Making Sense of HR and Benefits Delivery Options - Hewitt Study

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1 Making Sense of HR and Benefits Delivery Options - Hewitt Study Does the wide range of HR and benefits administration options confuse you? Do you, like most organizations, think about buying services from an outside provider, but you still aren't sure whether you want your HR and benefits administration to be insourced? outsourced? or co-sourced? Do you struggle to understand the difference? Do you read in the literature about alphabet soup of provider options--bpo, ERP, ASP, BSP--and wonder where you were the day they handed out the decoder rings to make sense of all or them? Do you look for explanations only to run across fuzzy distinctions like vertical specialist, process-oriented supplier, or pureplay BPO? Do you wonder how this ever got so complicated? If so, don't fret; you're not alone. It only seems like the complexity and confusion surrounding the options for HR and benefits administration are set up to intentionally confuse you. Clearing the fog is easier than you think--there are only three things to remember who owns the people, processes, and technology. People, Process, & Technology One approach to understanding the complexity is to break it into its component parts. HR and benefits administration has three basic components: People, Process, and Technology. The distinction between insourcing and outsourcing lies in the first two: people and process. Deciding whether to insource or outsource your HR and benefits administration lies in answering the question: Who should own the processes and the people who execute them? Technology is the key to what type of insourcing or outsourcing you are considering. Answering the question of who owns the technology will help us distinguish between different flavors of either insourcing or outsourcing. People Follow Process (Insource vs. Outsource)

2 You cannot own and operate processes without the people needed to execute them. Therefore, people and process go together, whether inside or out. Insourcing may be the best direction if the thought of a service provider controlling the processes for your HR and benefits administration gives you nightmares, or if you break into a cold sweat at the idea of the people who manage those processes being employees of an outside service provider. However, outsourcing may be for you if you warm to the idea that the continuous improvement of your HR and benefits administration is the responsibility of a provider whose core competency is human capital management. Outsourcing may also be for you if you would be relieved by knowing your administration provider has assumed the challenge of recruiting, hiring, training, and retaining the specialized human capital management talent necessary. In either case, whether you decide to insource and maintain control over the people and processes, or outsource to have a service provider take responsibility for the people and processes, you still have critical decisions to make about the three sub-components of technology: infrastructure, applications, and implementation. Technology's Three Disciplines: Infrastructure, Applications, Implementation/Integration The technology component of HR and benefits administration has three discrete disciplines, each of which is critical to effective HR and benefits administration: infrastructure, applications, and implementation. Regardless of whether you insource or outsource your HR and benefits administration, you will need to make sound business decisions about which, if any, of these three you develop and maintain yourself, and which you look to an outside service provider for. Few organizations consider HR systems to be "mission critical." Your organization needs to decide whether it has and is willing to allocate precious technology resources to development, maintenance, and continuous improvement of the non-mission critical technologies that support HR and benefits administration. Technology Infrastructure

3 Technology infrastructure encompasses everything necessary to host, manage, operate, and protect the security of the important and sensitive data and applications central to employees' HR and benefits administration. It includes everything from transaction bandwidth and capacity, to firewall design and architecture, to disaster recovery capabilities. When a soon-to-retire employee wants her pension calculation, she deserves to have confidence that the data is accurate and secure. When a father needs to confirm coverage for his newborn baby, he deserves to have confidence that transaction he executed adding her was not held up because the administration systems were not robust enough to handle the flood of transactions since the merger. You also deserve to have confidence that the infrastructure is sufficiently open, flexible, and adaptable to allow integrating new capabilities and applications as they are available. Technology Applications Technology applications encompass all the tools your employees, managers, and HR professionals need to interact with and manage HR and benefits programs. These applications may be simple interactive voice response systems that allow participants to check their 401(k) balances or enroll in their health plans. Or they may be sophisticated, Web-based applications for managers to identify and hire new employees, for participants to obtain retirement investment advice and execute the recommendations, or for HR professionals to do strategic workforce management projections. The range and scope of HR and benefits applications is mushrooming dramatically, and you deserve to have confidence that you have the tools you need and that new tools will work together effectively. Technology Implementation Technology implementation encompasses the full set of skills and experience necessary to integrate new infrastructure and applications into the existing technologies. Even the most state-of-the-art applications and the most reliable, secure infrastructure are of little value if the various technologies cannot be implemented and effectively integrated. The investment advice application needs to be integrated with the application that displays 401(k) accounts and balances. The application that allows employees to keep current on career opportunities needs to be integrated with the learning-management application. No single technology provider has yet to develop an end-to-end, fully integrated HR platform. Therefore, implementation of diverse, integrated systems is the key to technology that enables transforming human resources and benefits delivery. Insourcing--Technology Disciplines Implications If you've decided to keep ownership of your people and processes--in other words, you have decided to insource--you have three options for insourcing your HR technology disciplines: build, buy, or rent. Build

