Tendering for benefits products is commonplace in the public sector, but is still unusual among private sector organisations. By doing so, however, employers could gain a better service for their staff. Cost savings are also often up for grabs.
Case study: Powergen
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Tendering for products and services is something that public sector organisations are familiar with. EU regulations stipulate that they must invite bids for a whole range of purchases, including their employee benefits. In the private sector, the idea of putting benefits contracts out to tender is less popular, with many employers choosing to build long-term relationships with their benefits providers, in spite of the fact that they may not always be getting the best deal. Tenders Direct is one of the UK’s largest tendering websites, providing access to over 30,000 current government and utility company contracts in the UK and Europe.
Managing director, Tim Phillips, says there are few things that can’t be put out to tender, yet in spite of the potential benefits of doing so, private sector firms have been slow to catch on. "We are starting to deal with more private sector organisations, but it is still quite unusual. The fact is that they are not legally obliged to do it, and because they see the process as costly and time consuming, they choose not to. What they fail to realise is that by putting prospective providers in a competitive situation they are much more likely to get the best deal for [their organisation], themselves and their employees." Tendering is seen as one of the fairest way for buyers to ensure they have received the best available offer from the market.
There are benefits to the bidders too; they are all given the same time limits to respond, the same objectives to overcome, and no preferential treatment. The process is straightforward; the main objective is to produce a number of proposals, which meet most of the buyer’s requirements. Tendering usually involves a number of stages, each one designed to provide more information from those potential suppliers with solutions near to the requirements, while eliminating any that are unsuitable.
A summary of the buyer’s needs is sent out to prospective providers, who are then asked to provide the organisation with a statement of their capability, an outline of their proposal, and the likely cost. From these, the buyer draws up a shortlist of around six or seven providers and issues them with a formal invitation to tender, asking them to submit their final proposals. The process can be managed in-house. "You don’t need to go through a third party or a tendering portal. HR should have enough current market information to draw up a shortlist of three or four providers that best suit their needs and simply ask them for detailed proposals," says Phillips. However, companies that do put their benefits contracts out to tender usually engage the services of an employee benefits consultant.
Tim Gillingham, head of employee benefits at consultancy firm John Scott & Partners, says: "When we go to the market on behalf of a client, we give prospective providers the basic client information and establish from the various providers the terms of the policy they are offering, what sort of technology they use to deliver the benefits and what support is provided. From there, we produce a shortlist and ask those on it to come in and present their proposal." Employers often base their decision to invite tenders on the prospect of making substantial savings, but Gillingham insists that cost should not be the main focus. "The tendering process might cost £1,000, and as a result [organisations] could make savings of £1,000 on the policy, but where they really stand to gain is by awarding the contract to a provider who can offer a better or more efficient service.
The key consideration here is that quality and efficiency of service are very important to the employee." By the same token, employers should not [opt] for the cheapest deal. "Price alone gives no indication of how good the service will be, how secure the provider is and therefore how much of a risk the employer is taking," Gillingham explains. The decision to tender may also be based on what proportion of the benefit is paid for by the employer. Martyn Phillips, a consultant at Towers Perrin, says: "Where the costs of a particular benefit are borne by the employee, the employer may not feel as inclined to try and find the most cost-effective package. What they should remember is that with modern technology employees can do their own cost comparisons [for rates and terms] using the internet. From the employer’s point of view it is [worth] making the effort."
Things like pensions administration and life insurance products, where only a small proportion of the workforce are likely to make a claim, are the types of benefits most likely to be put out to tender. However, the private medical insurance market is so complex that many employers are wary of changing providers and often go on to develop long-term relationships with them. With the occasional incentives thrown in, they see no reason to move, until things go wrong. Darren Laverty, a benefits consultant at Millfield Employer Partnership, encourages his clients to take more of a proactive approach. "We do get asked to review benefits packages for our clients, and, in the majority of cases, it is because there has been a problem. Our approach is to raise employers’ awareness before they reach that point by stimulating and, if necessary, disturbing them into reviewing their benefits. We do this by sharing with them the results of our own market research and studies."
Then there is the added factor of employees’ perception of the value of their benefits. "In assessing whether or not they have a good deal, most employers don’t seem to consider their staff, who typically place a value on benefits of only around a-third of what it actually costs the employer," he adds. If, at the end of the tendering process an organisation decides to stick with their existing provider, there is still no room for complacency. "Employers need to keep an eye on the market and resist the easy option of simply rolling the contract over at the end of its term," says Towers Perrin’s Phillips. And the same goes for the procurement of employee benefits consultancy services. More than anything, employers need to be aware of the huge changes that are ongoing in the benefits marketplace. With their in-depth knowledge of the marketplace, brokers can add real value, and those services are well worth tendering for as well.
Depending on the size of the contract, paper-based tendering can be a lengthy and laborious process, both before and after the bids are submitted. Hosted by an internet broker, online tendering can reduce the post-tender negotiation period from weeks to a matter of hours. The reduction in paperwork also enables members of the benefits procurement team to increase their own productivity. The online bidding process itself is fast and highly competitive, but organisations that use it generally ensure that price is not the main criteria when selecting providers. Quality of service and support are just as important, to the extent that in many cases the winning bid is not necessarily the one with the lowest price. Many organisations are now getting to grips with the concept and pace of online tendering and seeing it as an additional procurement tool that can bring extra value to the company and its employees. And just as tendering can help employers to save money on their benefits package, carrying out the process online may generate additional cost savings.
Case study: Powergen
Under EU public procurement rules, public authorities and utilities businesses that operate in the energy, water, transport and telecoms sectors, must get tenders for goods or services above certain value thresholds. When energy operator Powergen’s private medical insurance contract with Axa PPP expired last year the company put it out to tender, eventually awarding it to Bupa. Corporate procurement manager Katherine Brough says: "Publishing the request for information, assessing the submissions and watching three presentations was time consuming. At the end of it, Bupa were considered the cheapest and most efficient provider." Given the choice, many regulated organisations might prefer to simply roll these contracts over at the end of their term, particularly where standards of service have been high. Powergen, however, saw it as an opportunity to improve a key benefit currently provided to more than 2,000 members of staff. "In terms of time and money it was a big investment. But it does reflects the level of commitment that the company has towards its people," adds Brough.