Employee Benefits Should Not be Off Limits For Sourcing Savings

A recent post over on E- Sourcing Forum got me thinking that far too few procurement organizations are willing to insert themselves aggressively into the process of sourcing employee benefits. They would rather leave benefits sourcing to HR, and let it deal with the repercussions: when cost-saving measures are applied to benefits sourcing, the popularly held belief that you can't reduce the cost of benefits without sacrificing quality often results in negative PR, and flack from employees. (BTW, for those who are new to employee benefits, I'm talking about the broader category of health insurance, pharmacy benefits, 401K servicing, and the like -- in other words, the out-of-control HR cost categories than many feel have only one direction to move and can't be addressed by procurement effectively.)

The fundamental challenge is that current advisors in these areas have fundamentally misaligned incentives. Many benefits advisors are also brokers who stand to make a commission based on the size of a particular package they sell. Moreover, benefits advisors nearly always come from an HR orientation that is focused on containing employee push-back on package changes. Procurement, on the other hand, examines the total value and cost of the package (based on available budgets and options in the market -- and the overall effectiveness of the negotiating effort).

Rick Schlegelmilch of Paladin Associates points out, "Employee-benefit plans are a critical component of a company's ability to attract and hold talent. This sacred task often puts price negotiation with service providers in the hands of outside HR consultants and internal Human Resource specialists." In the case of pharmacy benefits, "All Drug plan administrators have plans to help companies control drug USAGE but they rarely address the sourced COSTS of the medications, outside of generic substitution efforts." Schlegelmilch goes onto suggest that savings in pharmacy benefits can be significant, pointing out a recent case where the threat to switch to a pre-negotiated consortia brought an immediate "9.5% reduction for the remaining year of a three-year contract."

Pharmacy benefits is just the beginning for companies (even those that self-insure) that are interested in aggressively tackling cost reduction through employee benefits. Pursuing benefits spend is never easy, however; of all the categories we have the opportunity to touch, it requires some of the softest hands. It means directly managing the expectations of not only other stakeholders such as HR, but also those of employees. Moreover, it requires pursuing the entrenched and potentially conflicted interests of HR benefits consultants who, unless managed appropriately, are some of the best at raising the FUD factor.

Do you have an experience with sourcing employee benefits that resulted in hard-fought savings -- and perhaps some battle scars -- that you think Spend Matters readers might benefit from hearing about? Feel free to drop a line. I will be discreet about sharing any organizational information, because I know how sensitive this subject is.

Jason Busch

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