Global Delivery Model-pensions Administration

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Strategic Benefits of a Global Delivery Model for Retirement Administration Services Overview: Global Delivery Model Finding innovative outsourcing solutions to benefits administration assumes greater importance for corporates, Third Party Administrators (TPAs) and everyone else in the value chain

Though a global phenomenon that has come to stay, outsourcing seems to win a broad-based organizational commitment particularly during the times of uncertainties such as: "Y2K", "dotcom bust", "economic downturns of 2001-02". The recent, and the on-going slow-down, triggered by sub-prime crisis, is no exception. Organisations are under great pressure to save cost (for survival) and to find new market differentiators (for growth). Outsourcing innovation promises to support organisations to achieve exactly these twin goals: For instance, US organisations that outsource, agree that there is a cost saving of US$ 0.58 for every dollar spent in outsourcing; thanks to outsourcings, executives can have more than 80% of their management time and bandwidth for formulating strategies, rather than managing details of transactional business processes. Studies show that corporates in the US allocate on an average up to 5% of their IT budgets to outsourcing their business processes. The value of global IT outsourcing alone accounts roughly for US$ 125 billion – this figure is expected to increase to US$250 billion White Paper - Final Draft

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by 2015. In 2008, the global BPO market is estimated at US$ 235 billion. During the same year, the Human Resource Processes Outsourcing (HRPO), which covers pension administration, payroll management, employee benefits management, etc, is estimated to be of the size of US$67 billion – this means outsourcing of HR services accounts for over one fourth of the global outsourcing market. As the population across the globe is aging, the number of participants in company's defined benefit (DB), defined contribution (DC), and retiree health plans will continue to increase. Therefore, the administrative and cost burdens will go up. In this context finding innovative outsourcing solutions to benefits administration assumes greater importance for corporates, Third Party Administrators (TPAs) and everyone else in the value chain.

Global Delivery Model and Benefits Administration: Organisations that see value in co-creation wear the attitude of partnership and outsource mainly the so-called core, upstream, strategic functions

Globalization of businesses processes had begun when organisations found the necessity to externally distribute business processes across boundaries – organizational, geographical and cultural, to enhance competitiveness through growth, learning and value addition. In this context, the success rate of an organisation in outsourcing - which comes in different hues, colors and combinations of in-sourcing, out-tasking, off-shoring, nearshoring, etc – clearly determines its competitiveness. Today, outsourcing is pursued not just for labour arbitrage - it is not done with “do-the-best-and-outsource-the-rest” philosophy anymore. Organisations that see value in co-creation wear the attitude of partnership and outsource mainly the so-called core, upstream, strategic functions, adopting the new ethos of: “create-usingWhite Paper - Final Draft

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global-hands-and-deliver-with-local-touch”, the underlying theme of the global delivery model (GDM). Different from a typical onsite/offshore model, GDM refers to a customized sourcing framework that encompasses a combination of innumerable sourcing options. In the context of GDM involving knowledge process outsourcing, the outsourcing vendor creates a value proposition by leveraging skills that exist across all borders - organisational, physical and cultural, intensively using information & communication technologies to achieve cost effectiveness, innovation and productivity. The vendor distributes projects to different strategic locations across the globe and delivers services, typically through an onsite centre. The key differentiators of a GDM model are: minimized security and project risks, easy ramp up/scaling up of projects/teams, roundthe-clock productivity/work cycle. Over a period, the GDM vendor creates Centres of Excellence across the globe for various skill sets that form a self-excelling global value chain for particular business processes. For a long time, benefits administration, which comprises health and welfare, pensions administration, and Consolidated Omnibus Budget Reconciliation Act (COBRA) services, remained as the proverbial “black-box”. It was fully managed in-house mainly for reasons of data security. However, today, a whole host of benefits administration processes such as 401 (k) administration, retirement planning help, pension administration, health care benefits administration, payroll, executive compensation and incentive plans, administration of compensation/incentive plans, wage and salary administration, among others, are getting outsourced with some estimates pegging the value of global outsourcing market for benefits administration at over US$ 22 billion.

Key Growth Propellers: White Paper - Final Draft

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Outsourcing offers several non-cost related strategic benefits that facilitate business growth—such as service extensibility and reduced cycle times through shifting work to other locations.

