Outsourcing benefits administration - should you do it?

Outsourcing of benefits administration occurs when an employer contracts for outside services that are a necessary part of doing business but are not core functions of the business.

An employer might consider outsourcing the benefits function in order to obtain consistent administration, improved technology, service flexibility, and cost reductions. In addition, outsourcing allows employers to focus on their core business and areas of competence and get closer to their customers. Finally, by outsourcing, an employer can concentrate on human resources strategies, rather than taking on related administrative responsibilities and intricate legal and technological complexities.

Outsourcing some or all of the employee benefits functions is very popular. According to one survey, 95 percent of employers outsource at least one portion of health and group benefits activities. The claims payment function is the most frequently outsourced activity. The cost effectiveness of outsourcing was cited as the most common reason to outsource.

Making the decision. In considering whether to outsource administrative responsibilities, employers should examine whether:

• centralizing their administration is appropriate for their company. Companies weigh the benefits of group purchasing power versus the advantages of divisional cost controls;
• they can establish a benefits center and perform the services themselves. They analyze whether they need hands-on supervision of the individuals who perform detailed administration and deal with employees to ensure quality;
• benefits, compensation, and human resources administration is a business they want to be in; and
• short-term cost increases from high front-end costs (with a three- to five-year return) and the dedication of the human resources staff to the transition outweigh the long-term savings from staff reductions and lower systems cost.