How to make the fastest-growing area of HRO work for your company.
Training and development outsourcing is one of the HRO areas with the greatest potential. But first, those evaluating their T&D programs must educate themselves on how to make them an A-plus strategy.
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Of all the human capital/HR activities that lend themselves to outsourcing, the area with the greatest potential is training and development (T&D). Pre-Internet and before IT demonstrated its potential, the HR professionals T&D initiatives were restricted by location, cost, and availability. They were also restricted by the organizations ultimate resourcethe caliber of the training professional (if, that is, the organization believed strongly enough in T&Ds importance that it budgeted for one).
The potential of T&D as an effective function was limited even further by complications that have existed since its inception. First, candidates frequently targeted for the T&D profession were career-changing teachers from the primary and secondary education ranks. The challenge with this is that not only do children learn differently from adults, but also training is a different skill set than educating.
Second, employees were often made trainers, not due to their ability or potential, but rather because of their temperament, personality, or the needs of the organization. Finally to complicate matters further, training professionals too frequently prefer the excitement of classroom presentations to the aspects of T&D design. This results in many training presentations being given by professionals who are only subject matter experts in how adults learn and not experts in T&D program design (and even subject-matter experts are not always guaranteed).
The whole question of T&D becomes quite strategic when approached in this context. There is a lot at stake for the organization in light of the competencies it is trying to develop for its employees. But dont let a fear of tackling a highly strategic issue prevent you from doing it. Because doing nothing different from the status quo, or even nothing at all, is also a strategic decisionwith its own set of dire consequences.
When the T&D function is considered in its entirety, think of the full range of activities, including administration, evaluation, Website design, and maintenance. In fact, as with all outsourcing considerations, early on in the process, you should consider breaking down each function into core competencies and commoditized (and labor-intensive) activities. The core elements are those that your organization does well and that provide a competitive advantage. Commoditized activities are those that sap energy and resources but are tangential and nonconsequential when done correctly.
Commitment to any T&D effort should be part of an overall organizational development strategy that should really be undertaken internally. To entrust others with this process is to deny key players inside the structure the chance to determine what would really be effective. In fact, as with all strategic planning, the process is as important as the result. Others may be called in to provide advice, but the decision should rest with those responsible for providing leadership for the organization.
Before we discuss where to begin, you need to consider your personal attitude toward T&D. See if you agree with this statement: You have many more resources accessible to you if you agree that you want the best available training for your organization, regardless of where you find it. This is a big step for those organizations that have traditionally prided themselves on homegrown training and believed it was the best available.
Consider a gap-analysis approach. Ask your executive team and C-level players what they feel the organization needs from training to maximize organizational effectiveness. Get granular and obtain all the details that you can, and avoid generalizations.
Then ask each of the key staff members you approach what they would like to see and expect from in-house training efforts. Even ask what they think of the new employee-orientation program as well as any other training programs currently provided internally. Your goal is two-fold. First, to determine the priority level these key executives assign to the training function. Second, to assess their level of sophistication for what they feel training should and should not be expected to do.
Before you begin the next phase of T&D assessment, one more step to take (assuming you have received positive indications from your activities above) is to continue your research by enlisting the support of anyone organizationally who could provide you with additional input. This includes reaching out to contacts locally and elsewhere who will share with you information about what they and their organizations are doing and what resources they are using.
Sophisticated recognition programs are no longer just for the big boys.
New Web-based programs now make it simple for any organization to offer the best in rewards, regardless of size.
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Recognizing and rewarding employees is an important way to reduce employee disengagement and turnover. Indeed, employee recognition and reward programs have become an increasingly strategic element for many major corporations.
Whether you have 50 employees or 50,000, the rationale behind a meaningful recognition program is clear. Study after study has shown that satisfied employees tend to be more productive and less likely to leave their jobs for other opportunities. Which begs the question, What keeps employees satisfied with their jobs? Equitable wages and a complete benefits package are certainly important factors. But employees also have consistently ranked receiving recognition for their work as one of the top reasons for staying in their present job.
