Most Companies Mix Outsourcing and Insourcing to Optimize Benefits Administration, Watson Wyatt Survey Finds

WASHINGTON, Feb. 26, 2004 -- Despite interest in the total outsourcing of corporate functions, very few companies completely outsource their employee benefits administration, according to a new study by Watson Wyatt Worldwide. Instead, most firms use a combination of internal and external resources to administer their retirement and health care plans, and they are largely satisfied with their results.

"The outsourcing decision is not cut and dried," said Richard Hubbard, global director of Watson Wyatt's technology solutions practice. "One-stop outsourcing makes sense for some. But most companies today are leveraging their technologies and people in combination with outside vendors to achieve better results."

A total of 315 mostly large and mid-sized companies participated in the Watson Wyatt survey. A subset of 87 firms also provided information on their internal and external call centers.

While companies were generally satisfied with their insourcing and outsourcing decisions, companies with internal HR call centers were more likely to report that they were successful at meeting their cost reduction goals (86 percent of insourcers versus 67 percent of outsourcers). Companies with internal centers were also somewhat more successful at meeting their goals of improving customer service and transaction accuracy, and increasing productivity. Participants with outsourced centers, however, were more successful at driving employees to use web-based, self-service applications.

"Overall, companies do not have as precise a handle on costs as might be expected, given the stakes involved," said Hubbard. "That said, costs are not the only factor in outsourcing decisions. Other considerations -- such as improving service to employees and reducing HR `administrivia' -- usually come into play. There is no one-size-fits-all answer. The right mix will vary by company culture and capabilities."

In the retirement benefits area, most companies have long outsourced 401(k) plan administration. For defined benefit pensions, the survey found that 60 percent of companies use a combination of internal and external resources for plan administration. Only one out of four (27 percent) completely outsource all pension plan administration functions, and even fewer (14 percent) completely insource these functions.

For example, 80 percent of large and mid-sized companies outsource the processing of pension benefit payments. By contrast, only 31 percent outsource the actual interaction with employees to an external vendor.

While defined benefit administration can be outsourced to a single vendor and bundled with actuarial services, very few respondents (6 percent) opt for this approach. "Many companies are concerned about the risk of putting all their eggs in one basket," said Tony DeNucci, national leader of pension administration systems for Watson Wyatt's technology solutions practice. The vast majority (71 percent) outsources the actuarial function and uses a mix of sourcing approaches for administrative functions.

"Today's web-based defined benefit administration tools allow companies to keep those functions 'in house' that make the most sense, like interacting with employees, while outsourcing other services, like system hosting or more complicated participant calculations," said DeNucci. "And, when done right, these web-based tools allow plan sponsors to electronically interact with their consultants and actuaries on participant-specific issues, while giving employees direct access to their data to do their own retirement modeling."

As for health and welfare benefits, employers are more likely to handle administrative functions in-house. Of the seven major health and welfare administration functions, a majority of companies outsource only two: the administration of flexible spending accounts and interim health benefits for people who leave the company (so-called COBRA benefits). Nearly all respondents indicated they insource the administration of the Family and Medical Leave Act.

Overall, most employers (86 percent) use a blended approach of insourcing and outsourcing for health and welfare administration. In fact, of the six goals respondents said are the most important, five were more likely to be met by companies using a blended approach.

"Health and Welfare technology has come a long way," said Cathy Tripp, national leader of health and welfare systems for Watson Wyatt's technology solutions practice. "It's more sophisticated, interactive and flexible -- giving companies more ability to mix and match products and vendors to optimize their benefits administration. Employers need nimble products and solutions that support efforts to engage employees as consumers in buying health care."

Copies of the Watson Wyatt Benefits Outsourcing Study are available at http://www.watsonwyatt.com.

About Watson Wyatt Worldwide

Watson Wyatt & Company, the primary subsidiary of Watson Wyatt & Company Holdings (NYSE: WW), is an international human capital consulting firm that provides services in the areas of employee benefits, human capital strategies and related technology solutions. The firm is headquartered in Washington, D.C., and has 3,900 associates in 60 offices in the Americas and Asia-Pacific. Together with Watson Wyatt LLP, a leading Europe-based consulting partnership, the firm operates globally as Watson Wyatt Worldwide. Watson Wyatt Worldwide has more than 6,000 associates in 88 offices in 30 countries.

SOURCE Watson Wyatt Worldwide

Web Site: http://www.watsonwyatt.com