How to Spot Client Risk and Weigh Value

Featured Article – PEO Insider, November 2022 (reposted with permission) 

Risk. On one side, it contains success stories that share leaps of faith that paid off; on the other, it holds shattered dreams of big gambles that eventually sunk a business. 

In the PEO world, risk is on every executive’s mind each time a new client is signed, and it’s not something taken lightly. For Stratus HR, that assessment is less about a balance sheet and more about the company’s history and values. 

“When our sales reps are vetting clients, they have to dig deeper than dollar value,” says John Farnsworth, CEO of Sandy, Utah-based Stratus HR. 

“Their job is to ask questions about the company’s culture. Does management see employees as expenses or as assets? If the answer is expenses, they’re not a good fit.” 

Risk Assessment Criteria

When prospective client companies explain they want more for their employees than what they can currently give them, or they want to be freed from transactional headaches and focus more on becoming a great place to work, or they admit they “don’t know what they don’t know” and want to be compliant, they’ve passed the first assessment. Stratus HR’s sales team will then assess the following risk factors: 

• Turnover: Is the company’s rate higher or lower than the industry average? 
• Penalties: Has the company had fines, penalties, or settlements in the past? 
• Employee classifications: Are employees correctly classified as exempt vs. nonexempt? 
• Payments: Have any workers ever been paid under the table? 
• Internal processes: What are their hiring and disciplinary practices like? Are there any safety concerns with how they operate? 

In each area, the sales team must determine if any red flags are due to naïveté or if they’re trying to skirt around the system. 

“We need to make sure that they’re a viable business and want to do things right,” says Chase Heywood, Stratus HR COO. 

“We get a feel for the company’s history, the business owner’s history, and even the management team — we want to know where they’ve been and what they’ve done.” 

Once Stratus is comfortable with the company’s background, they may undergo a credit check and sign a personal guaranty, depending on their preferred payment method. 

What About Startups?

When a startup comes to Stratus HR, there’s no history to know how employees have been treated to understand company culture. This means the assessment is a little different from an established business. 

“The fact that a startup is coming to Stratus means they want to do things right, so that’s a good sign. But we need some information about why and what they’re starting. A dentist starting a car dealership might not be the best fit,” comments Farnsworth. 

“Risk varies on the market they’re entering, as well as their experience, insurance, and business plan,” agrees Heywood. 

A lot also depends on the business owner. 

“We recently had a founder of one of our client companies call us. He sold his original business several years ago and is now ready to start a new venture. Because we have done business with him before, we know his reputation and history, so the underwriting was very short 
and simple.” 

At the end of the day, are startups considered riskier than established businesses? 

“Not necessarily,” says Heywood. “Our ideal client is one that views their employees as their most valuable assets; they communicate and live their ‘why,’ they’re fair with compensation and benefits, and they want to take care of their employees. If this is the attitude of the startup, they’re a good fit for us.” 

Red Flags For Risky Clients

Sometimes a company’s true colors are not as easily identified until after they have become a client. After nearly 23 years in business, detecting warning signs of risky clients is easier than it used to be. 

“When our team is finalizing details from the sales process and the client wants their first payroll Friday, that’s a red flag,” notes Farnsworth. 

Shifting employees around to meet payroll is also a concern. 

“If they’re calling in payroll, then pulling someone off payroll to pay the bill, that’s another huge red flag,” says Heywood. “Or when our team gets a lot of calls from employees with questions about payroll or checks being wrong, something’s not right.” 

This could be a sign that the company isn’t being forthright with employees, or perhaps they’re struggling with sufficient funds. Companies that never turn in payroll on time also push risk over client value. 

“If the deadline for payroll is Wednesday at noon and they’re consistently turning it in on Thursday, that’s a red flag,” adds Heywood. 

Manual tweaks to timekeeping are also signs of a problem. 

“If the timekeeping system submits 42 hours and they insist it’s only 40 hours, those tweaks are pretty big risk indicators,” Heywood continues. 

There’s certainly wiggle room for imperfection, and some industries have nuances that make running a business more complicated. But PEOs lose their competitive advantage of efficiencies when deadlines are missed, when mass calls come in with frustrated employees saying their paychecks are inaccurate, or when clients do not heed their advice and they are forced to respond reactively. 

When Is Risk Too Much? 

Although Stratus HR can be loyal to a fault, there is an eventual tipping point. 

Our clients aren’t usually a financial risk because we’re so stringent upfront,” says Farnsworth. “When we let clients go, 99% of the time it’s because of lack of respect to our staff. If they are disrespectful to our staff, they are out of here.” 

There’s also a risk to Stratus HR’s reputation when clients are not acting in good faith. If they are skirting the law or treating their employees badly, Stratus could become guilty by association. 

“Sometimes what tips the scales is we know they’re doing something out of compliance and they’re not telling us, or they try to push us to do something out of compliance,” says Heywood. “We can’t let that ride.” 

Does Dollar Value Ever Speak Louder Than Risk?

So where do you draw the line when weighing bottom line with risk? For Stratus HR, that line is barely on the risk grid chart. 

“We don’t chase markets; we chase clients who care about their employees,” says Heywood. 

That has been key to steady growth since 1999; cautious and intentional. This begs the question: would there ever be a dollar amount that would make Stratus HR reconsider its stiff criteria for screening out clients? 

“The gamble just isn’t worth it,” replies Farnsworth. “It’s easy to stick your hand in the cookie jar too many times. There’s still good business out there to get.” 

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• PEO Clients Fared Better During First Months of COVID-19 Pandemic 
• Why should my company outsource HR? 
• Study: The ROI of Using a PEO 
• A PEO in Perpetual Growth Mode