From a company perspective, establishing a good recognition program can go a long way to improving employee morale and performance, which most often leads to improved productivity and improved profits.
Small- to medium-sized enterprises (SMEs) and large organizations alike understand that establishing and maintaining a good recognition and reward strategy takes a lot of planning and implementation. The proper infrastructure to support ongoing recognition programs can be complex and expensive.
But while most large organizations have already established formal recognition programs, SMEs have tended to shy away from the practice. It is simply too costly in terms of infrastructure and manpower to set up and maintain a program with a dedicated staff. Moreover, SMEs simply arent large enough to be cost-effectively served by the leading outsourced recognition providers. With the introduction of Web-based solutions, everything has changed.
The latest trend in the recognition industry is the move towards easy-to-use, self-managed Web-based recognition and reward programs that are enabling large and small organizations alike to optimize their recognition investment simply by connecting their existing infrastructure (such as employee databases) to an online recognition solution provider. By outsourcing to an online recognition solution provider, it is now surprisingly inexpensive to develop and run a highly effective recognition and reward strategy. Thanks to the advances in Web programming and technology, its also conceivable for an SME to have their recognition program, including a customized Web page, up and running within an hour.
When a state-of-the-art Web interface enables you to develop a customized recognition program and Web page (complete with your corporate branding) within a matter of minutes, it is easy to see how online solutions are taking all the grunt work out of the process while providing a host of other benefits.
A clear benefit of the outsourced recognition solution is that one individual within an organization, rather than a dedicated team, can administer the process. But the benefits dont stop there. An integrated Web-based solution can be linked to existing employee data in your organizations database, or in the databases of your payroll provider. By linking the employees hiring date to the recognition program, organizations can ensure that employees are automatically acknowledged for their service. And if your organization also allows managers to reward deserving employees for achievements on a regular basis, a points-based system can be established that will allow employees to accumulate points to purchase the gift items they really want, rather than something their managers have chosen for them.
Another key benefit of an outsourced solution is access to a much wider range of employee rewards. Items ranging from e-cards to golf clubs can be grouped into categories, which enables an organization to control material expenditures while still providing managers and employees latitude in selecting an appropriate reward. And since an external provider runs the program, you avoid the hassle of maintaining an inventory of reward items. Often, items can be shipped within hours of placing the order, making the ordering process painless for both the employee and the administrator.
With any outsourced project, the litmus test in measuring success is how much value it brings to the organization. Outsourced recognition clearly delivers value in terms of maximizing a recognition strategy at minimum cost. In the end, however, the greatest benefit to your organization will be a happy, productive, and loyal workforce that is willing to go the extra mile to support your business.
Sick celebrities and healthcare cost control.
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I was on the phone the other day with Suzanne Somers. You know Suzanne. Ask 100 Americans about her and their top 10 answers would be: The blonde in the car from the movie American Grafitti, Chrissy from Threes Company, The author of Eat Great, Lose Weight, The Thighmaster and Buttmaster infomercial woman, The star of that TV movie Keeping Secrets, The TV host of Candid Camera, Oh, I just bought her stuff on Home Shopping Network, Shes got that family anti-addiction institute, She wrote that hormone book The Sexy Years, and, at the end of the list, Sure, shes a cancer survivor.
April 2005 will mark the fifth anniversary of Suzanne Somerss breast-cancer diagnosis. I interviewed her for my new book, which focuses on the new celebrity openness about previously taboo diseases. Somers has been outspoken about how, after surgery and radiation, she avoided chemotherapy by going non-traditional with a homeopathic drug named Iscador. Today, she is cancer-free and speaking to anyone who will listen about the power of awareness in fighting this dreaded disease. She is also urging employers to be understanding about their employees need for a variety of tools to stay healthy, including insurance plans that allow alternative remedies and employer flexibility to deal with the need to heal.
