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- Identify core financial measures that show a provider’s health and growth potential.
- Try to visit providers’ premises to ensure they are the organisation they say they are.
- Ask for the details of several existing clients and contact them. Don’t just accept the ones that providers put forward.
- If providers have responsibility for, or access to, sensitive information, check physical and online security measures.
- Look for a good cultural fit, too, because relationships ultimately depend on people.
Choosing an employee benefits provider, or the supplier of one particular perk, is one of the biggest financial commitments an HR function is likely to make, and the whole organisation will have to live with the consequences of its choice for some time.
Glenn Elliott, chief executive of Asperity Employee Benefits, says: “Employers hope that a benefits provider will help them engage with their whole workforce and make staff value the benefits offered. If they don’t work, the employer has lost a lot and the simple truth is that not all providers are equal. It is surprising how often [employers] are disappointed.”
Undertaking effective due diligence is, or at least should be, a prerequisite of any decision.Assessing a provider’s financial standing is a good starting point, using metrics such as turnover, net asset value and cash balance, plus year-on-year profit growth, says Elliott. “If the provider’s fee income isn’t growing much and it isn’t making much profit, you have to ask why,” he says. “If it isn’t making significant money, is it really going to be investing in products and services? But if the provider is winning a good number of clients every year, the employer will be part of a good growth machine.”
Other relevant measures include whether employees’ money is ring-fenced in areas such as childcare vouchers or discount programmes, adds Elliott. If so, any financial failure could leave the employer with unhappy staff and possibly having to foot the bills itself.
Financial strength
Providers’ financial strength is also one of the elements highlighted by Philip Smith, head of defined contribution (DC) and wealth at Buck Consultants, which, like many large consultancies, often undertakes due diligence into benefits providers on behalf of employers. “We take our own in-house view, then we blend that with material we source from the market, such as credit rating agencies or professional services firms,” he says.
The extent of this scrutiny varies according to the type of benefit being sourced, but for financial products such as pensions, a core criterion would be the amount of free capital held by that organisation, says Smith.
But there is a risk in seeking comfort in large numbers, says Matt Duffy, head of online benefits at Lorica Employee Benefits. The main emphasis should be on profitability rather than turnover, which can discriminate against smaller firms. “A provider could have 1,000 clients and turn over £100 million, but if its operating costs are £150 million, it is unlikely to be around in a matter of months,” he says.
“Employers need to look beyond that and ask what the cost is of servicing that business and whether it is profitable, and whether the business owners or shareholders will continue to support that product stream even if it is not profitable, particularly in this environment.”
Duffy adds this is something Lorica is taking on board with its own suppliers, including evaluating the impact of the retail distribution review (RDR) on its financial adviser community.
New accounts
Assessing an organisation’s ability to take on and service a new account is another criterion. This can be measured through both hard and soft metrics. Elliott suggests asking for ratios around the proportion of staff and account managers to the number of clients. “But the employer needs to make sure it understands which staff it is talking about,” he says. “Some private health firms have about 20,000 staff, but they don’t all work in employee benefits.”
Softer measures in this area include trying to get a feel for how any relationship would operate in practice. Lorica’s approach is to take a number of key individuals who would work on the account to meet potential clients, says Duffy.
“People can be blinded by a great sales presentation at a pitch, but who are the people who will be delivering that service and how available will they be?” he says. “How many other projects will they be working on at the same time? What is the support infrastructure behind it?”
A further option is to phone up helplines to see how attentive they are, says Duffy.
Another way of testing how relationships will work in practice is to contact a provider’s existing clients. This must be done at the right time, says Elliott. Organisations often take up references only at the very end of the process when they have already decided they would like to work with a particular company.
“There is no supplier that can’t scrape together two references,” he says. “I’d say take five and do them early. Don’t wait until the end because it makes a big difference in how you interpret what its clients are saying. I’d like the phone numbers of five or six clients won in the last six months and five or six it has had for the last three years; then I’d choose which ones to ring.”
