You are on page 1of 11

NLogic!

Your knowledge partner

White Paper

Strategic Benefits of a Global


Delivery Model for
Retirement Administration
Services
Overview: Global Delivery Model
Finding innovative outsourcing solutions to benefits administration assumes
greater importance for corporates, Third Party Administrators (TPAs) and
everyone else in the value chain

Though a global phenomenon that has come to stay, outsourcing


seems to win a broad-based organizational commitment
particularly during the times of uncertainties such as: "Y2K",
"dotcom bust", "economic downturns of 2001-02". The recent,
and the on-going slow-down, triggered by sub-prime crisis, is no
exception. Organisations are under great pressure to save cost
(for survival) and to find new market differentiators (for growth).

Outsourcing innovation promises to support organisations to


achieve exactly these twin goals: For instance, US organisations
that outsource, agree that there is a cost saving of US$ 0.58 for
every dollar spent in outsourcing; thanks to outsourcings,
executives can have more than 80% of their management time
and bandwidth for formulating strategies, rather than managing
details of transactional business processes.

Studies show that corporates in the US allocate on an average up


to 5% of their IT budgets to outsourcing their business processes.
The value of global IT outsourcing alone accounts roughly for US$
125 billion – this figure is expected to increase to US$250 billion

White Paper - Final Draft Jaisingh Page 1


NLogic!
Your knowledge partner

by 2015. In 2008, the global BPO market is estimated at US$ 235


billion. During the same year, the Human Resource Processes
Outsourcing (HRPO), which covers pension administration, payroll
management, employee benefits management, etc, is estimated
to be of the size of US$67 billion – this means outsourcing of HR
services accounts for over one fourth of the global outsourcing
market.

As the population across the globe is aging, the number of


participants in company's defined benefit (DB), defined
contribution (DC), and retiree health plans will continue to
increase. Therefore, the administrative and cost burdens will go
up. In this context finding innovative outsourcing solutions to
benefits administration assumes greater importance for
corporates, Third Party Administrators (TPAs) and everyone else in
the value chain.

Global Delivery Model and Benefits Administration:


Organisations that see value in co-creation wear the attitude of partnership
and outsource mainly the so-called core, upstream, strategic functions

Globalization of businesses processes had begun when


organisations found the necessity to externally distribute business
processes across boundaries – organizational, geographical and
cultural, to enhance competitiveness through growth, learning
and value addition. In this context, the success rate of an
organisation in outsourcing - which comes in different hues, colors
and combinations of in-sourcing, out-tasking, off-shoring, near-
shoring, etc – clearly determines its competitiveness. Today,
outsourcing is pursued not just for labour arbitrage - it is not done
with “do-the-best-and-outsource-the-rest” philosophy anymore.
Organisations that see value in co-creation wear the attitude of
partnership and outsource mainly the so-called core, upstream,
strategic functions, adopting the new ethos of: “create-using-

White Paper - Final Draft Jaisingh Page 2


NLogic!
Your knowledge partner

global-hands-and-deliver-with-local-touch”, the underlying theme


of the global delivery model (GDM).

Different from a typical onsite/offshore model, GDM refers to a


customized sourcing framework that encompasses a combination
of innumerable sourcing options. In the context of GDM involving
knowledge process outsourcing, the outsourcing vendor creates a
value proposition by leveraging skills that exist across all borders
- organisational, physical and cultural, intensively using
information & communication technologies to achieve cost
effectiveness, innovation and productivity. The vendor distributes
projects to different strategic locations across the globe and
delivers services, typically through an onsite centre. The key
differentiators of a GDM model are: minimized security and
project risks, easy ramp up/scaling up of projects/teams, round-
the-clock productivity/work cycle. Over a period, the GDM vendor
creates Centres of Excellence across the globe for various skill
sets that form a self-excelling global value chain for particular
business processes.

For a long time, benefits administration, which comprises health


and welfare, pensions administration, and Consolidated Omnibus
Budget Reconciliation Act (COBRA) services, remained as the
proverbial “black-box”. It was fully managed in-house mainly for
reasons of data security. However, today, a whole host of benefits
administration processes such as 401 (k) administration,
retirement planning help, pension administration, health care
benefits administration, payroll, executive compensation and
incentive plans, administration of compensation/incentive plans,
wage and salary administration, among others, are getting
outsourced with some estimates pegging the value of global
outsourcing market for benefits administration at over US$ 22
billion.

Key Growth Propellers:

White Paper - Final Draft Jaisingh Page 3


NLogic!
Your knowledge partner

Outsourcing offers several non-cost related strategic benefits that facilitate


business growth—such as service extensibility and reduced cycle times
through shifting work to other locations.

The trend to outsource benefits administration appears to be


firmly entrenched. Let us understand some of the key growth
propellers of the outsourcing growth, apart from the cost
arbitrage [Though cost is not the only reason for outsourcing,
GDM promises a 30%-40% cost savings, making cost arbitrage
forming a strong business case for outsourcing].

