The New Benefits Calculus

TBO is a more viable—and transformative—option than many companies realize.
By Jeff Miller
To many U.S. employers, HR outsourcing begins and ends with their defined contribution (DC) programs, while they continue to in-source or “co-source” health, pension, and other benefit programs. But things are changing. Prompted by the uncertainties of the economic downturn and the increasing complexities of the current and future regulatory environment, companies are focused on minimizing the cost and risk of administering their benefits. And that’s where outsourcing plays not only an important role, but also a transformative one, especially for an organization’s HR structure.
Obviously, moving to a total benefits outsourcing (TBO) solution is something that many companies might view as a luxury that only the largest companies can absorb efficiently. But first-time outsourcing of health and other traditionally in-sourced programs is on the table at more organizations than before, especially as HR leadership reassesses its options, deciding whether the HR department, an outsourced benefits provider, or a “co-sourced” combination can best deliver. More to the point, what will best promote HR’s transformation from administrator to strategic business partner?
Admittedly, it’s not an easy call. But asking the right questions can guide the right decision. For starters, there’s the issue of risk. Will your company be able to manage the risks associated with providing pension and health care benefits amid increasingly complex benefit regulations? Do you have a data management system that will help you manage all your employees on a global basis?
As for the question of cost, can your company efficiently perform all benefit functions without leveraging the technology and economies of scale of a large outsourcing provider? Will your sourcing solution be able to grow with your company as it becomes more global? And finally, which option will provide the best decision-making tools, resources, and support employees need as the demand for high-touch benefit services increases? In-sourcing may indeed provide high-touch support, but can that go far enough without outsourced technology?
The case for outsourcing, of course, lies in how it brings these issues together. The right outsourcer will address cost concerns by providing value and scalability with fee transparency and definition. It must mitigate in-house risks and offer expert navigation of regulatory changes that in-house HR might miss. And it should guarantee efficient, high-quality service—whether co-sourced or TBO—that meets employee needs and company goals.
But before proceeding with a first-time outsourcing strategy, companies must take a diagnostic approach to valuing their sourcing options, always in the context of HR and business goals. This begins with measuring the feasibility of both in-sourcing and outsourcing solutions. The sourcing decision should then be designed from the standpoints of operational cost, competitive differentiation, and ability to deliver strategic results. Implementing the design requires that it provide quantitative data for HR to demonstrate the return on investment, and to optimize the cost, continually improve efficiency, and align with business strategy.
Again, that’s a complex task. In our business model, it’s not enough to just offer outsourcing services; the process begins with a diagnostic tool we call the operations scanner, which gathers the data to quantitatively and qualitatively assess the HR operation and enables an informed sourcing decision, modeling multiple scenarios and demonstrating the impact of changes. The diagnostic approach is especially important when the organization is in need of HR transformation.
Indeed, we encountered this in the case of a northeastern U.S. city where health and benefits administration had always been in-sourced but had become fragmented and resource-heavy, lacking internal processes and controls. The structure of its HR team needed to be redesigned as well, with redefined employee job titles, descriptions, and responsibilities. But change would require the buy-in of various elected and appointed officials and labor union representatives.
It came down to building the business case for a collaborative solution. By outsourcing the current H&B administration and transforming the organizational structure of HR to meet union requirements and provide cost efficiencies, the city achieved a transformational change—not just an outsourced solution.
Outsourcing is always transformational. Changes to HR structure and processes create a domino effect, for better or worse, throughout the remaining HR function and even the broader organization. Thus, those considering a first-time move to outsourcing should not view it as a stand-alone event. The most successful outsourcing efforts are holistic. Outsourcing providers that can offer an integrated solution to this complicated challenge have an advantage over those that merely administer. It’s an advantage that can translate into a genuine competitive edge for their clients.
Jeff Miller is president of Mercer’s outsourcing business. He may be reached at

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