Corporate history
Buck’s Smith says other factors to consider are the provider’s corporate history and strength in the marketplace. “We have a very rigorous annual survey that looks at all the major providers, certainly in the pensions market, which measures multiple aspects of their organisation, service being a key one,” he says. “We look at the ratio of members to administrators, the level of automation in systems, where call centres are located, and what processes are outsourced overseas.”
Security is another consideration, particularly where providers could have access to, and responsibility for, personal information such as medical histories, national insurance numbers, and children’s ages and dates of birth. James Malia, head of employee benefits at P&MM, says this is an area where the amount of scrutiny applied by employers varies hugely, with some simply accepting providers’ statements and others, such as police forces or financial organisations, undertaking penetration tests and site visits.
“Some of our products don’t require a great deal of employee information because people will just be going onto a portal and doing some shopping,” he says. “Then there are others where [employers] want to give us all their employee information. But penetration testing is not unusual.”
Iain McMath, chief executive of Sodexo Motivation Solutions, says employers should go beyond initial security checks to conduct ongoing reviews. “Everyone should have a data policy and that should be checked by the employer annually,” he says. “The other thing is that if we are handling personal data around children, we make sure all our employees who handle such data have a Criminal Records Bureau check. Not everyone asks because they’re not all that savvy, but it’s something we believe is key.”
Data protection
Sometimes the scrutiny around security works both ways. Health provider Nuffield Health, for instance, often goes to potential clients’ sites to ensure their procedures are up to scratch and are not likely to cause a breach that could be damaging for both parties.
Scot Smith, commercial and business development director at Nuffield Health, says: “There are huge data protection and confidentiality issues on both sides, so we have IT people who go to the organisation to see what the requirements are, and advise if it needs to add software or change something. Negotiations an slow down because the IT has to be worked out.”
Nuffield also clarifies what staff data it can share with organisations, with personal medical information being off limits, says Smith.
Other due-diligence criteria can focus on a provider’s ethical or sustainable objectives, says Sodexo’s McMath. “These want to know how it deals with its suppliers and customers, how it deals with the environment and how energy-efficient it is,” he says.
But such initiatives can be problematic. McMath cites the example of a government department that asked Sodexo to sign up to a pledge to be a diverse employer and a programme to prioritise the employment of young people. “If I had signed up to one, I couldn’t sign up to the other,” he says.
The pressure to conduct thorough due diligence on providers is only likely to increase in future as employers realise they can ill afford to pick the wrong partner. P&MM’s Malia says organisations’ procurement functions are increasingly playing a role in vetting and assessing potential providers, which can result in a tendency to focus on cost rather than service delivery or the potential to generate significant savings by encouraging higher take-up, particularly around benefits that qualify for salary sacrifice arrangements.
Yet perhaps there is still a role in any decision-making process for good, old fashioned gut feeling, assuming the other selection criteria have been met, says Lorica’s Duffy. “The most important element, regardless of facts, figures and how pretty you can make a document look, is that people work with people and there’s a relationship between two organisations that either fits or doesn’t.”
Viewpoint
Malcolm Reynolds, managing director, trustee solutions, JLT Benefit Solutions
There are a number of key issues an employer should consider through due diligence when selecting a provider. First, the employer should consider how well it thinks it can work with the service provider’s team and senior management. Also, look at the financial strength of the organisation and assess whether it could survive a further downturn.
Employers should look at the provider’s strategic commitment to the market and how it keeps abreast of new legislation, technology and working environments. Can the provider demonstrate this? Another issue is whether the provider has considered all aspects of sustainability, including environmental, social and financial. The employer should ask whether it takes part in and shares best practice with the industry, and how it develops people and systems.
In terms of experience, employers should look at whether the provider can demonstrate improved service delivery over a sustained period, and how its clients have benefited from this in the past. Other key points are the typical client size of the business, the average length of relationship with existing clients, and how [an employer’s] scheme will fit.
Technology is another key point. Employers could ask what the provider’s systems strategy is, and how it will enhance the outsourcing proposition. If the provider has disaster recovery and business continuity plans in place, have they been tested?