How about Mike Milken? Our keynote speaker at last years NY HR Week/HRO World Conference, Milken has single-handedly revolutionized cancer research. After his prostate cancer diagnosis in 1993, Milken threw the weight of both his considerable intellect and wealth at the problem, with dramatic results. Today, while prostate cancer continues to represent 32 percent of all male cancers, more than $485 million annually is committed to prostate cancer research, and cure rates are as high as 85 percent in even previously incurable forms of the disease.
And what about singer-songwriter Naomi Judd, a hepatitis C survivor who gave up her career to fight the disease. Today, as she told me in September 2004, she is disease-free and the celebrity spokesperson for the National Liver Foundation.
And former Democratic vice-presidential candidate Geraldine Ferraro, who met me a couple of months ago in her high-rise office overlooking Ground Zero in lower
And Grammy-winner Shawn Colvin, whose recurring bouts with depression caused her to miss several sold-out shows. Colvin met me twice to stump for employer-awareness of the impact of depression on employee performance.
There are more: former Los Angeles Lakers basketball star Magic Johnson, whose battle against AIDS has helped convert him from pariah to profit-minded paragon of the virtue of openness. And former President Bill Clinton, whose emergency heart artery bypass surgery late last year caused more than 400,000 Americans to schedule appointments with their doctors.
And how could we forget diabetes sufferer Dick Clark, whose diabetes-caused stroke forced him to hand over his annual Rockin New Years Eve show to Regis Philbin. I met
To date, I have talked with more than 50 celebrities about their previously secret afflictionscancers, neurological diseases, eating and digestive disorders, mental illness, AIDS, heart disease, and diabetes. All of them are coming out of the closet for two reasons. First, openness is good for finding a cure for their disease. And second, because the cost of employee health care is todays most worried- about employer topic. (Note: 64 percent of all Americans get their health care through employers.)
At this years HRO World Conference, April 12-13 in
When plans compete for it, can employees win?
When it comes to tax-deferrable income, employees can win if their employer helps them understand the true value of each type of savings or coverage offered to them, depending on their financial situation and where they are in their career.
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The chart below compares seven common plans. That comparison, plus company matching, use it or lose it provisions, investment performance, flexibility of distribution options, and differences in tax law can make one type of salary deferral more appealing than another. However, it is not only possible but also appropriate that the appeal of one plan over others will evolve over time for any given employee.
Choosing a Pre-tax Savings Hierarchy
At most ages and circumstances, paying for medical expenses generally comes first. These can be direct payments premiums for medical coverageor indirecta flexible spending account (FSA) or health savings account (HSA). Next will usually be some form of savings, often in a plan offering a company matchlong-term for retirement or nearer-term for education or home purchases. The challenge for many companies is communicating the right information to help their employees choose how deeply to invest in the plan(s) that make sense for them at the time. Ideally, employers should present this information in a way that facilitates easy and regular re-evaluation by employees of their contribution and premium options.
The Life-cycle View
Employees savings goals change as lives and careers progress. For instance, employees unburdened by homeownership, childcare, or high medical costs might be inclined to save the maximum matchable percentage of their pay in their companys plan. Employees accompanied by children and a mortgage or other debt often find saving for education, home purchase, retirement, and family medical coverage or elder care to be higher priorities. Of course, as employees reach their 50s and 60s, their own age-related increases in medical costs further affect their spending behavior.
Can More Options Affect Nondiscrimination Testing?
The concern about the magnitude of lower-paid employees 401(k) contributions (relative to those of highly paid) remains relevant. Is the plan already suffering from poor nondiscrimination testing results? Or is current publicity about HSAs steering lower-paid employees away from 401(k) contributions and creating new nondiscrimination tension? Conversely, if the lowest-paid employees are living paycheck to paycheck, are they justified in paying pre-tax premiums for current medical coverage but for little else?
As long as employers are able to recognize and respond to these personalized communication challenges with understandable and accessible financial and tax information and guidance, competition among these plans for employees tax-deferrable dollars is a good thing. Then, and only then, will employees be able to properly allocaterather than dilutetheir disposable pre-tax income among employer-sponsored plans
Case Study: NBC Universal finds innovative ways to say Good Job!
