Standardized Health and Benefits Admin Outsourcing Services Proliferating for the Mid-Market

As my colleague Gary stated in his May 27 blog, standardization is key in making mid-market HRO affordable, efficient and sustainable for both buyers and providers. And given the skyrocketing costs associated with healthcare and delivering health and benefits administration services to employees, it should come as no surprise that Mercer on June 11 introduced an expanded health and benefits administration outsourcing platform to offer a standardized solution for clients with 5,000 to 10,000 employees.

With this new service offering, Mercer joins the ranks of HRO vendors – including Hewitt and ExcellerateHRO (which, as of last week, is now exclusively owned by HP following its purchase of Towers Perrin’s shares in the company) – which have developed and are providing standardized health and welfare offerings to the mid-market. What’s the value proposition of such standardization for mid-market buyers?

Our January 2009 Mid-Market HR Outsourcing Market Analysis found that the top drivers for outsourcing benefits administration services are: 1) Better technology than clients have the capital to invest in themselves; 2) Improved employee experience; 3) Standardized and streamlined processes; and 4) Reduced expenses. And indeed, the standardized health and welfare offerings from today’s HRO providers are helping mid-market companies meet each of these needs. Let’s look quickly at each one.

Better Technology – due to economies of scale, providers have been able to cost-effectively develop or invest in technological platforms which enable rapid implementation – and thus quicker payback – of automated functions and robust self-service capabilities for their clients’ managers and employees.

Improved Employee Experience – whether it’s changing a deductible amount, applying for a Leave of Absence, enrolling in a benefits program or adding or removing a spouse or dependent to an insurance policy, employees feel more in control when they can manage health and benefits-related activities themselves via self-service. And they can do so 24/7, rather than during regular working hours.

Standardized and Streamlined Processes – enterprise-wide consistency regarding activities such as how to enroll in a benefits program, how to determine the impact of healthcare policy changes, who to call for questions and where to go for online portal-based FAQs is advantageous for employees and their companies alike in terms of satisfaction, bandwidth and cost savings.

Reduced Expenses – our above-mentioned Mid-Market Analysis found that mid-market health and benefits administration outsourcing buyers are reducing their costs by an average of 26 percent.

We estimate more than half of the health and welfare outsourcing market is comprised of mid-market organizations. Further, we anticipate growth in overall benefits administration in the mid-market will be 10 percent through 2013, which signals a continuing trend for mid-market organizations to address technology, service delivery and cost issues through outsourcing.  But questions do remain. Which companies will jump on the bandwagon, and which won’t? Will health and welfare outsourcing for the mid-market live up to its promises? This is certainly a space to keep an eye on.

Until next time, happy sourcing!

Helen Neale, Research Director, Human Resources Outsourcing, NelsonHall

To Offshore or Not to Offshore…That is the Question for Mid-Market Companies

Is offshoring of non-client facing, back-office HR processes valuable and viable for mid-market companies? Let’s put political rhetoric, protectionism, fears of domestic job losses, etc. aside for a moment and look at the dollars, sense and stats.

Just like their larger brethren, mid-market companies can gain fairly significant cost savings by offshoring back-office processes such as data entry and validation, payroll processing, software applications development, resume mining and job offer generation, file sharing and other administrative and transactional processes. They can also benefit from improved service delivery due to streamlined, standardized processes and technological homogeny, and expedited cycle times due to 24×7, follow the sun capabilities.

On the flip side, the purported cost savings for mid-market companies (of up to 30 percent, a questionable number, in my view) often don’t materialize anywhere near to that extent. This lack of anticipated cost savings is due to a range of initially unforeseen factors including greater than expected training expenses, travel-related costs, inflation and increasing wages in many offshoring locations. And service delivery issues, still maturing delivery models, governance challenges, etc. also have a negative impact on the benefits and perception of mid-market HR offshoring.