Sometimes, things go wrong: references from other clients of the provider can shed light on how it dealt with issues and how quickly they were resolved.
It can also be useful to ask what the nature of the issues were. For example, was there an underlying problem with controls and processes or was this a one-off? What learning experiences did the service provider have?
HOW ONE PROVIDER SHAPES UP: LORICA EMPLOYEE BENEFITS
Turnover: £13.4 million (£11.4 million in 2010-11, growth of 17.5%)
Operating profit: £1.77 million (£464,000 in 2010-11, growth of 280%)
Cash: £6.3 million (up from £5.7 million in 2010-11)
Assets less liabilities:
Lorica Consulting: £6.97 million (down from £10.9 million in previous year)
Lorica Consulting IFA: £4.46 million (up from £4 million from in previous year)
Total: £11.4 million (down from £14.8 million in previous year)
Figures for the financial year ending 31 March 2012 for Lorica Employee Benefits (financial information relates to Lorica Consulting and Lorica Consulting IFA combined)
When conducting due diligence into a provider, analysis of its financial accounts can give a good picture of its strength.
David Battle, chief executive officer at Lorica Employee Benefits, says: “The key things to look at are: turnover, whether it has been shown to be sustainable; and profit, whether it is reasonable.”
Battle suggests looking at the provider’s balance sheet to make sure there is a good surplus of assets over liabilities.
Another measure is the net assets figure which shows the amount of profit that has been generated historically and has been retained within the business, plus the amount of money shareholders have invested. Net assets may show positive or negative growth dependent upon profits achieved.
Lorica Consulting had net assets of just under £4.5 million for 2011-12, up from just under £3.0 million in the previous year, while Lorica Consulting IFA had assets of just under £4.0 million, which was relatively unchanged from the previous year.
Battle offers an insight into Lorica’s financial figures:
CASH
“Cash in hand overall has grown from £5.7 million on 31 March 2011 to £6.3 million on 31 March 2012. The reason we have a large amount of cash is that we make profit and reinvest that profit into the business, which is why the profit in 2010-2011 was lower than it is in 2011-2012.”
GROWTH
“It is organic growth; there is no acquisition growth in there at all. It comes from two sources. The first is a growth in the number of organisations that we deal with across the full range of employee benefits, whereas in the past we might have only given them advice on one benefit. As a business, we made a big strategic play to talk to our clients about creating engaging benefits programmes as opposed to a simpler approach of trying to help with some of their benefits. It is a combination of doing more for existing clients and also adding new ones to the fold.”
HEADCOUNT
“Lorica’s headcount has expanded from 100 to 120 employees during 2011-12.”
DEBT
“There are two key elements of debt that we show, which is debt to either our shareholder or to the bank, which is debt that was lent to us to create the business in the first place.If you took our trade debtors, people we owe money to because they have provided us with an IT service or stationery, there was a total debt at the end of March of around £2.4 million. But that’s a debt as it exists at any one point in time; sometimes those balances will be higher at certain times of year than others. The key thing is that the business is cash-rich.”
CASE STUDY: RAC
Good homework drives flex decision
When motoring organisation RAC wanted to change its flexible benefits provider in early 2012, it was critical to find a partner with a proven track record of working with a large, diverse organisation.
Verona Farquharson, reward manager at RAC, says: “We wanted to be able to talk to its client list, so we could ask other HR professionals what the service was like and what the pinch points were.”
The company got in touch with two clients for each of the three suppliers it had shortlisted.
Trying to get an idea of how things would work in practice was also important. “We asked them to show how they would structure the contract and many brought their customer service managers down so we could see who would manage it and who would take on the day-to-day queries,” says Farquharson. “We wanted to make sure there was a support system in place.”
The suppliers were also subjected to financial assessments, led mainly by RAC’s finance team. “They did put some warnings on some of the smaller firms, but it was up to us how to use that data,” says Farquharson.
Eventually, RAC decided to appoint Lorica, and the new flexible benefits platform it introduced resulted in a 25% increase in take-up last year. “Doing our homework has really benefited us,” adds Farquharson.