The trend to outsource benefits administration appears to be firmly entrenched. Let us understand some of the key growth propellers of the outsourcing growth, apart from the cost arbitrage [Though cost is not the only reason for outsourcing, GDM promises a 30%-40% cost savings, making cost arbitrage forming a strong business case for outsourcing]. Outsourcing offers several non-cost related strategic benefits that facilitate business growth—such as service extensibility and reduced cycle times through time-shifting work to other locations. Demography: The demography related challenges to benefits administration, were attributed to the aging population with long-life span (paying benefits will have to be continued for a longer period), increasingly mobile lifestyles of retirees (it becomes difficult for organisations to track retirees and exchange information). The profile of pensions and other benefits may increase, with a lot of disparate and complicated schemes. Government: There is great scrutiny from government, which is coming up with regulations, new disclosure requirements to enhance the governance of benefit administration activities. The regulatory authorities are scrutinizing benefit calculations much more closely. Consolidation: Mergers, spin-offs, take-overs, corporate reengineering, downsizing, rightsizing affect the benefit programs. During such organisational restructuring, employers may have to wind up or merge various pension plans. Employers make changes in plan design and features changing formulas, freezing accruals and terminating plans – White Paper - Final Draft

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all these need support of a specialized third party and a focused GDM vendor. Technology Improvements: Thanks to the development of web-based administration tools, organisations can keep the actuarial functions - like interacting with employees, inhouse, while outsourcing services like participant calculations to TPAs. Employees can enrol online, set contribution rates, update fund choices with data files interfaced to company payroll systems without manual intervention. There are web-based pension estimators, information on total benefit package that goes beyond pension to savings, health and life insurance, and estimates of social security, if any.

Benefits of Outsourcing for TPAs In a nutshell, GDM is all about arriving at a unique combination of technology and BPO services that help TPAs achieve reduction of costs and increased operational efficiency.

TPAs face many strategic and tactical challenges that affect their business. They include consolidation of players, greater financial disclosure and transparency requirements, legal changes, raising costs of administration, staff turnover, shortage of qualified people and increasing IT capital expenditure. Outsourcing addresses all these aspects. In a nutshell, GDM is all about arriving at a unique combination of technology and BPO services that help TPAs achieve reduction of costs and increased operational efficiency. Cost Reduction: Cost reduction has been synonymous with outsourcing throughout its development. However, a real global delivery model is not just about making the most out of labour arbitrage. GDM uses technology, process improvements to the administration and by selectively offshoring functions where they make business sense. White Paper - Final Draft

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Nevertheless, outsourcing brings down the total cost of ownership of the business processes. Knowing whether your dollars are being spent in the most appropriate place and whether those dollars are making the right return on investment is a key driver for outsourcing. Operational efficiency: In the wake of technology induced productivity improvements, TPAs are doing away with manual processes, spreadsheet-based administration approaches, and decentralised service delivery models. Since outsourcing automates pension administration end-toend, it greatly decreases operational risks and costs. A technology-enabled BPO can enable TPAs achieve better governance control, cost savings, and improved levels of customer service in helping TPAs handle plan changes. It empowers TPAs to deliver and communicate benefits efficiently, accurately and on time to their customers. Vendor Landscape: Within the total benefits outsourcing framework, vendors are engaged in the following functions: • Health and Welfare Administration – including enrollment, flexible spending account administration;

plan

• COBRA/HIPAA administration and database management; • Defined Benefit Administration – administration for pension plans, trustee pension payment and benefits database management; • Participant Services – assisting employees, managers and retirees through state of the art self-service technology, call center services, operational tools and continuous reporting; White Paper - Final Draft

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• Processing Services – providing retiree health and welfare administration, premium billing and reconciliation and communications. Nevertheless, there are typically four types of GDM vendor positioning. Vendors that focus on providing transactional services such as COBRA; providing single service benefits administration, e.g health and welfare administration or pensions administration; providing multi-service benefits administration or service offering 'bundling' and providing benefits administration as part of a wider multi-process HR outsourcing contract.

Major issues while outsourcing administration services Outsourcing is not a commodity purchase – therefore, it is not about selecting a cheapest service provider.