An annual survey of NBC Universal (NBCU) employees showed that while employees felt that they made a difference, their contributions were not always recognized and spotlighted by their higher-ups. In response to the employee feedback, NBCU decided to create an improved employee recognition program. To help them in this project, they partnered with recognition provider IncentOne. < ?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
CREATION OF A BRAND
Prior to launching a new employee recognition program, the existing reward program was evaluated. NBCUs spot special award program was cash-based and awards were presented without fanfare. Although the program was well defined with good back-end controllership features, the front-end nominating process consisted of a paper nomination form that had to be routed throughout the company for appropriate approvals. NBCU decided to come up with a new program and a new brandOvation. The brand was chosen because this word describes the new culture of recognition NBCU desired to create and nurture. The goals of Ovation were to make the employee recognition process:
More memorableby encouraging merchandise and gift certificates, rather than just cash
More prevalentby encouraging smaller-sized awards, given more frequently and to more employees
More visibleby the creation of a branded program and by encouraging public presentation of awards
More personal and spontaneousby using Web-based technology to enable a wide variety of choices (merchandise, gift certificates, cash) to suit different employees and different occasions calling for recognition.
The Ovation program was designed to enhance NBCUs position as an employer of choice and improve overall employee satisfaction by developing a culture of recognition. A cross-functional team of NBCU managers, using GEs Six Sigma process, established the program guidelines based on voice of the customer input from operations managers. Recognition budgets were established at division levels and managed by HR managers in conjunction with operations managers. Ovation had managements full approval. The HR managers, charged with being the champions of the Ovation program, participated in various in-person and online training sessions in the weeks leading up to the launch. Several days prior to launch, the program was communicated to employees via e-mail announcements and feature articles on NBCUs intranet. Key to the success of Ovation is the broad choice of rewards that would appeal to a diverse audience. The program offers the award recipients choices with the Gift Certificate Award, which was specifically branded for NBCU. This award enables employees to select rewards from an extensive portfolio that includes gift certificates, merchandise, travel packages, personal services, airline miles, and phone cards. NBCU uses a comprehensive award management system that automates and integrates all program rewards, administration, and procedures. Eligible managers issue awards through an automated nomination and approval process that facilitates as many as four levels of authorization (for the very largest award levels). Once a nomination is approved, a personalized congratulatory letter; the Gift Certificate Award; as well as a framed Ovation Certificate of Appreciation, suitable for display to assure that the employees accomplishments are properly and publicly recognized, is sent to the nominating manager for presentation to the employee.
As part of the Six Sigma process that was used to develop the program, a variety of measures were set up to track progress. Key measures include the number of awards given each month, the average size of awards, the percentage of awards delivered as cash, and the average time it takes to go from nomination to final approval in their systems. Overall results include the following:
A culture of recognition strategy was well received and has been embraced at NBCU.
More employees are being recognized, more frequently, at no additional cost to the company. Return on investment has increased.
The entire rewards process is Web-based which results in quick turnaround with no manual residue.
Memorable merchandise awards, rather than nonmemorable cash awards, are encouraged.
Says Eileen Whelley, EVP of Human Resources at NBC Universal, I am thrilled with the enthusiasm with which managers and employees have embraced the Ovation program. Clearly, recognition of the accomplishments and outstanding work of our employees was something we needed to improve. This program has made an impact in this regard and is continuing at a fervent pace.
The changing scope of defined benefit outsourcing.
Once upon a time, the defined benefit (DB) pension plan system in the United States included a large number of plans fully cared for within the insurance marketplace. Insurance companies managed the investment of assets, provided draft or model plans, annuitized benefits upon retirement, and even took on mortality and investment risks post-retirement. Reporting and filing requirements, required communications to employees and retirees, and actuarial valuations were all included in the scope of the services.
