ADP’s benefit TCO study presented some very interesting numbers as well as a few questions:
First, I’m not at all surprised that outsourced benefit administration is less costly from a TCO (total cost of ownership) measure than in-house benefit admin. However, let’s look at some of the unspoken assumptions in the survey:
- The average size of the employer surveyed was 5700 employees ((
Sourcing Analytics, December 2005. “Benefits Administration – The Impact of Outsourcing on the Total Cost of Ownership.” Page 4.)). I’m guessing that the largest client in the survey may have been around 20-25,000 employees or smaller. I’m also thinking that a company of 25K employees is significantly outside the standard deviation for company size. Most employers surveyed were probably in the 2000 to 10,000 employee range. If you are in this employer size (I’m going to call it mid-market if that’s ok), there really isn’t much sense in having large benefit administration organizations. - Sourcing Analytics found an even greater savings when the benefits call center was outsourced. ((Ibid. Page 5.)) Again, this is not much of a surprise. At the mid market employer, having a call center in-house (or even a person or two dedicated to answer the phones) in not sensible. Outsourcers can scale much better than a mid market employer.
- We really need to look closely at what TCO does not tell us: the effectiveness of the benefits staff after outsourcing. Does a mid-market employer really have the benefits expertise to negotiate premium rates, commission fees, etc? Even the largest organizations lean on the major HR consulting firms for these cost reductions. What I’m saying here is that a mid market employer who effectively utilizes a good benefits consulting firm may achieve similar cost reduction in their TCO without moving in-house. However, most mid-market employers have not realized the cost/benefit of these firms. I am also saying that the mid-market broker/consultant does not have the expertise to return the type of ROI that Mercer, TP, WW can. Here‘s another resource on this.
I’m certainly not criticizing the survey or the survey results. The results are intuitive and make sense. However, it’s clear who the target of the survey is – ADP’s sweet spot mid-market. I’m also advocating a two pronged approach to reducing benefit TCO:
- If outsourcing makes sense, outsource.
- But don’t forget the value a real benefits consulting firm can bring to the bottom line.
I’d also like to point out a few other things that are in the survey:
- Service levels are predictable given that you chose the right vendor. ((Ibid. Page 8.))
- “Web based services” (benefit self service) was 18 times more likely for ADP clients than in-house clients. This is only reflective of the size of employers in the survey. ((Ibid. Page 8.))
- Cost of SOx compliance is significant. The survey correctly points it out and the fact should not be minimized. If your outsourcer can get you out of an audit or two, this is a huge selling point. ((Ibid. Page 9.))
http://biz.yahoo.com/iw/051219/0104415.html
5 responses to “ADP Benefit TCO study”
Thanks for taking a look at the study. I’d be happy to answer any questions directly about it.
Call me! Contact info is on the White Paper.
Donald, thanks for taking a look. The work ADP and Sourcing Analytics have been doing on finding true TCO is great. Please let me know if you do more work like this.
To my readership: If you call Donald, ask about the various elements in the TCO. What savings were derived from outsourced call center vs web enrollment vs whatever else. Also understand their results for your particular employer size.
While the study provides insight into the cost dynamics of outsourcing, it also provides something not available elsewhere in the market: a database of information specific to benefits administration. With this information, Sourcing Analytics can now provide benchmark financial analysis unlike any other company.
Howard Gerver, CEO of HR Best Practices states: “So much work has been done to analyze the cost of benefits programs, while the data just wasn’t there with regard to administrative costs.” Furthermore, benchmarking administrative costs can provide indicators of inefficient and risk laden administration. Says Gerver, “The claims audit work HR Best Practices performs often reveals serious problems related to proper eligibility determination and enrollment administration. Benchmarking costs in these areas can be a first step in identifying and fixing critical administrative shortcomings.”
This is the third TCO outsourcing study that has captured TCO information for payroll, HRIS and benefits administration for more than 250 companies with more than 1,000 employees. Donald Glade, President of Sourcing Analytics, is excited to have been involved in all three studies. Glade said “TCO is a powerful tool for analyzing costs which can be used in determining the ROI of change, identifying inefficient process, or better managing risk. In fact, the TCO studies all point to another key finding; there are right ways and wrong ways to outsource!”
Indeed, the study demonstrated that in the outsourcing environment, outsourcing fees as a percent of TCO can be as low as 20% or as high as 80%: the higher this percentage, the lower the TCO. The study showed that the companies with the highest TCOs in an outsourcing environment retained the highest in-house costs, suggesting that companies can often reduce costs even further through internal process enhancement and effective relationship management.
[…] Many regular readers of SystematicHR know that I conducted a Total Cost of Ownership study to determine the cost of benefits administration. The results were released last December. Double Dubs commented on it here, and it is how I originally came to find his great blog. […]
[…] of benefits administration. The results were released last December. Double Dubs commented on it here, and it is how I originally came to find his great blog. Generally, TCO is a means at getting at […]