Outsourcing offers several non-cost related strategic benefits that


facilitate business growth—such as service extensibility and
reduced cycle times through time-shifting work to other locations.

Demography: The demography related challenges to


benefits administration, were attributed to the aging
population with long-life span (paying benefits will have to
be continued for a longer period), increasingly mobile life-
styles of retirees (it becomes difficult for organisations to
track retirees and exchange information). The profile of
pensions and other benefits may increase, with a lot of
disparate and complicated schemes.

Government: There is great scrutiny from government,


which is coming up with regulations, new disclosure
requirements to enhance the governance of benefit
administration activities. The regulatory authorities are
scrutinizing benefit calculations much more closely.

Consolidation: Mergers, spin-offs, take-overs, corporate re-


engineering, downsizing, rightsizing affect the benefit
programs. During such organisational restructuring,
employers may have to wind up or merge various pension
plans. Employers make changes in plan design and features -
changing formulas, freezing accruals and terminating plans –

White Paper - Final Draft Jaisingh Page 4


NLogic!
Your knowledge partner

all these need support of a specialized third party and a


focused GDM vendor.

Technology Improvements: Thanks to the development of


web-based administration tools, organisations can keep the
actuarial functions - like interacting with employees,
inhouse, while outsourcing services like participant
calculations to TPAs. Employees can enrol online, set
contribution rates, update fund choices with data files
interfaced to company payroll systems without manual
intervention. There are web-based pension estimators,
information on total benefit package that goes beyond
pension to savings, health and life insurance, and estimates
of social security, if any.

Benefits of Outsourcing for TPAs


In a nutshell, GDM is all about arriving at a unique combination of technology
and BPO services that help TPAs achieve reduction of costs and increased
operational efficiency.

TPAs face many strategic and tactical challenges that affect their
business. They include consolidation of players, greater financial
disclosure and transparency requirements, legal changes, raising
costs of administration, staff turnover, shortage of qualified
people and increasing IT capital expenditure. Outsourcing
addresses all these aspects. In a nutshell, GDM is all about
arriving at a unique combination of technology and BPO services
that help TPAs achieve reduction of costs and increased
operational efficiency.

Cost Reduction: Cost reduction has been synonymous with


outsourcing throughout its development. However, a real
global delivery model is not just about making the most out
of labour arbitrage. GDM uses technology, process
improvements to the administration and by selectively
offshoring functions where they make business sense.

White Paper - Final Draft Jaisingh Page 5


NLogic!
Your knowledge partner

Nevertheless, outsourcing brings down the total cost of


ownership of the business processes. Knowing whether your
dollars are being spent in the most appropriate place and
whether those dollars are making the right return on
investment is a key driver for outsourcing.

Operational efficiency: In the wake of technology induced


productivity improvements, TPAs are doing away with
manual processes, spreadsheet-based administration
approaches, and decentralised service delivery models.
Since outsourcing automates pension administration end-to-
end, it greatly decreases operational risks and costs.

A technology-enabled BPO can enable TPAs achieve better


governance control, cost savings, and improved levels of
customer service in helping TPAs handle plan changes. It
empowers TPAs to deliver and communicate benefits
efficiently, accurately and on time to their customers.

Vendor Landscape:

Within the total benefits outsourcing framework, vendors are


engaged in the following functions:

• Health and Welfare Administration – including plan


enrollment, flexible spending account administration;

• COBRA/HIPAA administration and database management;

• Defined Benefit Administration – administration for pension


plans, trustee pension payment and benefits database
management;

• Participant Services – assisting employees, managers and


retirees through state of the art self-service technology, call
center services, operational tools and continuous reporting;
White Paper - Final Draft Jaisingh Page 6
NLogic!
Your knowledge partner

• Processing Services – providing retiree health and welfare


administration, premium billing and reconciliation and
communications.

Nevertheless, there are typically four types of GDM vendor


positioning. Vendors that focus on providing transactional services
such as COBRA; providing single service benefits administration,
e.g health and welfare administration or pensions administration;
providing multi-service benefits administration or service offering
'bundling' and providing benefits administration as part of a wider
multi-process HR outsourcing contract.

Major issues while outsourcing administration


services
Outsourcing is not a commodity purchase – therefore, it is not about
selecting a cheapest service provider.

The reasons for outsourcing should be based on: improved


turnaround time, reduced technology resources, higher quality,
process discipline, operational flexibility and continuous
improvement. TPAs should have systems, templates, checklists to
measure and monitor these benefits at regular intervals. The
checklists can let TPAs know whether outsourcing has helped
them to reduce cost, given more time for them to focus on more
business, whether they were able to increase the business,
specialise.

Being aware of some of the following macro and managerial


scenarios may help TPAs come up with a unique set of systems to
prepare for and assess the benefits of outsourcing benefits or
pensions administration:

Geo-political risks: There is a need to mitigate geopolitical


risks. Understand the economic and political environment of
the outsourcing destination of your GDM vendor. There are
many global rating agencies that monitor political, economic,
social and security developments for the specific countries
White Paper - Final Draft Jaisingh Page 7
NLogic!
Your knowledge partner

and forecast their impact on legislation, financial markets,


investment and trade risks, and other risk mitigation
services. Subscribe to their information services.

