Balance Sheet Booster Shot: Curing Rising EB Costs Executives looking to solve balance sheet problems often begin the process by cutting employee headcount for immediate cost savings. These layoffs seem like the answer because they eliminate salaries, the largest item on the expense sheet. They also whittle down the enormous costs of providing full-time employee benefits such as health care, dental, vision and pension.

Layoffs, however, can have a significant negative effect, from the ability to research, develop, market and sell products, to more abstract effects such as employee morale and productivity.

Ultimately they affect Wall Streets perception of your companys future potentialyou risk alienating the very populations youre hoping to appease.

What most large employers dont realize is that the gross inefficiencies in procuring employee benefits, coupled with the skyrocketing cost of benefits such as health care, can create massive expenses that sometimes necessitate layoffs. If these expenses could be brought under control, however, mandates such as cutting benefits or laying off employees could be rendered moot.

Consider the following facts about corporate provision of health care benefits:

Employee benefits represent a cost of $12,000 to $15,000 per employee per year to large businesses such as Fortune 500 corporations.
Health care costs account for $5,500 per employee per year.
A business with 50,000 employees spends $275 million on employee health care.
Health care costs have increased 12% per year for the last two years, according Mercer HR Consulting.
Health care costs are expected to double by 2007, according to Watson Wyatt.

Any CFO will tell you, unless your business growth is exceeding these rising cost projections, it is losing money. And if your growth is not exceeding costs, you have to cut spending to maintain margins. But are there areas that can be refined instead of cut altogether that will bridge the gap between the flatter earnings and growing costs endemic in todays economy?

Management of all employee benefit plans, their related documentation, purchase of employee benefits, and management of employee benefit suppliers are the responsibility of the human resources executive. In most cases, however, HR outsources these functions to consultants and third-party vendors.

Unfortunately, the current process to manage and purchase employee benefits is much the same as it was 30 years ago.

This method is still a serial, inefficient, costly paper process hampered by lack of accessible data or diverse data residing in myriad databases and expensive third-party consulting.

The method also is limited by an inability to efficiently bring more suppliers to the table to bid, a lack of technology and innovation to streamline current HR policies and protocols, and incompetent cost-control management in the HR office.

Lack of information, control and process creates a dependency on the business carriers, vendors, and most importantly, costly consultants. Intellectual capital management and purchase process of employee benefits is so onerous and painful that businesses pay consulting firms millions of dollars to manage a serial, paper-intensive process.

The bill-by-the-hour approach used by consulting firms is in direct conflict with organizational productivity.

This facilitates a chain of added costs in the system. For example, 30% to 50% of all consulting hours are spent on low-value items such as data collection, RFP production and report generationcharged at high-value prices.

Vendors and carriers have employees who cater to consultants, providing them with data and reports that the consultants can turn into readable information for the business, thereby incurring added costs to the business.

These consultants, however, dont necessarily have their customers best interests at heart: firms receive 15% to 30% of their revenue through paid incentive commissions or overrides (non-reportable commissions) for placing additional business with a specific vendor or carrier.

Vendors and carriers spend upwards of 5% to 7% of every dollar employing sales and marketing representatives to educate, sell and entertain the decisionmakers at consulting firms.

Whats more, outsourcing everything to consultants prohibits the enterprise from developing internal competencies in this area.

Finally, the process today has created co-dependencies between all stakeholders except the one paying the billthe business.

As consultants, vendors, carriers and providers have become more enfranchised, they have had little impetus to change the way things are done. They have helped scratch each others business backs, excluding the corporate buyer from the equation.

The irony is that until recent cost increases, the corporate buyer has been happy to get rid of the onerous process, even if the cost to do so is significant.

But there is a way to lower high costs and gross inefficiencies while still providing employee benefits such as health care.

If a business can move away from the paper-driven process and consolidate its plan management and procurement process under a single system, costs can be better analyzed and controlled, competing bids can be compared and shared, and historical data can be housed. This enables businesses to streamline operations, reduce costs and increase quality of choice.

A single gateway for benefits management and procurement information has many benefits, including information and visibility.

Adopting a system of managing all employee plans in one single repository and procuring benefits through an automated repeatable process allows businesses to gain visibility into their employee benefits and health care costs.

This empowers them to predict and plan for rate increases; know which plans, vendors and regions are performing; know the status of all health plans; make informed decisions; hypothesize changes; share information across an organization; report on all aspects of employee benefit plans; compare plans across region and type; and have information about all their health plans accessible in one common database.

A single gateway of information gives HR and other executives control of their data. This enables them to review the data anytime without having to pay for access. They also can be independent of vendors and third-party consultants for data access, and can easily share data internally and externally.

HR and other executives also can use the data to make better collective decisions, go to market at any time, and obtain “real time” market data without added consulting costs.

By adopting new ways to gain access to information and control over data, enterprises are empowered to establish best practice processes. These can be used to better manage and procure employee benefits and health care. This in turn enables businesses to be less dependent on third parties and more in control of employee benefits and health care spending.

Employee benefits and health care costs make up an enormous corporate line item. A major cost component of this amount, health care, has been rising at 12% per year for the last two years and is expected to double in four years. So it is a high priority of every enterprise to gain control over this expense before it further erodes earnings per share.

Just as businesses gained cost controls over direct and indirect goods in the late 1990s, new management methodologies will empower businesses to take control of employee benefits and health care spending today.

Brent Bannerman is chief marketing officer of IE-Engine Inc., Waltham, Mass., a company that develops systems companies can use to buy employee benefits. He can be reached at bbannerman@insurance-engine.com.

Reproduced from National Underwriter Edition, April 7, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.

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Balance Sheet Booster Shot: Curing Rising EB Costs

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