For small and medium-sized businesses (SMBs), outsourcing HR to a Professional Employer Organization (PEO) can be a game-changer in the early stages. Providers like ADP TotalSource, TriNet, and Insperity bundle HR services, payroll, compliance, and benefits into a single solution, allowing businesses to focus on growth. But as companies scale, the very convenience that made a PEO attractive can become an expensive constraint. That’s when it’s worth evaluating whether switching to an a la carte Human Capital Management (HCM) or Administrative Services Organization (ASO) model could save money and provide greater flexibility.

In this blog, we explore the cost savings opportunity and the key inflection points when SMBs typically outgrow a PEO. We’ll also examine why switching can drive financial, operational, and compliance benefits.

What’s the Difference Between a PEO and an HCM/ASO Model?

A PEO operates on a co-employment model. The PEO becomes the employer of record for tax purposes, handles HR compliance, manages payroll, and offers access to its group health plans. The pricing is usually either a percentage of payroll or a flat per-employee-per-month (PEPM) fee.

By contrast, an HCM/ASO model unbundles these services. You stay the sole employer of record and pay only for the services you need—like payroll software, a benefits broker, or HR compliance support. Utilizing an HCM or ASO model that offers a one stop shop for these services also gives businesses more control, transparency, and leverage over their costs.

The Cost Savings Opportunity

PEO fees generally range from $100 to $200 per employee per month. For a 75-person company, that could mean $9,000 to $15,000 per month—or over $100,000 annually. These fees cover bundled services like payroll processing, HR support, compliance management, benefits administration, and workers’ comp coverage.

In an HCM/ASO model, businesses can replicate these services at a lower cost:

• Payroll processing software: $5-$10 PEPM
• HRIS/benefits administration: often included with payroll or via a low-cost platform
• Benefits brokerage: generally no direct fee, broker earns commissions
• Workers’ comp insurance: direct purchase based on company profile
• HR support: hire internally or contract an HR consultant as needed

Even when adding in the cost of hiring an internal HR manager (say, $90,000/year), the total cost often remains lower than continuing with a PEO, especially as headcount grows.

When Does It Make Sense to Switch?

Most companies begin to question their PEO arrangement between 50 to 100 employees, with 100 employees often being the tipping point. At this stage:

• You may have in-house HR capabilities or are ready to hire them.
• You can access competitive health insurance plans without relying on a PEO.
• PEO fees start to rival or exceed the cost of running HR in-house.
• Operational complexity increases, and flexibility becomes more important.

According to HR consultants, the cost to maintain a PEO relationship at 100 employees could fund an HR manager and still leave room for tech tools and compliance services. At 150 or 200+ employees, the cost differential becomes even more pronounced.

Real-World Example

Let’s say ABC Tech, with 75 employees, pays $150 PEPM to a PEO. That’s $11,250 per month or $135,000 annually. By transitioning to an HCM/ASO model, ABC Tech hires an HR manager ($90,000), implements payroll software ($5,000), and incurs slightly higher insurance premiums ($40,000 more). Total cost: $135,000. The same spend, but with a dedicated HR leader and more control.

As ABC grows to 100+ employees, the PEO’s fees will increase, while internal HR costs remain relatively flat. Over time, this creates a significant cost advantage.

There are many reasons to consider a PEO alternative, including financial benefits, operational benefits and compliance considerations.

Financial Benefits of Switching

1. Lower per-employee costs: PEO fees scale with payroll and headcount; internal HR and software costs do not.
2. Avoid duplicate spending: Companies often hire internal HR staff while still paying PEO fees for overlapping services.
3. Transparent billing: Know exactly what you’re paying for payroll, benefits, and support—no hidden fees.
4. Customized benefits: Choose plans tailored to your workforce instead of the PEO’s limited options.

Operational Benefits

• Greater control: Develop your own HR policies, onboarding flows, and PTO structures.
• Tailored employee experience: Build a culture unique to your company, not dictated by PEO templates.
• Improved service: Internal HR staff are fully dedicated to your business.
• Better system integration: Use HCM software that integrates with your accounting, CRM, or performance tools.

Compliance Considerations

PEOs offer shared liability and risk mitigation, but growing businesses often have the resources and systems to handle compliance in-house or via targeted vendors. With proper support (like a labor law attorney or compliance consultant), you can stay compliant without the constraints of a co-employment model.

Moreover, owning your compliance processes means fewer surprises and more control. You choose how to address new regulations, not your PEO.

When Staying on a PEO Still Makes Sense

• You have under 50 employees.
• You lack any HR personnel or infrastructure.
• You value simplicity over customization.
• Your industry has complex multi-state or high-risk compliance needs.

But as you approach 75 or 100 employees, the question shifts from “Can we handle HR ourselves?” to “Why are we still paying a premium to outsource it?”

Time to Move On?

PEOs serve a valuable purpose, especially for small businesses with limited resources. But they’re not a forever solution. At a certain size, the cost of convenience outweighs the benefits, and companies find themselves paying more than necessary for services they could manage internally or through specialized vendors.

By switching to an HCM or ASO model, growing SMBs can gain cost savings, operational flexibility, and full ownership over their workforce strategy. The key is knowing when to make the move—and planning ahead to ensure a smooth transition.

If your company is approaching or has surpassed 75 employees, now may be the right time to re-evaluate your PEO relationship. The numbers, and your future growth, might thank you for it.