TriNet HR Services Boom As Red Tape Swamps Businesses

More than a million new business establishments formed in the U.S. last year, according to federal government data, and history suggests that roughly half will likely go under within five years.

If you make your money serving small businesses, this can’t be a very heartening figure.

On the other hand, if you flip the equation upside down, you realize that a pretty good percentage of businesses will make a go of it beyond five years.

Executives at TriNet Group (NYSE:TNET) figure there’s plenty of money to be made in this market. The company provides human resources services to small and midsize businesses in the U.S and Canada.

It does payroll processing, handles aspects of employment law compliance and offers employee benefits such as health insurance, retirement plans and workers’ compensation insurance.

TriNet delivers its services via a cloud-based, software-as-a-service (SaaS) platform. Its customers come from a diverse mix of end markets including technology, life sciences, property management, professional services, banking and financial services, retail, manufacturing and hospitality.

Employers Get Expertise

Most of these customers lack the staff and resources to weave through complex human resources and employee benefit regulations.

Rather than do the work themselves, they outsource it to TriNet and peers such as Automatic Data Processing (NASDAQ:ADP), Paychex (NASDAQ:PAYX) and Insperity (NYSE:NSP).

TriNet operates under a professional employer organization (PEO) model in which clients enter into a shared employment relationship. TriNet is the employer of record for work site employees, or WSEs, while clients retain day-to-day control and direction of the WSEs.

ObamaCare Costs Factor In

According to industry data cited by Timothy McHugh, an analyst at William Blair & Co., the PEO sector grew at a compound annual rate of about 10% from 1995 to 2013, the last year data are available.

“We believe that this growth is occurring because PEOs provide a strong value proposition for small businesses, which are facing increasing regulation, a growing number of potential point-solution providers, and upward pressure on insurance rates as a result of the Affordable Care Act,” he said in a report initiating coverage on TriNet.

He said TriNet’s “vertically oriented salesforce, multiproduct approach and transparent and flexible pricing” are unique in the field.

“In our view, TriNet’s technology ranks at the high end of the PEO sector and there are solid benefits to scale in this business,” he added.

It’s hard to argue with TriNet’s sales results. The 26-year-old firm, which had its initial public offering in March, has run off nine straight quarters of double-digit-percentage revenue growth. Bottom-line performance has been choppier.