Benefits Magazine v 48 no 9 Sep 2011 pp 36-40

Transcription

1 Outsourcing 36 benefits magazine september 2011 Benefits Magazine v 48 no 9 Sep 2011 pp 36-40

2 g Benefits Rules of the Road by Clark Sprague Plan sponsors that follow these suggestions for outsourcing benefits are more likely to stay on track. Flexibility and an understanding of how, what, why and when to outsource are key. P rior to the passage of the Employee Retirement Income Security Act (ERISA) in 1974, all health and welfare plans were outsourced. There was no self-insurance. Almost all of the employee benefit plans, with the exception of traditional defined benefit pension plans, were insured and by definition outsourced. With the passage of ERISA, self-insurance and employer-managed benefit coverage took off, especially among larger employers. On the pension side, employers traditionally performed all the pension and investment work in house. When it came to health insurance, insurance carriers initially declined to offer assigned-services-only (ASO) agreements, arguing they were first and foremost insurance companies and not administrators for these newfangled self-funded plans. Third-party administrators did not yet exist for health plans, and employers started to process their own claims. Benefit designs were straightforward and options for employees extremely limited. This brief period of fully insourced benefits lasted until the mid- to late 1980s. By then, companies faced with constantly expanding regulatory impacts and changes in both federal and state laws, combined with competitive pressures in a global market, resulted in the flattening of many organizations. As a consequence, insourcing benefit administration became a headache companies didn t need. continued on next page

3 Pick a vendor that works with companies your size. Everyone wants the big name-brand vendor, but if that means you are sharing your account team with 50 other companies, you will get the vendor s attention only one week a year. Those are not good odds. As the director of benefits for a Fortune 100 company during this period, I negotiated some of the earliest outsourcing programs including the first outsourced benefit administration contract with Hewitt Associates. After 20 years of negotiating contracts for outsourced services, here are my rules of the road. Guiding Principal: Outsourcing is not a panacea. Understanding the how, what, why and when will result in the best possible outcome. Rule 1: Understand Why You Want to Outsource and What It Is You Want to Outsource This may sound intuitive, but it is fundamentally important. In decisions to outsource in which I participated, cost savings was never the primary reason. Outsourcing is not necessarily cheaper. This is not to say cost is not an important factor, but it should not be the main driver. We made outsourcing decisions as part of the overall corporate strategy and the recognition that the company neither had nor wished to acquire and manage the expertise and resources to operate certain functions internally. Those commitments of capital and resources could be better deployed in support of the company s business. Essentially, we rented or leased those services that strategically made the best business case. learn more >> Education Vendor Management Four-Hour Course Vendor Selection Balancing the Needs of the Sponsor, Participants and Vendors For more information, visit Rule 2: You re in the Driver s Seat So Drive the Car It is easy to agree to outsource your benefit programs. In practice, it is much more difficult to do so. Too often I hear a manager say, We should outsource the benefits program. The manager wants to call up the local consulting firm or broker and say: Here it is. We want you [the vendor] to manage it! This is a prescription for problems. In one example, a large company with thousands of employees had committed to outsourcing its entire benefit program to a large, wellknown firm. The company had even made a sizable down payment on the job. I arrived two months after the contract was signed and was told that I didn t need to worry, as all the work was underway. The vendor had assured the company that it was calm seas and smooth sailing ahead. This was four months before launch. No one recognized the inherent flaws. This project was a train wreck in the making. A corollary to Rule 2: You can outsource responsibilities and functions, but you can never outsource accountability and strategy. Rule 3: Don t Take the Vendor s Marketing at Face Value Vendors will always tell you the upside of their product. You must identify the downsides as they impact your business. This means you should kick the tires: Learn the vendor s products and capabilities inside and out. This should include everything about the service, recruiting and hiring practices, pay practices, etc. Ask to see all of the vendor s internal productivity reports, instruction and training manuals, etc. During a site visit to one prospective vendor, we learned that the vendor 38 benefits magazine september 2011

