs may offer HCM services, not every professional employer organization offers human capital management.

The PEO breakdown

A PEO provides human resource services for businesses. A PEO and business enter into a contractual arrangement where specific responsibilities is shared or allocated between the business and the PEO called co-employment. In this model, the PEO provides certain HR services which may include:

  • Benefits administration
  • Payroll processing
  • Payroll tax administration
  • HR Compliance
  • Risk management
  • Cloud-based software

There are many benefits to working with a PEO, particularly for small to medium-sized businesses that may not have enough staff or resources to handle human resources internally. Having the capacity to maintain focus on an organization’s core competency is one of the main advantages, but there are several more, including providing HR guidance to help ensure compliance with local, state and federal employment-related regulations, administering benefits, and short-term and long-term human capital planning, to name a few.

Human capital management as a service

HCM is the process and/or set of tools used to manage employees in the pursuit of an organization’s objectives. There’s a large market for software that automates or manages these processes and tools since few businesses would say they don’t want to invest in the success of their employees. In competitive markets and industries, HCM software can be a potential advantage for an organization’s long-term success.

At its core, HCM is software designed to support human resource functions. Human capital management software may include (but isn’t limited to):

  • Organizing employees by assigning various dimensions, such as geography or cost center, helping align a business financially
  • Reporting and analytics for the workforce
  • A secure way to store HR data, such as a cloud-based platform
  • An application to manage HR data and access reporting
  • Training and development support, such as an online portal
  • Other software features, such as AI and machine learning

HCM software can also help inform managers and leadership in companies with largely remote workforces. Having HR analytics data on a mobile device allows for greater access flexibility and helps leadership to stay up to date with trends and insights from their teams.

HR management vs employment management

This brings us to the core difference between the two concepts—PEOs are built to provide outsourced HR management, while HCM and associated software are designed to facilitate employment management done by the customer itself. There’s clearly overlap, and it is possible that a PEO might offer HCM software or a similar service, but not always. Some differences relate to a few key concepts of HR management and employment management, which we’ll explore further in this article.

Ownership and control

PEO relationships involve outsourcing some of the services that a business might traditionally perform in-house, specifically human resources functions like payroll processing and benefits administration. In the co-employment model, the customer, or worksite employer, retains the control to make decisions about the workforce and their core business functions and certain HR services, payroll processing and benefits administration are outsourced to the PEO.

HCM software would be used by an in-house team, typically those that administer HR work within the business or organization. A company using HCM software will want to have employees set up, use and maintain the software, providing functions like HR data support to keep the HCM database current.

HR compliance

One of the key differentiators and a major benefit of working with a PEO is that they are frequently well-versed in navigating HR compliance with various employment-related laws and regulations, such as ACA and other employment rules and regulations. While HCM software may be able to flag issues, they may or may not have expert consultants to help an organization with HR compliance. Depending on the needs and resources of an organization, the increased help in HR compliance support provided by a PEO may make more sense for an SMB, especially when there are penalties and fines that can be associated with noncompliance.

Scalability

Depending on the software’s design, certain HCM tools are built with scalability in mind and do not require additional cost or licensing as an organization grows. There are a variety of cost models, such as per-employee, which may increase as a result of hiring and growth. As mentioned above, it’s also important to consider who is needed to maintain the software if employee counts increase.

PEOs also have different scalability considerations; namely as an organization grows larger, there may be a business decision to bring HR functions in-house as opposed to outsourcing in something like a co-employment model. Many PEOs offer programs to facilitate a company or organization’s development to scale alongside the customer in a cost-effective way.

Choosing the right solution for your organization

Selecting the right solution for your organization will depend mainly on size. Larger, more complex companies and businesses may have more HR staff to manage software and processes in-house, in which case HCM software may be an appropriate fit. For small to medium-sized businesses that don’t specialize in HR, a PEO may offer an attractive solution since they can help with payroll, benefits and other human resource functions while the business can focus on its core competency.

Cost will likely play a role in your decision. Larger budgets afford more flexibility, either via greater in-house staffing or more spending power when selecting an outsourcing provider. Many PEOs may offer service packages and pricing models depending on the different size of the organization.

Researching available options and performing due diligence in the process will help your organization determine whether working with a PEO makes sense or whether you’ll need HCM software to support your HR goals. Certain businesses will want to take advantage of both, perhaps to help their employees maintain focus on what they do best and to build a long-term strategy for human capital within their business.

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