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There are two main drivers for HR outsourcing. First, it allows organisations to control expenditure more tightly. Secondly, it offers easy access to expert help with the processes and technology needed to comply with changing legislation.
The risk and complexity for organisations providing employee benefits is higher than ever before. Few organisations can afford to spend millions on putting the necessary controls in place just for themselves. Outsourcing is becoming the natural way forward because it offers organisations a way of tapping into the economies of scale that come from working with specialists who are providing these services for a number of different clients.
As experts in their field, they are always up to date with current best practice, tools and technology, as well as being geared up to cope with changes in legislation – enabling organisations to manage the risks associated with their employee benefits efficiently.
Hewitt’s survey on Trends and experience in flexible benefits 2004 showed that the financial argument for outsourcing has shot up the corporate agenda.
The feasibility of flexible benefits and the IT infrastructure to support them is no longer a major concern for companies planning to outsource. The market has already proved this and the evidence is out there for all to see. When it comes to constructing a business case, the quantitative financial arguments now take the highest profile.
The survey also showed that chief executives and finance directors are taking a more active role in deciding how benefits are managed. This is not surprising when you consider the scale of some large companies’ pension liabilities. Across the FTSE 100 organisations, pension fund shortfalls are running at about £50-60bn and it is not rare for them to exceed the value of a company. In a situation where a fluctuation on the stock market can lead to bankruptcy for the organisation, pension control, risk management and governance becomes extremely important. Any organisation which is not running its pension plan extremely tightly, as a business, is just irresponsible.
Although most organisations spend enormous amounts on benefits – about 10-15% on top of the overall compensation bill – employees rarely appreciate this. In my experience, if you go into a company and ask employees how much their employer spends on benefits, their guess will be closer to between 1% and 2% of their package. The value of benefits is not understood or appreciated, and is rarely communicated effectively.
This is another area where outsourcing can make a significant difference. Streamlined technology with an emphasis on self-service can meet rising employee service expectations and provide immediate, real-time information about the benefits they are receiving. Flexible benefits take this a step further, giving employees the chance to select the benefits that they value most from a range offered by their employer. As employees are better informed, their appreciation of the package they are receiving rises.
These changes help organisations too, by giving them a direct line of sight into their benefits expenditure and pension assets performance, allowing them to monitor their liabilities far more efficiently and provide finance directors with the information they need.
As the pressure on benefits costs has been upwards and the risks attached to benefits have increased, organisations have had to invest much more in the ongoing management of benefits than they expected. They are now more reluctant to introduce new benefits and are looking at ways of managing and containing benefits risks. Vehicles such as flexible benefits and outsourcing support this objective.
In summary, outsourcing helps clients to save money, add value to their organisations and manage risk effectively. As organisations realise how much they can gain through outsourcing, the practice is moving from the shadows into the spotlight and looks set to develop in the future with the broader integration of benefits, outsourced solutions and other HR processes.