4 paid its customer service representatives (CSRs) on a piecework basis solely on call volume. This method is great for productivity, bad for relationship management. Since the call center was to handle health plan issues, handholding was absolutely critical. We witnessed the impact firsthand. We spent time speaking with reps at their stations. It was clear the CSRs were eager for us to leave, as every minute they spent with us reduced their pay for that day. As a result, we excluded this vendor from consideration for our call center project. In our view, the vendor s pay practice was rewarding reps in a way that was counter to the kind of service we wanted delivered. Rule 4: Know Your Plans and Systems Thoroughly, Down to the Smallest Detail Details, details, details! Knowing your plans thoroughly will assure the best possible chance of success. In my example in Rule 2, the client was offered a product that did not meet its needs. The client didn t understand its own plans thoroughly enough to know that the solution it was purchasing would not work. When we detailed out the plans and compared them to the purchased solution, there were approximately 60 areas just in plan design that were critical failure points between the offered services and the company s needs. Equally important, understand the strengths and limitations of your internal systems. Involving the human resource information system (HRIS) and payroll staffs in the planning process can assure a smooth transition. Learn how these components will integrate, what they can handle and, equally important, what they cannot handle well. You may find the vendor can fill in gaps. Negotiating these issues up-front will make for a successful implementation and better cost structure. Change orders or add-ons after the fact will lead to unexpected cost overruns and delivery problems. Rule 5: Size Matters Be a Big Fish in a Small Pond Pick a vendor that works with companies your size. Everyone wants the big name-brand vendor, but if that means you are sharing your account team with 50 other companies, you will get the vendor s attention only one week a year. Those are not good odds. I learned this early in my career. Although I worked for a Fortune 100 company, we were small relative to the Fortune 10. We bypassed one vendor s offer to consider our company a national account, choosing instead to be an account serviced by the regional team. Why? Because we were the largest account in the region and got that team s full and undivided attention. Rule 6: Don t Focus on Performance Guarantees Performance guarantees will not improve your service or satisfaction. But they will give the insecure sleeptight insurance for a price. I believe there is too much emphasis on performance guarantees. It is said that Ray Kroc, founder of McDonalds, built the business without ever signing a contract. I certainly would not go that far, but you can get carried away. When a company I worked for was acquired, I discovered that our new parent paid four times as much as we did with the same vendor for a similar menu of outsourced services. Curious, I spoke with an executive of the vendor and asked why. The explanation was that our new parent company had such complicated and extensive performance guarantees that the vendor knew it could not meet them all and that failure through no fault of its own was likely. So it built the cost of complying with the guarantees into the contract price. At the end of the day there was no advantage. The company could have saved time and money eliminating the guarantees. All vendors want to do a good job. Usually, a failure that would trigger performance guarantee payments can be traced back to the failure to follow the rules I have listed. Most causes of failure are created by the buyer not the seller. takeaways >> Outsourcing is not necessarily cheaper; strategic reasons other than cost may be more important. Functions can be outsourced; accountability can t be. After-the-fact contract changes can be costly. Performance guarantees can drive up costs. continued on next page september 2011 benefits magazine 39

5 Rule 7: Treat Your Vendor as a Real Partner Getting the vendor and its staff on your team is critical to success. The closer you can come to obtaining a dedicated unit devoted either mostly or entirely to your company, the better. Include them in all planning. Solicit their ideas and show interest and incorporate their ideas into the final program. Build team spirit with your company. These people are representing your company. When working with a new vendor, we would conduct an orientation program for people working on our accounts just like a new hire. We would have team-building sessions. We would encourage the vendor to have special recognition programs for its employees working on our account. We would have spontaneous luncheons and pizza parties. All of this was to build loyalty. In starting up with any new vendor, we had people on the ground at the vendor s offices, solving problems, answering questions, leading and listening. Rule 8: Don t Put All Your Eggs in One Basket Do not select one outsource vendor to handle all of your << bio Clark Sprague is president of The Sprague Group, LLC, a benefits consulting and insurance company in the greater New York City area, with clients in the telecommunication, consumer product, pharmaceutical, airline, utility, high-technology and retail industries. He has over 20 years of experience designing and managing plans for some of the largest companies in the United States. Sprague earned an M.A. degree in human resources from St. Francis University and a B.S. degree from the Kelley School of Business at Indiana University. He can be contacted at clark@thespraguegroupllc.com. outsourcing needs. If there is a problem, moving the business will be difficult. In some cases, brokers will offer one-stop shopping, arguing they can supply everything from insurance to administration. They may actually believe their own marketing. Each vendor has strengths. Select vendors on their strengths and do not gloss over weaknesses. It is far easier in the long run to select and manage multiple outsourced vendors. This will give you more leverage, since moving pieces of the business is always easier than moving an entire program. Unless the company is very small, consolidating all services in one vendor results in administrative simplicity, but rarely an improvement in overall satisfaction. In almost every case I have seen, one-stop outsourcing has resulted in overall lower satisfaction. Flexibility should be key in choosing outsourcing vendors. Summary As someone who has been involved in outsourcing both as a buyer and consultant since before it was fashionable, the ideas presented here are what I found lead to the greatest success. Outsourcing is not a panacea. Understand the why, what, where and when behind the decision to outsource. Understand your plans, internal processes and culture. Details matter. Manage the process and don t let the process manage you. Size matters. Choose vendors that are right-sized for your company. Don t get hung up on performance guarantees. If you must have them, keep them few, simple and easily measured. Build partnerships with your vendors that create loyalty. Don t fall for the easy fix. Putting your eggs in one basket rarely produces the best result. 40 benefits magazine september 2011