Why Small to Mid-Sized Organizations Should Consider Outsourcing Benefit Related Aspects of Human Resources
By: Eric M. Parmenter, CLU, ChFC, LUTCF, REBC, RHU

A wise old adage says; "Concentrate on your strengths and delegate your weaknesses." This concept is true in sports, business, and virtually all areas of life requiring top performance. A basketball team with a star shooter will design special plays to get the ball into her hands. A company with a tremendous product or a unique service will focus company resources to further develop, promote, and capitalize on its advantages. Perhaps this principal has no greater application than in the effective management of small to mid-sized organizations (defined as 20 to 3,000 employees). A major component of effective management is the proper utilization of human resource (HR) personnel.

Full Court Pressure

In basketball, it’s hard to get the ball up the court if the opposing team uses full-court pressure. In business, external and internal forces represent full-court pressure and these forces are motivating organizations to look for new and different ways to succeed. First of all, budgets are being stretched more than ever before. For instance, now that the possibility of an all-encompassing national health care system has diminished, the cost of medical care and health insurance premiums is on the rise again. According to a recent study the average per employee cost of health insurance is now over $3,837 for Preferred Provider Organization Plans (PPO) and $3,596 for Health Maintenance Organization Plans (HMO) per year.

The cost of doing be business has increased in several other areas as well. For example, businesses are investing significant sums of money in technology in order to adapt to the information age. The tight labor market makes attracting and retaining quality employees more difficult than ever. Keener and fiercer competition in the market place for a firm’s products and/or services also presents a formidable task for organizations to tap into new sources of revenue.

In addition to these budgetary pressures, most mid-sized organizations are not properly staffed in the Human Resource area. For instance, the average salary of a professionally educated Human Resource Directors in the for-profit sector is over $87,000, which makes it difficult for smaller to mid-sized businesses to afford more qualified HR personnel.

Because of the high cost of highly educated and experienced HR Directors, many organizations are placing significant demands on a small HR staff.

Yet, these financially challenged executives are responsible for an increasing population of employees. Unemployment is at the lowest point in nearly thirty years.

Adding to the budgetary, compensation, and growth pressures on organizations, are increased legislative initiatives. In addition to the already complex nature of ERISA (Employee Retirement Income Security Act), COBRA (Consolidated Omnibus Budget Reconciliation Act), and the IRC (Internal Revenue Code), we now have several relatively new legislative mandates, such as the following, that are expanding employer responsibility:

ADA (Americans With Disability Act)

FMLA (Family Medical Leave Act)

PHSA (Public Health Service Act)

SBJPA (Small Business Job Protection Act of 1996)

HIPAA (Health Insurance Portability and Accountability Act)

MHPA (Mental Health Parity Act)

NMHP (Newborns’ and Mothers’ Health Protection Act)

trA97 (Taxpayer Relief Act of 1997)

Budget Act of 1997 – Medicare Provisions

Final and Proposed Cafeteria Plan Regulations (March, 2000)

GUST (2001)

With the cost of health care on the rise again how can organizations afford to offer attractive employee benefits and compete in the job marketplace with the sizable Fortune 1,000 companies? With stretched organizational budgets, lower pay scales, and a growing number of employees to serve, how do small to mid-sized companies survive and thrive in new millennium? In an era of increased legislative, regulatory, and legal pressures, how do human resource departments of small to mid-sized companies achieve compliance and reduce liability?

Go To Your Bench

In basketball, when your starting players are exhausted or ineffective the coach will turn to players on the bench to come in to the game and give the team a lift. Championship teams often have a strong and deep bench with many talented players that can come into a game to play a specific role. The pressures noted above are just a few reasons making it more rigorous for small to mid-sized organizations to remain competitive in today’s workforce and why these organizations are considering outsourcing various aspects of human resources and employee benefits. According to Sue Burzawa, Associate Editor of Employee Benefit Plan Review, "Corporate streamlining and the desire to improve service to employees have prompted human resource departments to seek administrative solutions that enable them to do more with less."

The main problem with most human resource departments of small to mid-sized organizations is not enough humans and not enough resources. In other words, HR departments often lack a strong bench. However, human resource managers are discovering new ways to increase the size, scope, and expertise of their departments through outsourcing. Think of a human resource department with a bench of talent in outside consulting or administrative firms that function as back-up support. On this bench are human resource specialists, attorneys, CPAs, and additional administrative support personnel. Because these professionals are equipped with the knowledge and strategies to effectively develop benefit plans and manage HR, they often find sufficient cost savings to offset their own fees. Thus, HR outsourcing can be very cost effective.

