End-to-end benefits outsourcing is not new to HR, but for the mid-market the offerings so far have been paltry. However, the Hess Corporation has put the delivery of employee benefits on high octane since it embraced a TBO deal.
Total benefits outsourcing (TBO), in which administration of employees’ pension, 401(k), and health and welfare plans are outsourced to a single provider, hit the scene decades ago as a way for large companies to pare costs and for their employees to simplify access to important information regarding their investment assets and well-being. In the past few years, TBO has migrated into the mid-market, assisting mid-size companies to acquire the same benefits as their larger counterparts.
A year ago, the Hess Corporation signed a TBO contract with provider Affiliated Computer Services, Inc. Headquartered in New York, Hess is a global integrated energy company engaged in both upstream and downstream enterprises, from exploring for oil and gas to refining petroleum into products such as gasoline to selling the finished product at the pump. Unlike oil giants Exxon-Mobil, Royal Shell, and ConocoPhillips, Hess is a mid-market player, ranked 24th among integrated oil companies in petroleum refining. Yet, it is finding many of the same advantages in TBO that larger organizations have gleaned, including a 25-percent cost reduction.
Hess is by no means a small fish. The company enjoyed nearly $29 billion in 2006 revenues; it lists more than 14,000 employees across six continents and 15 countries; and its retail stations in the U.S. top 1,350. But compared with industry leader Exxon-Mobil’s $347 billion in 2006 revenues, Hess’ sales place it squarely in the mid-market. Its modest size turned out to be a factor in attracting outsourcing service providers, many of which were focused on much larger organizations (see When Size Matters, p. 35).
The tantalizing factors enticing most organizations to consider TBO also attracted Hess to the table. The company had previously outsourced its 401(k) administration to Fidelity and in-sourced both pension and health and welfare. While this strategy worked just fine, David G. Lutterbach, Hess vice president of global benefits, health, and wellness, said, “It was a high-cost structure to maintain, given the expensive upgrades for an employer our size.”
The previous system also was low on functionality and productivity gains. “We had no software, for example, to do pension modeling,” Lutterbach added. “Much of the work also was manual, done by our internal staff, which created the risk of error. Additionally, we were concentrated in terms of knowledge, with a few people here having the broad view, creating yet another risk exposure. And, from an employee standpoint, they had a fragmented view of their wealth-building information, which could affect their decision-making.”
While employees could log on to the company’s intranet and see their defined-contribution plans handled by Fidelity, there was no similar access to their pensions because it was an internally administered, paper-intensive system, Lutterbach explained. “We wanted more of an employee-centric solution,” he said. “Less important to us was cost savings.”
As Hess’s HR department began to assess its administrative provision of “total” benefits, it realized that it had things backwards. “To coin a phrase my boss used, we were insourcing administration and outsourcing strategy,” said Lutterbach, who was hired in part to lead the TBO transformation at Hess in 2005. Previously, he had served as the director of global benefits for Ingersoll-Rand after leaving the Siemens Corp., where he was director of benefits, a role that also required him to oversee a TBO solution provided by Hewitt.
“We wanted benefits here to become more strategically oriented versus transactional,” Lutterbach added. “It was a sea change, shifting HR resources to make them more consultative and focused on leadership issues, as opposed to doing administration.”
One of Lutterbach’s first decisions was to utilize the services of an outsourcing consultancy in handling the RFI and RFP process. Hess hired Technology Partners International (TPI) in Houston to grease the wheels.
“Having been down this path before, I wanted to define clearly what we were trying to achieve before we entered the planning and contract phases,” he explained. “We did some feasibility benchmarking with TPI to analyze what we would yield from the effort, including the savings that would accrue by maintaining state-of-the-art software and best practices.”
He recalled TPI as a veritable storehouse of data and possessor of deep institutional knowledge on TBO solutions, which, he said, gave it the expertise to match up the right providers with the appropriate clients.
As Hess went through the bidding process, it learned that not all top service providers were interested in providing a TBO solution for a mid-size company, including Fidelity, the service provider for Hess’s defined contributions, Lutterbach said. While Fidelity wanted to continue administering defined contributions and was interested in tacking on defined benefits to its services, it wanted to “patch in” another provider for health and welfare services, he recalled.
Still, there were enough bidders to make things interesting and competitive. From a list of five potential providers, three were selected for on-site visits at Hess. Getting the nod was ACS. Lutterbach recalled that it offered an alluring combination of service, contract terms and conditions, and price.