Sounds pretty much like large-market and mid-market buyers face the same dilemmas in the whether to offshore or not to offshore decision, yes?

Yes. This all said, the results and our analysis of the findings of our January 2009 research study entitled “Mid-Market HR Outsourcing Market Analysis” found that offshoring of non-client facing back-office HRO processes will continue to increase. This is in large part because offshoring service providers are increasingly recognizing the importance and value of the still largely untapped mid-market, and are making significant investments to support and satisfy it. For example:

•  One mid-market provider we spoke with plans to increase its offshore capacity from 475 to 800 by the end of 2010; 60 percent of the volume increase will be to service newly transitioned processes from existing clients and the balance is expected to come from new clients

•  New or expanded service centers to support mid-market companies are planned for or cropping up in Ukraine, Mauritius, Morocco, the Far East and Philippines, as well as Tier 1 and Tier 2 locations in India

•  Pure play offshoring providers such as Caliber Point and Wipro are partnering with ERP providers to deliver services to the mid-market through offshore locations, signifying a clear change in both the supplier landscape and the services to be provided to mid-market organizations

•  We estimate offshore, mid-market HR FTE numbers will increase by five to 10 percent over the next three years

The investment in offshored mid-market HR processes is clearly being made, and uptake appears to be solid and growing. Time will tell what level of ROI is realized by the provider and buyer communities.

Gary Bragar, Lead HRO Analyst, NelsonHall

The 80/20 Rule in Mid-Market HRO = Major Cost Savings and Much More

The “80/20 rule” most frequently refers to the Pareto principle which states that, for many events, roughly 80 percent of the effects come from 20 percent of the causes. But here, with all due respect to Italian economist Vilfredo Pareto for well-intentioned plagiarism, I’m referring to making mid-market HRO affordable, efficient and sustainable for both buyers and providers.

In mid-market HRO, the 80 percent is standardization, e.g. alignment and relative homogeny of systems, processes, metrics and data across the buyer organization, and a provider model built to operate to scale and at peak efficiency across multiple clients. And the 20 percent is configurability – minor changes to the standardized processes and technology – to meet individual client’s unique needs and requirements.

And the model appears to be working well for the provider and buyer communities alike. It enables providers to realize a profit by offering scalable, repeatable, affordable solutions to mid-market companies, and provides buyers with significant cost savings, single, standard technology platforms for delivered services, increased consistency and accuracy, and employee self-service ease.

•  For example, in payroll, a variety of providers offer multi-country payroll services which are a big boon for multi-lingual, multi-currency companies. And per our January 2009 research report entitled “Mid-Market HR Outsourcing Market Analysis,” the average cost savings for mid-market payroll outsourcing buyers – whether multi-country or not – was 22 percent.

•  In benefits administration, the standardization provides enterprise-wide consistency on how to enroll, how to determine the impact of changes, how to apply for a leave of absence, where to go for company online portal-based FAQs and who to call for more individualized questions, etc. And our above noted report found an average savings of 26 percent for buyers.

•  Standardized RPO processes in the mid-market include creating and submitting job requisitions, screening and testing candidates, extending job offers, processing I-9 forms proving eligibility to work in the U.S., etc. And by outsourcing RPO, buyers can save an average of 26 percent according to our January 2009 mid-market HRO research study.

The downsides of this high level of standardization for the mid-market are that there is a learning curve for both HR staff and employees, and larger mid-market companies may have multiple systems and legacy processes that “work” for particular groups within the organization, and those will have to be given up and the new modus operandi embraced. But effective communications and change management programs can eliminate those challenges.

Finally, according to our January 2009 Mid-Market HR Outsourcing Market Analysis, by 2013 HRO standardization will increase to 90 percent to meet the mid-market’s top three drivers: 1) reduced cost; 2) improved service (including consistency of service delivery); and 3) better technology than clients can afford to implement themselves.

Gary Bragar, Lead HRO Analyst, NelsonHall