The Benefits of a Professional Employer Organization (PEO) Service
When it comes to employing people to run your business in a foreign country like Indonesia, the traditional approach has been to establish a fully operational company that complies with HR, tax, and other regulations. However, the process of setting up a company in Indonesia can take several months. During this time, the intended company remains non-operational, incurring significant running costs and requiring substantial investment capital. This approach also means that the investing company may not fully understand the business, financial landscape, consumer preferences, or local culture of the foreign market.
This fixed market entry strategy can lead to avoidable mistakes such as:
- Choosing the wrong pricing model
- Launching an unsuitable initial service line or product
- Setting up in an unfavorable location
- Pursuing a misguided business model, or
- Partnering with the wrong business associates or suppliers.
Without on-the-ground information and practical experience, these mistakes can occur easily. However, rectifying such errors after investments have been made is costly, time-consuming, and can even damage the business' reputation.
Considering these challenges, an increasing number of firms today are opting for a more prudent approach, initially testing or targeting a smaller or shorter-term presence in Indonesia - allowing businesses to mitigate risks and gain valuable market insights before making significant commitments.
A lesser-known model for businesses to hedge against the risks of market entry is available across several Asian markets.
Understanding Global staffing solutions and PEO: How does it work?
Global Staffing Solutions (GSS) is a market entry strategy and suite of services that can make it easier for businesses to operate internationally. Key within the GSS suite, is Professional Employer Organization ("PEO") service.
A Professional Employer Organization (PEO) is a third-party service provider that acts as an employer of record for a business, managing all human resource-related functions, including payroll, benefits, and compliance with labor laws. By partnering with a PEO, investors can engage local employees and navigate the intricacies of employment in Indonesia, without the need to establish a legal entity.
This results in a local firm taking on the burden of day-to-day employee HR management, payroll, and tax compliance, freeing up your critical resources so that you, as an international firm, can focus on your business and explore your options in a new or unfamiliar market.
This means that, while the overseas company and its outsourced hires will maintain normal day-to-day control and working employee relationships, the local service provider in Indonesia will handle all the risk mitigation, compliance, payroll, and benefits on the ground.
Advantages of adopting a global staffing solutions strategy
Foreign companies can benefit from the GSS service by hiring full-time employees to work in overseas markets while remaining compliant with local laws, without the time and investment required to set up and operate an overseas legal entity.
It can specifically provide the following advantages to businesses.
Local expertise and support
By partnering with a PEO service provider, investors gain access to a team of local experts who possess extensive knowledge of the Indonesian market. These professionals can provide guidance and support on various aspects, including recruitment, employee relations, cultural nuances, and market insights. This local expertise can be invaluable for businesses seeking to make informed decisions and navigate the unique challenges of operating in Indonesia.
Employing staff at local labor costs
Through GSS, the foreign company can easily hire employees at reasonable local wages, which avoid unnecessary costs due to lack of knowledge of local wage standards and wrong estimation of manpower budget.
It also gives the opportunity to the foreign investor to test the local person and assess suitability for a hire under a local permanent structure or, determine what additional skillset the “first” employee of the company should possess to deliver results in the country.
Outsourced employee management
Due to the labor relationship between the employees and local provider, the HR team can assist the foreign employer with its salary calculations, social insurance contributions, individual income tax (IIT) declarations, and reimbursements for their local employees. The GSS service frees the foreign company from day-to-day HR and administration, so that it can concentrate on its business activities.
Hiring employees in compliance with labor laws
Navigating the complex labor regulations and compliance standards of a foreign country can be a daunting task. Fortunately, partnering with a PEO in Indonesia can help investors mitigate this challenge. A reputable PEO service provider will possess an in-depth understanding of local labor laws and regulations, ensuring that businesses operate in full compliance with all legal requirements, minimizing the risk of penalties and legal complications.
Quite a few foreigners and local staff continue to be hired “off the books” in Indonesia and are sent money from the overseas company directly into their local bank account. This is risky from a legal compliance perspective as there is no local social contribution or taxes paid. Moreover, it also does not provide the overseas investor with any leverage or legal control over such asset on the ground.
Under a GSS strategy, the local provider can ensure that the foreign employee remains compliant within Indonesia’s law and regulations, and proactively assist with the foreign employee’s visa and work permit application, setting up a bank account, as well as their IIT verification in Indonesia.
This has the added benefit of mitigating many of the legal and practical problems that arise when a payment is made into an employee’s overseas private bank account. With a GSS structure in place, the foreign employee can instead receive money directly from the local company to their local bank account in Indonesia.
Getting legal support on labor contract issues
Finally, the legal team in Indonesia can also assist with the establishment and determination of labor contracts with employees, according to the local labor laws.
Flexibility in the working relationship
Foreign companies are able to terminate the local working relationship at limited cost if there is a mismatch in skillsets or expectation. In the same vein, they can easily scale-up their staffing solution if the working relationship is proven successful.
Accessing the Indonesian market with ease: Versatile applications for a global staffing solutions model
Traditionally, a successful market entry strategy requires consideration to timing, scale relative to competition, and the ability to leverage complementary assets. However, in this new age of doing business, operational agility has now emerged as a key determinant of success.
In this way, businesses should be prepared to rapidly respond and adapt to changes in the market and environment in both productive and cost-effective ways. In terms of designing a market-entry strategy, this indicates a shifting focus to different markets, quickly and with minimal costs and risks.
More broadly, GSS provides an effective market entry strategy for companies looking to expand into fast-developing countries within Asia, such as Vietnam, Singapore, and Indonesia.
Investors can use this in a new market to gain first-hand knowledge of the local business environment and culture – to determine market suitability and formulate an appropriate entry strategy.
Uncertainty is an inevitable factor of doing business in any economic climate. Yet, recent black swan events like the COVID-19 pandemic illustrates is that, now more than ever, businesses need to plan for the unexpected – disrupted global supply chains, destabilized economies, and / or mass lay-offs.
One of the key advantages of utilizing a PEO service is the flexibility it offers to investors. Businesses can quickly scale their operations up or down, depending on market conditions and business requirements, without the hassle of restructuring or downsizing. This level of flexibility allows investors to adapt and respond to changing market dynamics swiftly, ensuring agility in their Indonesian business operations.