However, several factors drove significant portions of the market away from these fully bundled approaches:
ERISA and subsequent regulations made design and operation of the plans more complicated and firmly ensconced the pension consultant as a plan sponsors trusted advisor.
The impact of asset growth and trust investment performance on plan and corporate bottom lines led many sponsors to pull away from insurance companies conservative investments, general funds, and investment and mortality charges. Companies also came to expect their own trusts to perform better than insurance company investment pools.
Declining purchase of defined contribution (DC) plans, growing scale of DB plans, and proliferation of lump-sum options in these plans eliminated the perceived need for insurance companies to assume the mortality risk (and to provide annuity products for DC plans).
The number of plans in the small and mid-sized market decreased dramatically, eliminating much of the insurance industrys market.
In the 15 to 20 years after the introduction of ERISA, most DB plan sponsors built their own infrastructures to support their growing plans. Internal staff typically used rudimentary programs to perform pension calculations for employees leaving or considering retirement. External actuaries provided plan design, compliance guidance, funding results, and certified annual government filings. Separate trustees and investment managers supported the growing trusts and ongoing benefits disbursements. This period was, perhaps, the high point of non-integrated administrative servicing. However, the DB plan was about to begin a migration back out of the halls of the plan sponsor and into integrated outsourced solutions.
Participant service technologycall centers, voice response, Web applications, and robust calculation engines and databaseschanged the pension system from one used to support former employees to an integral element in recruiting, retention, and retirement planning. Plan participants growing expectations of instant access to information, online transactions, and better support led to outsourcing.
Next came the financial reporting nightmares. In the late 1980s, DB plan sponsors became subject to separate financial accounting requirements. During the 1990s, plan assets generally performed well and plan sponsors enjoyed latitude with respect to financial assumptions. This allowed many plans to produce pension income for their sponsors and to continue to improve their funding levels. As long as these trends continued and participant service improved, the benefits department was often the hero. However, the heros welcome came to a dramatic end when the bad investment markets of 2001 to 2002 combined with low interest rates to produce higher reported liabilities on DB plan sponsors books.
Moving into 2005, we see a reversal of the disintermediation trend in the DB marketplace. Plan sponsors at all market levels are looking for providers to assume much of the plans management and devise strategies to minimize associated risks. But there are key differences between now and the days when insurance companies provided fully bundled services. For instance:
The number and type of providers have grown beyond the insurance companies. Other large financial players can offer the investment options and low investment costs that large employers may want along with continual monitoring of the investment mix versus investment policy.
Actuarial services, financial reporting support, audit support, government filings, and other plan management services are being reintegrated as added regulation and focus on financial reporting decreases plan sponsors discretion regarding assumptions and funding levels.
Outsourced administration has removed the plan sponsor from most interactions with plan participants. Communication requirements are integrated into the providers overall administrative solutions. Fully automated electronic solutions continue to replace costly paper and labor-intensive processes.
For many of the remaining (and declining number of) DB plan sponsors, outsourcing many of these interactions to as few providers as necessary is increasingly compelling. In the future, more plan sponsors will retain only the true basicsplan design decisions, plan funding responsibility, and vendor management.
Case Study: Pharmacy benefit management can be the perfect prescription for improved benefits services.
Like many health plans, Deseret Mutual has been facing increasing challenges presented by dramatic rises in the use and cost of specialty drugs. Several years ago, we realized the need for an improved system of managing specialty pharmacy benefits to better control costs and provide a higher level of clinical care support for members who use specialty medications. In choosing a pharmacy benefit manager (PBM) as our specialty drug provider, we found a partner whose experience and capabilities are helping us achieve that goal.
When we began developing our specialty pharmacy strategy, Medco Health Solutions offered consultative support that helped us understand the current state of Deseret Mutuals specialty pharmacy spending and utilization among our plan members. Historically, Medco managed all of Deseret Mutuals pharmacy benefits. When we asked them to look into specialty pharmacy benefits, they were able to provide an analysis of specialty pharmacy spending across our pharmacy and medical plans to give us an increased understanding of the specialty pharmacy challenge. We created a comprehensive plan to align coverage of specialty medications across Deseret Mutuals medical and pharmacy benefits and to provide new services through Medcos Special Care Pharmacy program.
