Outsourcing benefits sometimes gets a bad rap, with the mere mention raising fears of redundancies. However, outsourcing certain benefits can make HR life much easier, reducing the time needed for admin tasks and allowing more room for strategic thought. Each organisation’s needs will differ, so examine the business case for outsourcing before writing it off.
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There cannot be many benefits managers that choose a career in HR with the express intention of spending their days filling in change of address details on employees’ benefits forms. Outsourcing schemes promises to take away the tedious elements of managing benefits, leaving staff free to focus their energies on more strategic tasks. Yet mention the word outsourcing to most staff and they instantly expect their P45 to land on their desk. Outsourcing has received a lot of negative publicity – not all of it unfounded. But it should not be dismissed as unsuitable for everyone, without first examining the business case for outsourcing benefits within each organisation.
Chris Noon, consultant in the HR outsourcing business at employee benefits consultancy Hewitt, says: "Most of the UK is not used to outsourcing and does not know what it means. Furthermore, [employers] do not know how to manage an outsourcing relationship or how deep to involve themselves in the process." A simple definition of outsourcing is the handing over of responsibility for providing and managing a service to an external party. In the employee benefits market, pensions administration has been the most popular employee benefit to outsource because it can be cumbersome to manage. Other benefits that can be outsourced include fleet management, private healthcare and, flexible and voluntary benefits schemes.
However, many in the industry say that large organisations, which have traditionally managed benefits in-house, are now moving towards the outsourcing model, albeit slowly. But before diving into the market, businesses need to look closely at the advantages and disadvantages of outsourcing employee benefits for their organisation. Cost savings are typically thought of as one of the main reasons for outsourcing schemes. Many processes in HR and benefits administration, such as updating employees’ details, can be repetitive. So there is an argument that these can be delivered much more efficiently by outsourcing to providers that have scalable and replicable systems in place, as well as the technology to process these transactions more cost-effectively.
For this reason, it is often claimed only larger organisations can appreciate the benefits outsourcing brings, because of the scale and size of their administrative duties. But SMEs can also gain from outsourcing, albeit for different reasons to larger businesses. Richard Stewart, director at provider PMW Benefits Solutions, says: "The arguments in favour of outsourcing are often more relevant to SMEs because of the issues they have. The benefit for smaller companies lies in removing the risk and cost of employing experts to run an employee benefits scheme in-house." Another argument for outsourcing employee benefits is better service provision. Anne Ross, corporate business manager at employee benefits provider Accor Services, explains: "The biggest benefit of working with an outsourcing organisation is their expertise." Hewitt’s Noon agrees: "An outsourcing firm running pensions administration will more readily be able to access [advice] with specialist pensions skills than an individual company might."
Many providers are also differentiating their offering through value added services. One of the main advantages they have is that they measure the cost of processes and can, therefore, find out if a company is not gaining the best value from its benefits programme. Gareth Emmonds, HR consultant at HR consultancy and outsourcing services firm, Black Mountain, says that organisations should not just expect their outsourcing provider to look after the day-to-day administration of their employee benefits system. Instead, he recommends employers should "tell [their] company if healthcare usage rates are low, for example," so that it can address the problem straightaway.
Much of the negative publicity around outsourcing has occurred because a provider has either failed to deliver what it promised or its client has been unrealistic in its expectations. Hewitt’s Noon advises employers to be realistic about the repercussions outsourcing will have on the HR team and rest of the organisation. "Things will go wrong and the organisational strain will be big. If a company is not ready for that strain, it should look at whether it wants to outsource the process at all." And the cost savings are not as transparent as they might first appear.
Vanessa Robinson, adviser for strategy and organisation at the Chartered Institute of Personnel and Development (CIPD), which is publishing a research document on outsourcing HR this spring, warns: "It can be hard to save costs unless they were carefully monitored beforehand. Remember that managing an outsourcing contract will still require someone’s time, which needs to be accounted for." With the outsourcing waters much muddier than they first appear, employers might be forgiven for not knowing what steps to take to examine outsourcing benefits in closer detail. Industry peers that have already been through the process offer a good starting point and can often pass on lessons learned. Employers should also consider exactly which benefits they want to outsource. Deloitte, for example, does not outsource flexible benefits schemes for clients because it does not believe a business case exists. Mike Ashton, principal in its Human Capital Practice, says: "The case for outsourcing is where administration is of a highly technical nature or where the skills are not available in the marketplace. Yet, the technology available has simplified flexible benefits administration significantly and a flexible benefits scheme puts all the benefits in one place so it should increase efficiencies."
Hewitt’s Noon argues this is nonsense: "Companies should definitely outsource flexible benefits programmes because these can be really complicated to manage." Indeed, Employee Benefits’ Flexible benefits research 2004 found that 59% of organisations with flexible benefits plans said the complexity of administration was the main disadvantage of the schemes. However, Cadbury Schweppes initially outsourced its flexible benefits programme because it considered it too complicated, only to bring it back in-house two years later. Jan Johnston, HR services development manager, explains: "When we started the scheme, it all seemed so complicated and we did not know where to start. But we found we lost control and it was inflexible."
The company’s main problem with the outsourcing model was that it simply did not believe it added any value to its business. "When we first launched, it was a paper-based system so we had to collect employees’ forms and post them to the third party, who then typed them up and returned them to us to check. This simply added another layer of complexity in administering the scheme," explains Johnston. So organisations should look at the benefits of outsourcing their employee benefits package on the individual merits of each benefit. "The main thing to bear in mind is that there is not one best solution; it is very much what fits the culture of your organisation, its size, sector and business pressures," concludes the CIPD’s Robinson.
Outsourcing employee benefits does not have to be a nightmare and there are some points employers should bear in mind to ease the transition. 1. Firstly, ensure that both parties are clear of their roles and the contract outlines exactly what the outsourcing provider will supply to the organisation. Vanessa Robinson, adviser for strategy and organisation at the Chartered Institute of Personnel and Development (CIPD), says: "The feedback we hear from some organisations is that, with hindsight, they would have done more research and been tighter on their contract than they were. For example, if you have signed a contract based on transaction volumes, what happens if your organisation shrinks?" 2. Communication is also key. Employers need to know, for example, that any questions about outsourced benefits will to be dealt with by the provider, which will include management of agreed processes and service measurements in its cost.
A flexible benefits launch prompted new media firm, The Usability Company, to outsource its benefits package. Paul Blunden, chief executive, explains that the company’s size – it employs just 25 employees – was behind the decision. "As a small company, we did not feel that we could do [it] without help." Outsourcing the scheme also seemed a logical step, because the company already outsourced its accounting function and part of its payroll to third-party providers. Its flex scheme, therefore, was outsourced to Thomsons Online Benefits in December last year. Blunden adds that the move has enabled it to offer staff additional benefits. "One of the things we have been able to do through outsourcing that we would not have been able to do before is offer benefits such as salary sacrifice schemes." The costs have worked out at about £4 per head. "It is also a very scalable system, which means that if we grow to 200 employees, the cost [scale] will not change."