The reasons for outsourcing should be based on: improved turnaround time, reduced technology resources, higher quality, process discipline, operational flexibility and continuous improvement. TPAs should have systems, templates, checklists to measure and monitor these benefits at regular intervals. The checklists can let TPAs know whether outsourcing has helped them to reduce cost, given more time for them to focus on more business, whether they were able to increase the business, specialise. Being aware of some of the following macro and managerial scenarios may help TPAs come up with a unique set of systems to prepare for and assess the benefits of outsourcing benefits or pensions administration: Geo-political risks: There is a need to mitigate geopolitical risks. Understand the economic and political environment of the outsourcing destination of your GDM vendor. There are many global rating agencies that monitor political, economic, social and security developments for the specific countries White Paper - Final Draft

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and forecast their impact on legislation, financial markets, investment and trade risks, and other risk mitigation services. Subscribe to their information services. Cost-versus-benefit analysis: TPAs have to identify all the costs involved in terms of people, technology, infrastructure, compliance cost. Benefits would mean: wage arbitrage, customer satisfaction, compliance, best practices, security, data consistency, reduced risks, quality of service, scalability, etc. Value proposition: The value proposition refers to the benefits that stakeholders are assured of receiving as a result of their relationship with the vendor. It is a promise the business makes to the customers. In the context of GDM, the four basic areas of value propositions could be: operational excellence, innovation, customer intimacy, and ownership or assuming responsibility. All these promises can be measured and monitored and managed. Short term contracts: An administrator considering outsourcing all or part of a function should initially carry out a review so that all factors which might influence the way forward are considered. TPAs can begin with short-term contracts and give time of about 5 to 6 months to see whether the teething problems are sorted out. Only when this review is complete will the administrator be clear on the nature and extent of the service to be outsourced and the overall objectives of the contract. Security: It is a prerequisite that the GDM vendors ensure network security using firewalls, antivirus software and hardware level measures, physical security through security guards, finger scan and access control cards, data encryption for transfer security, secure logins, separate work area’s for large customers and multiple centers for fail-over continuity, access cards, fire alarms, etc. The vendors should have business continuity plan with adequate redundancies. White Paper - Final Draft

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Importantly, the administrators should have checklists, templates to review compliance health-check to understand whether the scheme documentations fully comply with regulatory requirements, conduct administrative process check to establish best practices, and benchmark cost and performance/benefit standards so that they can get to compare the benefits of outsourcing administration processes.

Partner with the Focused KPO: As pensions and benefits are becoming more complex, specialisation of the vendors becomes the key to outsourcing success.

A specialist vendor can do a better job, possibly cheaper and certainly more efficiently, than a KPO with a dozen or more service lines. The specialist vendor can bring two important factors to table. They are: experienced staff and updated technology. Also, the focused outsourcing vendors have the broad capabilities to define, develop and administer a full array of benefits outsourcing services. They bring a consultative approach to administration, making process improvements and plan change recommendations backed by the capabilities and experience to implement and administer those recommendations through its members. TPAs have to take into consideration the track record, focus, financial stability, quality of human resources, competency, in to account before choosing a partner. Only the focused vendors can have access to best practices, thanks to their earlier engagements. TPAs also have to assess and evolve the technological infrastructure of the customer, applications they have, their business continuity plan, disaster recovery arrangements, etc. White Paper - Final Draft

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Governance and Relationship Management: A governance and relationship management structure goes a long way in helping TPAs build an effective working relationship with the vendor.

Outsourcing may not start producing results from the day one. It is a relationship – between customers-vendors, that needs time to mature. The best way to save the relationship is to place relationship over short term gains, as it would cost deadly if administrators start experimenting relationships, one after another. Relationship starts with understanding requirements: TPAs should understand what are the desired gains and evolve a system to monitor them. It is important to draft contracts that show the roles and responsibilities of all the parties. The governance and relationship management structure (GRM Structure) orchestrates the entire relationship processes that start from signing of the contract and evolves during transition, delivery of services, etc. This enables both sides clearly identify who has responsibility for making what decisions; understand how the decisions will be made and how the results will be communicated to each other; and provides accountability, responsibility that TPAs and vendors have in the relationship. The GRM Structure should specify the review mechanisms, escalation points and methods of resolving issues at the outset – it could insist on penalty and reward systems based on delivery, and could also have an exit strategy – as part of relationship management. It is only companies with governance and relationship structure that are able to meet their cost reduction goals, improving customer service, transaction accuracy, and increasing productivity. Conclusion White Paper - Final Draft

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The main areas of forecast demand for outsourcing are in human resource functions such as benefits and pensions administration, finance and accounting administration. GDM is synonymous with a cost-effective model that combines technological superiority with a secure global service delivery model. Any global delivery model should aim at leveraging skilled expertise and resources where possible across multiple development sites to increase flexibility, lower risk, reduce cost and improve service quality. There is no one-size fits all answer - TPAs can completely outsource benefits administration function or use a combination of internal and external resources to administer plans and leverage technologies and people in combination with outside vendors, to achieve better results.

White Paper - Final Draft

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