ACS is an amalgamation of some of the best minds in the TBO field, due in large part to a crucial key acquisition: a $405 million purchase of Mellon HR Services in June 2005. Previously, Mellon HR had acquired Unifi Network from Pricewater-houseCoopers, which had acquired Kwasha Lipton before that.
ACS today is a Fortune 500 company with 58,000 people supporting client operations across more than 100 countries, providing business process outsourcing and information technology solutions to a veritable Who’s Who of industry and commerce. In the TBO space alone, the service provider has chalked up 175 clients, including several oil and gas companies, a factor that played as much a part in Hess’s decision as did ACS’s keen interest in servicing mid-market clients. Recently, ACS inked a contract with Ameren Corporation, one of the nation’s largest investor-owned electric and gas utilities. The contract calls for ACS to manage the company’s defined benefit and health plans for Ameren’s 24,000 participating employees and retirees.
In contrast, the Hess-ACS deal calls for “full” TBO, explained Ted Rudich, executive managing director in the Little Falls, NJ, office of Dallas-based ACS. “One of the differentiators for us is our SBU (strategic business unit) model. We offer a self-contained, client-centric model that focuses exclusively on Hess and their particular needs.
“We looked at their processes and went through a best practices analysis to see what wasn’t automated and should be automated, such as pension calculations. As a result, Hess employees today have a single point of entry for all their benefit, pension, and H&W inquiries and transactions, from
a technology as well as a customer-service perspective.”
Given the wide range of petroleum-related enterprises that Hess participates in, its 11,000 U.S.-based employees and retirees covered by the TBO contract run the gamut, from executive-level engineers and geophysicists to oil field workers, service station attendants and mechanics. Some choose to implement ACS’s user-friendly web technology for their inquiries or transactions, while others opt to use a call center.
By putting the inquiry and transactional responsibilities in employees’ hands, Hess can concentrate on its core functions while ACS manages the participant-driven inquiries. Moreover, the benefit program and participant data that formerly were maintained in multiple Hess locations are now housed within ACS’s integrated technology. Said Rudich, “HR no longer has to worry about tactical administrative functions and can assist senior executives with their strategic priorities.”
Prior to implementing the TBO solution, Hess worked with ACS on the necessary but delicate change management procedures. “It’s the biggest challenge in the minds of employees,” Lutterbach stressed. “We conducted on-site training sessions and had a robust communications strategy that included the provision of CD-ROMs and information on new investment options via ACS.”
Rudich said that change management expertise was provided to Hess via Buck Consultants, an ACS subsidiary. By providing materials to help employees make the transition from one environment to another, Rudich said the provider’s aim is to make its HR service centers seem as if they were part of Hess’ operations.
“Our portal says ‘Hess,’ and when we answer the phone, we say ‘Hess.’ We feel like part of the Hess culture. We’re empathetic to their employees and are extremely client-centric, even though we’re behind the scenes,” Rudich noted.
ACS implemented services for Hess in phases, with defined contribution services having gone live on October 1, 2006. Open enrollment for Hess’ health and welfare programs went live later that month, while ongoing health and welfare went live in January 2007. The defined benefits component was up and running on April 1, 2007.
“We’re fully phased-in now, and from an employee perspective, they have the ability to look at the full gamut of their investments via a single solution, doing things like pension modeling, for instance,” said Lutterbach. “They can look at their work-life events, such as a marriage or the birth of a child, and use the Web to understand how this may impact their investments and pension in the futue and changes that may be required.”
While it is still too early to fully assess the success of the five-year outsourcing engagement, Lutterbach said he is bullish, noting the impressive cost savings.
“We’ve reduced headcount by 12 full-time employees,” he said. “We also now have a single, full-time employee whose sole job is to manage and oversee the performance metrics (in the contract). While issues still bubble up, we have developed and introduced clearly defined process maps that indicate when things can move up to the corporate level (for review and action). Consequently, we’ve been able to rechannel the benefits staff on things like wellness and healthcare strategies going forward.”
Down the line, Hess is looking to outsource other aspects of HR, Lutterbach said. The company continues to rely on a shared-services center within its HR department for payroll needs but is contemplating an outsourcing solution in that regard, Lutterbach confided.
“We’re looking at full HRO as the next space,” he added. “As things progress, I imagine we will want to move more administrative and transactional services outside the organization.”
As outsourcing engagements go, the one that Hess has undertaken is not unlike those of its predecessors—buyers who engage in point solutions before taking on HRO wholeheartedly. However, the oil company’s experience supports the contention that benefits outsourcing deals can be successfully implemented for mid-sized organizations, as well as for global enterprises with tens of thousands of employees. And that fact alone should continue to fuel the growth of HRO adoption in this segment.