Cost-versus-benefit analysis: TPAs have to identify all the


costs involved in terms of people, technology, infrastructure,
compliance cost. Benefits would mean: wage arbitrage,
customer satisfaction, compliance, best practices, security,
data consistency, reduced risks, quality of service,
scalability, etc.

Value proposition: The value proposition refers to the


benefits that stakeholders are assured of receiving as a
result of their relationship with the vendor. It is a promise the
business makes to the customers. In the context of GDM, the
four basic areas of value propositions could be: operational
excellence, innovation, customer intimacy, and ownership or
assuming responsibility. All these promises can be measured
and monitored and managed.

Short term contracts: An administrator considering


outsourcing all or part of a function should initially carry out
a review so that all factors which might influence the way
forward are considered. TPAs can begin with short-term
contracts and give time of about 5 to 6 months to see
whether the teething problems are sorted out. Only when
this review is complete will the administrator be clear on the
nature and extent of the service to be outsourced and the
overall objectives of the contract.

Security: It is a prerequisite that the GDM vendors ensure


network security using firewalls, antivirus software and
hardware level measures, physical security through security
guards, finger scan and access control cards, data
encryption for transfer security, secure logins, separate work
area’s for large customers and multiple centers for fail-over
continuity, access cards, fire alarms, etc. The vendors should
have business continuity plan with adequate redundancies.

White Paper - Final Draft Jaisingh Page 8


NLogic!
Your knowledge partner

Importantly, the administrators should have checklists, templates


to review compliance health-check to understand whether the
scheme documentations fully comply with regulatory
requirements, conduct administrative process check to
establish best practices, and benchmark cost and
performance/benefit standards so that they can get to
compare the benefits of outsourcing administration processes.

Partner with the Focused KPO:


As pensions and benefits are becoming more complex, specialisation of the
vendors becomes the key to outsourcing success.

A specialist vendor can do a better job, possibly cheaper and


certainly more efficiently, than a KPO with a dozen or more
service lines. The specialist vendor can bring two important
factors to table. They are: experienced staff and updated
technology.

Also, the focused outsourcing vendors have the broad capabilities


to define, develop and administer a full array of benefits
outsourcing services. They bring a consultative approach to
administration, making process improvements and plan change
recommendations backed by the capabilities and experience to
implement and administer those recommendations through its
members.

TPAs have to take into consideration the track record, focus,


financial stability, quality of human resources, competency, in to
account before choosing a partner. Only the focused vendors can
have access to best practices, thanks to their earlier
engagements. TPAs also have to assess and evolve the
technological infrastructure of the customer, applications they
have, their business continuity plan, disaster recovery
arrangements, etc.

White Paper - Final Draft Jaisingh Page 9


NLogic!
Your knowledge partner

Governance and Relationship Management:


A governance and relationship management structure goes a long way in
helping TPAs build an effective working relationship with the vendor.

Outsourcing may not start producing results from the day one. It
is a relationship – between customers-vendors, that needs time to
mature. The best way to save the relationship is to place
relationship over short term gains, as it would cost deadly if
administrators start experimenting relationships, one after
another.

Relationship starts with understanding requirements: TPAs should


understand what are the desired gains and evolve a system to
monitor them. It is important to draft contracts that show the
roles and responsibilities of all the parties.

The governance and relationship management structure (GRM


Structure) orchestrates the entire relationship processes that start
from signing of the contract and evolves during transition,
delivery of services, etc. This enables both sides clearly identify
who has responsibility for making what decisions; understand how
the decisions will be made and how the results will be
communicated to each other; and provides accountability,
responsibility that TPAs and vendors have in the relationship.

The GRM Structure should specify the review mechanisms,


escalation points and methods of resolving issues at the outset –
it could insist on penalty and reward systems based on delivery,
and could also have an exit strategy – as part of relationship
management.

It is only companies with governance and relationship structure


that are able to meet their cost reduction goals, improving
customer service, transaction accuracy, and increasing
productivity.

Conclusion
White Paper - Final Draft Jaisingh Page 10
NLogic!
Your knowledge partner

The main areas of forecast demand for outsourcing are in human


resource functions such as benefits and pensions administration,
finance and accounting administration. GDM is synonymous with
a cost-effective model that combines technological superiority
with a secure global service delivery model. Any global delivery
model should aim at leveraging skilled expertise and resources
where possible across multiple development sites to increase
flexibility, lower risk, reduce cost and improve service quality.

There is no one-size fits all answer - TPAs can completely


outsource benefits administration function or use a combination
of internal and external resources to administer plans and
leverage technologies and people in combination with outside
vendors, to achieve better results.

White Paper - Final Draft Jaisingh Page 11