Should budget conscious governments insource or outsource their benefits administration?
As the public sector competes for talent, employee benefits have never been more important. In fact, today’s governmental organizations invest 35% to 43% of their overall compensation spend on employee benefits. And for good reason: 87% of them rank “recruiting and retention of personnel qualified for public service” as a top issue.
Although governmental organizations outspend their corporate counterparts by a wide margin, 1 in 7 public sector HR pros claim their benefits package still isn’t competitive. These feelings are made worse by the booming economy and the historically low unemployment rates—factors which allow the private sector to sweeten their benefits packages year after year.
Meanwhile, HR teams are overwhelmed.
To make things worse, benefits have become more complex than ever. Now, administering those benefits is just as important as the benefits themselves.
In fact, 6 in 10 employers say they are “overwhelmed” with the complexity of managing benefits programs. And among governmental organizations, a mere 17% say their current human resources management system is meeting their business needs.
Public sector HR pros face unique budgetary challenges.
What’s an HR pro to do? Especially one who works in the public sector. It’s not like you can just ask the boss if she can raise more cash from investors or move some money over from the marketing department. Unlike HR pros in the private sector, those working in government know what it’s like to “live on a fixed income” long before they retire.
It’s not like they don’t want to invest more. In fact, according to the Sierra-Cedar Survey of HR Systems, 40% of governmental organizations plan to increase their spending in HR systems in the next 48 months. While that’s a step in the right direction, the actual solution could be years away.
The situation demands a predictable and budget-friendly cost structure.
When considering benefits administration technology, public sector HR pros must first navigate the proverbial fork in the road. That is, they need to decide whether to insource or outsource their benefits administration. Here’s how the two differ:
Insourcing: In this model, the organization relies heavily on internal resources to manage the entire benefits administration process, from enrollment to customer service. Most often, the technology used in this model is a basic benefits module that is tacked on to the organization’s existing human capital management (HCM) or enterprise resource planning (ERP) software.
Outsourcing: In this model, people, processes and technology are all handled by a third party. Also called a “point-solution” or “best-in-class” benefits administration platform, the technology is robust and the services are tailored to suit each organization’s unique needs and culture.
From a cost perspective, the price tag for an outsourced solution may, at first, seem larger than that of setting up an insourced solution. Organizations who insource, however, must make additional investments in staffing, and often must turn to consultants for the ongoing maintenance of their platform. Outsourced solutions, by contrast, have a more predictable and budget-friendly cost structure. Here are three reasons why that’s the case.
- It’s all about the total cost of ownership.
As HR budgets struggle to keep pace with other business priorities, the decision to insource or outsource often comes down to cost. This is why insourced solutions seem so attractive at first glance; it’s hard for a CFO to say no when your existing HCM or ERP offers a basic benefits administration module at little or no cost. Unfortunately, CFOs typically lack a direct line of sight into the day-to-day work of benefits professionals, which prevents them from seeing the entire picture and the downstream impact of insourcing.
With contracts for benefits administration solutions often spanning two, three or even five years, you need to make sure your CFO understands the long-term impact of selecting one platform over another. Start the conversation with a set of scenarios in which you estimate the total cost of owning a solution during the full term of the contract after hiring additional staff, borrowing resources from your IT or legal departments and/or paying consultants. Also make sure to research the costs of selecting a solution that may put your organization at risk for financial losses due to security breaches or employee experiences that negatively impact your talent retention efforts.
- Maintenance can be expensive.
Organizations with only a few hundred employees and who offer relatively few benefits may, in fact, want to consider insourcing their benefits administration. The larger your organization is and the more complex your benefits are, however, the less likely a one-size-fits-all approach will work for you. Because the functionality of HCM- or ERP-based benefits modules is so basic, any customizations to your platform will likely have to be completed by an HR tech consultant. Before you go down the path of insourcing, find out what your consultant would charge to simply get your platform ready for the first day of annual enrollment.
Then, consider any mid-year changes that may become necessary, such as making a tweak to a life insurance plan, or responding to new file feed requirements from your vendors. This is fine if you or your IT team has the technical expertise required. If not, get a quote on the hourly rates a consultant would charge for mid-year changes.
- You can’t afford to have your hands tied.
As health care costs continue to increase and utilization trends emerge, the biggest wins you can make are in the plan design itself. The last thing you want is a platform that won’t support your future cost-savings efforts because it lacks flexibility or would be too costly to reconfigure each year.
Some changes, like introducing a high-deductible health plan, may already be on your radar. Remember to consider other possible changes as well. To stay competitive, will you need to add more voluntary benefits like identity theft protection, pet insurance, student loan consolidation, or long-term care insurance? And what will happen if you were to change carriers altogether, as in the case of life or long-term disability? Will your selected platform be able to accommodate these changes while meeting the needs of grandfathered beneficiaries and retirees?
To learn more about the total cost of owning your HR technology, read our guide Why the Public Sector Should Outsource its Benefits Administration.