Several key HR functions are currently being outsourced by many organizations. For instance, a recent survey indicates that 67.9 percent of firms outsourced training, which included needs analysis, program design, and delivery. Outsourcing of human resource functions often includes the following items:

1. Employee benefits planning and administration
2. Employee benefits education and communication
3. Investment education and financial planning
4. Personnel forms and records administration
5. Job description and evaluation
6. training needs analysis and program development
7. In-house training
8. Personnel policies and procedures
9. Employee handbooks or manuals
10. Performance planning and review
11. Wage and salary planning and administration
12. Recruitment, selection and hiring of new employees
13. Terminations, suspensions and disciplinary actions
14. Employee opinion surveys
15. Affirmative action plans
16. Federal and State laws and regulation compliance
17. Labor negotiations and contract administration
18. Self-directed work teams training and implementation
19. Total quality systems
20. Fund raising

In the realm of employee benefits, outsourcing takes on several forms. To illustrate, the following list shows several areas that are being outsourced and the percentage changes from 1991, 1995, and 1997:

Outsourcing Plan Administration
Percent of Benefit Managers Using Service Providers (Bench Players)

* Not asked in 1991

The trend for outside help, since 1995, in most benefit areas is increasing dramatically. One of the most significant shifts from internal to external support is in the area of communication. With the explosion of electronic technology, employees are faced with more benefit options than ever before. The growth in multi-choice retirement plans, managed care plans, and flexible-spending accounts has created several layers of employee choice. The proper management and communication of employee benefit plans is not only a challenge, it is a mandate. Section 404(c) of ERISA creates fiduciary responsibility and liability for plan sponsors regarding investment selection and education. The concept of a fiduciary applies to virtually all areas of benefit management and communication including health and welfare plans.

The Three-Point Specialist off the Bench

In basketball, when a team is down they often turn to a three-point specialist. This player has the ability to shoot the ball from long-range to score 3-point baskets. Most employee benefit plans are only as valuable as employees perceive them to be. Creative and meaningful communication often makes the difference between great and average benefits. Because effective written material, multi-media, and knowledgeable educators are essential to good communication, many small to mid-sized organizations are outsourcing the communication aspects of their benefit plans to communication specialists. These three-point specialists develop powerful group presentations, written materials and one-on-one custom employee enrollment services.

A growing number of insurance carriers, and other service providers, specialize in Worksite Marketing. Worksite Marketing in its simplest form consists of an insurance carrier offering voluntary, payroll-deduction, supplemental benefits. However, some worksite specialists, like transamerica Worksite Marketing, not only provide supplemental insurance products but provide case management services to the employer. Case management involves the complete coordination of the benefit enrollment of core (group health, life, dental and long-term disability insurance) and non-core (supplemental) benefits though employee group presentations and with one-on-one computer enrollment. transamerica, for instance, has developed proprietary enrollment software that may be utilized on an intranet, the Internet or a stand-alone laptop computer to enroll employees in the core and non-core benefits. At the completion of the enrollment the supplemental insurance data is transmitted electronically directly to transamerica and reports are generated for the HR department to use in order establish payroll deductions and to notify other benefit providers with enrollment data.

Another form of benefit communication is the Benefit Statement. Benefit statements that summarize the value of each benefit are rapidly growing in popularity. According to Kenneth F. Phillips, President of the Boston-based Employee Communication Services, "Now we are starting to see employers spending more money on benefit plans than ever before, but employees still don’t know what kind of money is being spent on their benefits. As a result, some employers are saying, ‘Let’s do a total compensation statement including what people earn and what their benefits cost’. Many employers are looking to outside firms to help use the immediacy of technology to communicate this total compensation message to current and prospective employees."

Do employees really want or need benefit statements? According to a recent U.S. Chamber of Commerce Study, employers are spending an average of 41.3 percent on top of payroll for benefits. The worst part about this is that most employees have no idea what their benefits are and how much the company is paying for these benefits. Employers need to effectively communicate their benefit package. They need benefit statements to quantify the value of the benefits to each employee.

Energy to Finish the Game Strong

Outsourcing certain human resource functions, including employee benefits, for many small to mid-sized organizations, may be one of the best ways to leverage the talents, energy, and resources of their internal staff. According to Tony Martin, a principal with the Kwasha Lipton Group of Coopers and Lybrand, LLP, "Benefits are important in retaining employees, but they probably are not the principal driver. Benefits and other administrative functions typically are a noise that keeps people from being able to focus on more strategic, more highly leveraged activities. Maybe the human resource people or the senior human resource person can’t get to strategic human resource issues, because they spend their time putting out fires and responding to administratively-driven issues. These may be important matters, such as an employee not being able to get medical treatment for a child because eligibility is fouled up, but from a strategic perspective they are a distraction. Through reengineering, these administrative tasks not only get done better, but they get segmented and insourced or outsourced to specialists, and get out of the way of human resource managers."

The top five reasons companies outsource are:

1. To reduce and control operating cost
2. To improve company focus
3. To obtain resources they lack
4. To free their own resources for other tasks
5. To gain access to "World Class" capabilities

According to the same study, 65 percent of companies with revenues of less than half a million dollars say they do not outsource. However, of the group of firms characterized as the fastest growing in the United States, 83 percent do outsource. Perhaps Bill Gates, founder and Chairman of Microsoft Corporation, put it best, "As technology makes it easier for business to find and collaborate with outside expertise, the very nature of almost every business organization will have to be reexamined. This should include its structure and balance between inside full time staff and outside consultants and firms."

Through the proper balance of inside and outside talent small to mid-sized organizations are finding new ways to focus their organizational energy on the firm’s mission. By outsourcing various human resource functions, many small to mid-sized companies are discovering new ways to cut cost, attract and retain quality employees, reduce liability, and gain access to a high level of expertise. These organizations are also learning that proper outsourcing frees up valuable time and energy for key personnel. All of these advantages of outsourcing some HR functions serve to recapture much needed personnel and financial resources, which enable the small to mid-sized firm to play to their strengths and succeed in the highly competitive ballgame of business.