4 If you decide to build it yourself, you are in that minority of organizations committing to developing the infrastructure or hosting capability, creating the applications, and implementing and integrating all the systems to create a whole. The advantage of the build strategy is that you maintain control over your infrastructure and the systems implementation and integration, and that you can build your application to meet your specific needs. You are not subject to the constraints or conflicting priorities of an outside provider. The disadvantage of the build strategy is that you need the budget, the know-how, and the infrastructure to create, maintain, and enhance all three technology disciplines in an area that your organization may not consider mission critical. Buy Over the last several years, buying HR technology applications has become the popular option. Many companies have purchased and implemented the HR functions of Enterprise Resource Planning (ERP) systems, such as PeopleSoft, SAP, Lawson, and Oracle. The strength of this approach to HR technology is that ERPs provide a proven, integrated set of applications that can run on most any technology infrastructure. However, with an ERP, you will still need to own and maintain your own infrastructure, and you have to hire someone, most likely one of the "big five," to perform the implementation and integration. In addition, as close as the ERPs are to an end-to-end HR solution, they are not quite complete, so you may have to buy, host, and implement and integrate a handful of "point solutions" to fill the gaps. Rent Renting HR technology has gained popularity over recent months. Application Service Providers (ASPs) will rent you "carve-out" applications for specific HR solutions, such as benefits, payroll, and recruiting. Business-Process Service Providers (BSPs) will rent you an end-to-end HR system. The renting option is sometimes referred to as "co-sourcing."

5 The strength of the ASP/BSP approach is that the provider not only supplies the application, but also hosts the applications. In the case of BSPs, the provider also manages ongoing implementations and integration across a broader spectrum of the HR function. An ASP is a carve-out solution to a specific segment of the HR process. It is not an end-to-end solution, and integrating all the carve-outs to cover the process end-toend isn't in the cards. BSPs, much like ERPs, automate most all of the HR process, but they also leave gaps. If you choose the BSP route, you will need to ensure that your provider will continue to develop and integrate the applications necessary to fill all the gaps. Outsourcing--Technology Disciplines Implications If you're willing to let go of the people and processes--in other words, you have decided to outsource--you have two options for outsourcing your HR technology disciplines: carve-out or end-to-end. Carve-Out Outsourcing Most of the traditional HR outsourcing involves carving a specific process out of the total HR picture. A common example of carve-out outsourcing is the way that many companies outsourcing their benefits delivery. The outsourcing provider takes ownership of the process, and with its own people and technology (infrastructure, applications, and implementation and integration), it provides the services back to the client company. The advantage of the carve-out approach is that there are suppliers of proven carve-out HR services. Some come at it from a core competency of fund management; some from a core of systems integration. Hewitt, for example, comes at carve-out benefits outsourcing from 60 years of creating and deploying core competencies in HR and benefits strategy and design, financial management, managing HR risks, and delivery technologies. A carve-out outsourcing provider takes the responsibility of managing the processes, staffing the function with the necessary expertise, and maintaining the technology infrastructure, applications, and implementation and integration.

6 Carve-out outsourcing, however, by definition, is not end-to-end. If your ultimate goal is to reach an end-toend HR outsourcing solution, you will need to choose your carve-out providers wisely to ensure that they can integrate their solutions with the other providers to cover the entire function. End-To-End Outsourcing You can arrive at end-to-end HR outsourcing (often referred to as HR BPO) through one of two basic models: take-over or contractor/subcontractor. (The reality, of course, is that neither appears in its pure form. Take-over outsourcers usually have subcontracting partners, and contractor/subcontractor outsourcers usually often to take over some of their clients' people, processes, or technology.) Takeover end-to-end HR outsourcing occurs when the outsourcing provider absorbs or "takes over" your people, processes, and technology applications into its organization and manages them. The applications continue to run on your current infrastructure, but the outsourcer will provide the implementation and integration discipline for any system upgrades or enhancements. One advantage of the takeover model for end-to-end HR outsourcing is that the primary providers of this approach are the ERP implementers--the applications they take over are the same applications they implemented for you a year or two earlier. This route to end-to-end HR outsourcing gives you immediate relief from the responsibility for the entire HR process, the people, and two of the three technology disciplines. It is the provider's responsibility to manage the process and people for maximum cost effectiveness and operational efficiency. The challenge of reaching end-to-end HR outsourcing through the takeover model is that initially the provider simply takes over the same ERP system, with the same limitations and capability gaps, that you were using. Contractor/subcontractor end-to-end HR outsourcing occurs when the outsourcing contractor uses its own people, processes, and technology (infrastructure, applications, and implementation and integration) by assembling a group of "subcontractors" to provide a complete, end-to-end HR solution. The advantage of the contractor/subcontractor model for end-to-end HR outsourcing is that all three of the components of the HR function--people, process, and technology--and all three disciplines within technology--infrastructure, applications, and implementation and integration--are managed for increased cost effectiveness and efficiency by an outside provider. The challenge in the contractor/subcontractor model is that even if it achieves its cost effectiveness and efficiency goals, it may not achieve the primary objective you have for end-to-end HR outsourcing. Your objectives may run deeper than merely gaining efficiencies and lowering costs. Your objectives may include making human resources genuinely more effective in delivering value to the business. If so, it is critical to

7 choose an HR outsourcing provider with deep and broad understandings of the true value of the human capital it takes to run your business. HR Transformation HR transformation is about more than saving money or gaining efficiencies. The ultimate prize is to transform the human resources function so that it is an effective partner in the strategic management of the human capital you need to achieve a competitive advantage. Efficiencies and cost savings are important, but genuine transformation requires an outsourcing partner with core competencies in human capital management, business process, financial management, managing HR risks, and delivery technologies. Transformation requires a partner who can redesign the human resources function not only for efficiency, but for effectiveness.