The extraordinary expense of specialty drugs makes proper management essential to ensure that patients who need these treatments receive them, while having systems in place to prevent potential underuse, overuse, and waste of these medications. By selecting a PBM with vast experience in utilization management, Deseret Mutual was able to ensure that the same tools used to control utilization of traditional pharmaceutical products would also apply to managing specialty drugs. This includes prior authorization, step therapy, and product selection strategies. By working withour PBM, Deseret Mutual is better able to identify those members that will truly benefit from specialty therapies and those that may benefit from a more cost-effective therapy.
Deseret Mutual realized significant savings by requiring that select specialty drugs be dispensed through the PBMs specialty pharmacy. By doing so, we have been able to bring consistency to the pricing and utilization management of specialty drugs under the pharmacy benefit without compromising the services and quality of care available to members.
Controlling costs is a major concern, but equally important to Deseret Mutual is a specialty pharmacy that can provide the most comprehensive clinical care for our members. Medco offers the advantage of being able to look across a patients entire prescription drug profile and find out if traditional or specialty drugs are being used. This is particularly important for specialty patients, who are often also prescribed traditional medications for conditions associated with a disease that requires specialty treatment.
There are additional advantages to having all our pharmacy services provided under one roof. Through Medco, we are able to offer a coordinated approach to managing all of a members pharmacy needs. Having a single point of contact makes the system much more streamlined and less complicated for both physicians and patients. Physicians can order both specialty and traditional medications from the same source, and, at the same time, obtain comprehensive patient prescription information while qualifying the member for coverage under prior authorization. This coordinated system also improves patient careour PBMs specialty pharmacists and nurses work closely with Deseret Mutuals case managers to coordinate patient support services.
Administration for all out pharmacy benefits is also simplified by working with a single point of contact. When using stand-alone specialty pharmacies, plans must often manage multiple specialty pharmacies in order to provide members access to the wide array of specialty products in the market today. Many of these niche specialty pharmacies focus only on a limited number of conditions or products. However, our PBM gives us access to the services and drugs needed to provide our members with a comprehensive specialty drug benefit plancreating a much more efficient system that has helped us reduce administrative time and costs associated with specialty benefits.
Deseret Mutuals experience shows that by working with a PBM that offers specialty benefit management services, we can provide members using specialty medications with high-quality care in a cost effective manner.
Dont ignore the young talent around you, mentor the next HR generation.
One of the requirements you need to meet as you become an HR professional of the 21st Century, is to go out and see what is occurring outside the office walls. Heeding my own words, this past week I participated in the 17th Annual Benefits Management Forum and Expo in Nashville, Tennessee. The conference was arranged by Thomson Media, the publishers of Employee Benefit News. Let me share with you some observations in case you either did not attend or were there but had a different experience.
First, it was good to see that there were a lot of senior HR professionals representing major buyers and providers of outsourced services, both as presenters and as participants. Unfortunately, it did not appear that the seniors brought along their juniors, the detriments of which I will discuss later.
Second, so what was new? I was impressed to see an increasing level of specialization among the exhibitors. The provider industry is becoming more and more specific in terms of what they wish to offer and to what size employee population they wish to offer their expertise. One of the exhibitors was a CPA firm that specializes in HR areas, particularly retirement plans, and is, in fact, getting referrals from the Big Four. This is a dramatic change from the past, where HR has had to suffer second-class status as part of the annual organizational audit, with short-shrift treatment from lower-level public accountants who had little experience in the HR and health and welfare area. What is the big deal? It is not so different, was the cry from their seniors. They didnt add, It is also so boring, but you could see it in their demeanor. Now, finally, there are thriving firms who relish the business in this most recently higher profiled area.
