The perfect storm in global economies over the past few years has dramatically transformed human capital and benefits markets, and an HR department must determine how to maintain—or even improve—its organization’s competitive advantage and sustainability in the current climate.
A continuum of total health management
There are three approaches to benefits management: reactive, proactive and preventative. Of these, it is the preventative approach that is best suited for effective transformation of benefits plans. This approach sees benefits as an investment in the future, allowing a company to target employee attraction and retention. It also focuses on strategic benefits management, involving analysis and benefits decision support.
The following chart demonstrates the continuum of total health management.
But before we delve deeper into the preventative approach, let’s quickly look at the other two and explore why they aren’t ideal.
Reactive approach: Filled with challenges
The reactive approach faces inherent challenges, with its focus on responding to issues as they arise rather than preparing for them in advance. The volume, scope, speed and volatility of available data all create difficulties in the successful application of this method. Future uncertainties, the need for long-term forecasts, benefits risk management and strategic decision-making all point to the need to shift away from a reactive approach to benefits management.
Proactive approach: Cost savings with potential problems
The proactive approach takes a different path, identifying areas with strong potential for cost savings. For example, proactive benefits management recognizes that administration fees represent 5% to 20% of the overall cost of benefits and that the cost-efficient alternative would be to outsource benefits administration to professional companies. However, the major limitation of this approach is that administration fees, while significant, represent only a fraction of the overall cost. In addition, this approach may unintentionally increase employee absenteeism and the direct and indirect costs of other employee benefits.
Preventative approach: Long-term impact, appreciable savings
In contrast to the reactive and proactive approaches, the preventative approach is highly strategic. It can improve employee attraction and retention by balancing benefits value and costs, keeping benefits affordable and sustainable, and maintaining business differentiation. The following factors play a key role in the preventive approach:
- the organization’s priorities, risk tolerance and governance principles;
- the regulatory environment and change trends; and
- per capita costs, trends, future benefits costs and associated risks.
This path includes clear objectives, strategic and financial management based on data-driven decision-making, and a focus on health initiatives, such as integrated absence management and health and wellness programs. In defining benefits objectives, it’s essential to set goals that consider current market trends and the company’s differentiation in the labour market. In addition, overall business strategy must be considered, including HR objectives in managing benefits and controlling costs.
In this approach, strategic benchmarking of benefits is essential in order to provide insight into the company’s integrative position, establish strategic objectives and identify areas for improvement. It compares company benefits positions (plan design, per capita cost, demographics, etc.) with industry benchmarks and assesses whether each benefit is a cost or an investment. It also explores potential imbalances in business risk tolerance, benefits diversification, employee benefits perception and benefits cost efficiency, showing how each dollar spent is aligned with business and HR objectives.
The role of data-driven decision-making
To build a successful benefits strategy with sustainable growth, decision-makers need insight into future high-cost and high-risk areas. Data-driven decision-making tools provide this information, allowing for strategic and financial management of benefits plans. Data from predictive modelling, workforce planning and predictive risk mitigation provide a solid foundation for solutions that contribute to continuous improvement and flexibility of benefits plans. This foundation also allows for fact-based objective communication, benefits value articulation and evaluation of a program’s measurable performance.
Two areas where these tools can have particular impact are integrated absence management and health and wellness programs. Predictive modelling for these components of benefits plans can potentially drive cost reduction and improvement of productivity, which will increase the overall return on investment.
The preventive approach uses these tools to do the following:
- comprehensively analyze company-specific and market-available data;
- project future costs and test scenarios;
- estimate change and intervention impacts;
- create a long-term action plan;
- track projections versus actual results; and
- learn from new experience.
Time to make a difference
The value of the preventative approach is clear—it provides cost savings, improves productivity and positively impacts employee and business health. Now is the time to develop an employee benefits strategy that makes the right plan changes at the right time and provides more value for each dollar invested. It is time to move from passive reaction to active prevention.
Alex Uborcev is a senior associate in Aon Hewitt’s health and benefit group.