Third, there continue to be top-tier benefit professionals in placedespite the mergers, acquisitions, and downsizing that has frequently decimated HR professionals as part of cost-reduction programs.
Fourth, there is more interest at the C Levelthat is CEO, CFO, CTO, CLO, and hopefully CHROfor the benefits aspects of HR, and internal HR professionals are stepping up to the plate. The result is that credibility is increasing because HR professionals are doing a better job of communicating the message upward and sideways.
Here, though, comes the alas (I bet you knew it was coming). A panel of four very distinguished senior benefits executives was moderated by conference mastermind David Albertson. One of the participants asked the panelists what senior-level professionals, themselves included, are doing to grow the next generation of benefits professionals. Other than a response of That is a very good question, the answer seems to be not much at all based on the weaknesses of the replies. Sure they include junior-level staff at meetings, but did they bring them along to this conference? Are they offering any opportunity for formal structured training? How about networking?
Talk about Killer Skillswhether your HR specialization is benefits or any other HR function, the key question you should always be asking is what are you doing to grow your staff? Not to detract from the panelists own drive and intelligence, but I am sure that each of them was fortunate enough to have been nurtured by someone as they were learning the profession, and they benefited from it.
It should not be by chance that a person gets to grow professionally or not. Make it part of the HR DNA, and hopefully, it will become an integral part of the organizational fabric elsewhere as well. Start today to plot a specific professional development program for each member of your HR team. Whether they grow internally or move over to the other side (buyer or providerI am sure in the future it will go both ways), there is no greater legacy that you can leave behind.
To make you feel uncomfortable, let me ask you to consider the alternativeWhat if you do nothing to help your team to grow professionally? If you dont do anything, you should not be able to sleep nightsyou will have too much to worry about and may even feel guilty as well.
Tips for Getting the Most Out of Your Next Contract Renegotiation
With many first-generation total benefits and HR outsourcing contracts up for renewal in the next 12 months, employers may be losing money if they arent taking advantage of the changes taking place in the market. Based on our experiences at Watson Wyatt, we have found that one way to improve efficiencies is to drive more employee benefits transactions to the Web. Another tool that employers now have in their favor (that they may not have had several years ago) is several years of data that allow them to renegotiate contract terms based on actual employee usage patterns and customer service trends.
Research shows that many of the companies who first signed HRO contracts five to seven years ago are likely to renew their deals. However, doing so without significant renegotiation could be a serious financial mistake. Many early-stage HRO adopters experienced higher than expected outsourcing costs because of certain elements in their original contracts. Locking in long terms, for example, prevented employers from negotiating lower rates after just a few years. Not including reasonable transition fees in the event the employers population size changed dramatically, also proved to be to employers detriment.
Nowadays, employers have more leverage and information than when they negotiated their first contracts, and they should capitalize on this opportunity to reduce costs and improve customer service. Companies are in a much stronger position due to the consolidation occurring among multiple outsourcing service providers and recent research on usage trends, companies have more leverage in renegotiating contracts.
This makes it a great time for organizations to negotiate their next outsourcing contracts. But lowering costs and improving service quality isnt automatic. Companies must be proactive in their contract renewals to get the most competitive deal.
NEGOTIATING KNOW HOW: FOUR FACTORS TO SUCCESS
SO HOW DO YOU GET THE MOST OUT OF YOUR NEXT CONTRACT NEGOTIATION? BEFORE YOU RE-SIGN ON THE DOTTED LINE, TRY THESE TIPS.
1) Focus on service needs.
With advances in technology and growing employee comfort with Web-based transactions, many of the service provisions necessary five years ago may no longer be needed. Because more workers use the Web to conduct benefits-related transactions, this means fewer employees are calling outsourcers customer service call centers than in the past, lowering the vendors staffing requirements and costs. Companies should capture these types of shifts and potential savings during contract renewal negotiations.
2) Use acquired data.
Original outsourcing contracts were negotiated without much information on usage levels and other factors. Now, after years of data collection, companies have real numbers at their fingertips to help them negotiate contracts that closely align with their needs. By looking at measures such as call volume, content, and call resolution rates over a period of time (12-24 months), companies can better predict future service center usage for leveraging in the negotiations.
3) Solicit stakeholder input.
Input from employees, benefits staff, and other key stakeholders can help companies get a better perspective of actual service quality and cost savings and translate this knowledge into action. If, for example, employees report frustration with long wait times during service-center calls, the new contract should modify existing performance guarantees to address the changing requirements.
4) Consider shorter contract lengths.
By negotiating shorter contracts or contracts that allow for midterm renegotiation, companies can obtain the flexibility they need to update their contract terms to reflect the changing environment. Locking into a long-term contract may not provide the best deal because of reductions in various service charges. Its important for companies to have the option to adjust their outsourcing strategies to use new technologies, incorporate new groups of workers added through mergers or acquisitions, and capture any benefits and savings associated with further consolidation within the outsourcing industry.We have seen a continued reduction in various service charges over the last six years. Because we expect this trend to continue, locking into a long-term contract may not provide the best deal.
Passive enrollment may be automatic in many ways, but it still requires action.
The concept of passive enrollment appeals to many 401(k) plan sponsors. Surveys show an increasing number of sponsors adopting this approach also referred to as automatic or negative enrollment. Passive enrollment is essentially the opposite of conventional enrollment, where employees do not make any contributions to their company’s 401(k) plan until they submit specific instructions. Passive enrollment allows the employer to automatically enroll employees into its 401(k) at specified contribution and investment percentages immediately upon hire or upon meeting eligibility requirements. These specified (default) percentages remain in effect until the employee instructs otherwise. Passive enrollment has the potential to benefit both the employer and the employee. But there are communications requirements and pitfalls worth avoiding that plan sponsors should note before implementing.
With all employees contributing (at least upon their initial eligibility), the plan will likely produce more favorable nondiscrimination test results. Meanwhile, employees may come to appreciate that salary deferrals are an easy way to save for retirement, without having a significant effect on take-home pay.
However, there are potential downsides. Its automatic nature may confuse some employees as to their options for changing the default contribution and investment percentages. Others will question whether the plans default investment options take the proper amount of investment risk (perhaps too little for younger employees or too much for older ones). Furthermore, IRS Revenue Ruling 2000-8 requires that, upon hire, the plan administrator must advise all employees affected by passive enrollment of the following:
- the default salary deferral percentage automatically applicable to their pay (typically 3% or 4%);
- their ability to change the initial default contribution, and specifically how and when to do so; and
- their right and the timeframe to opt out of making contributions altogether (meaning a change to 0%).
The plan administrator must provide similar notifications annually to all employees who remain in a passive enrollment status i.e., those who never revised the defaults initially applied to their contributions.
The Revenue Ruling sets these requirements only for the contribution percentage aspect of these automatic contributions, not for their investment. But these notification requirements present an excellent opportunity for the plan sponsor to highlight the plans investment options. This is especially true since plans with a passive enrollment provision must provide at least one default investment fund usually either fixed income or low-risk equities until the employee specifies otherwise.
When exercising passive enrollment, the employer loses some of ERISA Section 404(c)s protection against participants legal action, because the Department of Labor views default investment elections as the employee not having exercised control over their account. Therefore, while reinforcing the long-term benefit of plan participation, salary deferrals, and (where applicable) the company match, the plan sponsor may want to include additional advice to employees about their passive enrollment process, such as:
- the default investment fund(s) that will apply to their contributions;
- the funds available in the plan and how to transfer from the default investment fund;
- procedures and timeframes for changing investments;
- the value of assessing their personal financial situation and risk tolerance, and how to do so; and
- how and where to obtain more information on the plans investment options.
In short, initial and ongoing employee communications about passive enrollment is far from a passive exercise for the plan sponsor and the plan administrator. However, passive enrollment can consistently yield higher participation levels if plan sponsors think carefully and innovatively about how to weave it into the plans overall design and administration.
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