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Thomas L. Schmitz is Hewitt Associates L.L.C.'s guru on outsourcing employee benefit plan administration.

Mr. Schmitz has led Hewitt's foray into benefit outsourcing since 1989, when he developed technology that integrated previously separate recordkeeping systems for 401(k) plans, flexible benefit plans and defined benefit plans.

Mr. Schmitz in 1990 took outsourcing another step, when Hewitt staffers dealt directly with participants in a 401(k) plan sponsored by General Dynamics Corp. During the next several years, Hewitt expanded its business of offering employers integrated data systems and direct handling of participants' 401(k) inquiries.

In 1993, Hewitt took what Mr. Schmitz calls "the next logical step" and began working with GTE Corp. to administer more than its 401(k) plan.

Lincolnshire, Ill.-based Hewitt now has 110 benefit administration outsourcing clients whose plans cover approximately 9 million employees and dependents.

Mr. Schmitz, 49, joined Hewitt in 1972. He has a bachelor's degree in business administration from Drake University and is a Fellow of the Society of Actuaries. He worked for a small insurance company in Ohio for a year and a half before joining Hewitt's Cincinnati office.

Mr. Schmitz, who holds the title of consultant, discussed the growth of outsourcing employee benefit plan administration with Associate Editor Deborah Shalowitz Cowans.

Benefit outsourcing can mean many different things to different people. How do you define it?

Outsourcing technically can be defined as anything we do that employers could do for themselves. In the benefits outsourcing business, it's been defined a little bit differently than that. Even though we do software and recordkeeping for a client and they could do those things themselves, that was never really referred to as outsourcing.

What's referred to as outsourcing is the participant interaction portion of this. The benefits industry got into the business of outsourcing when we started to talk to participants directly and take phone calls. That was the dawning of the day of the age of outsourcing to this business.

For decades, employers have outsourced administration of their defined contribution and flexible benefit plans. What is so different about the benefit outsourcing that is occurring today?

Right now clients are asking us to administer any type of benefit plan. A lot more defined benefit administration work has been outsourced.

Another key change has been that whereas the administration that was done outside was primarily around flex enrollments or running a flex plan, now it's broadly around health care and all the other elements of group benefits.

The other piece that's been outsourced is all the interaction among all the third parties involved, particularly in the health care area. We would be heavily involved in the interaction from an eligibility and a billing standpoint, for example. And then the other piece, of course, is participant interaction.

Benefits outsourcing is growing rapidly. Is there some way to quantify the growth in both the field as a whole as well as your own growth?

Overall industry growth is pretty difficult to quantify. There's been quite a bit of fallout in the business as various competitors have really struggled to make the investment. I've never seen a number (quantifying) benefit outsourcing, but I read a number about HR outsourcing. The number was $30 billion.

Our revenue growth in our outsourcing business has been in excess of 50% each of the last two years. For our fiscal year ending on Sept. 30, 1997, our outsourcing business revenue was in excess of $350 million -- (approximately) 50% of the revenues of Hewitt Associates. We're expecting another very high growth year.

What is driving the growth of outsourcing?

The early '90s, when outsourcing started to take off, was a time of focus on restructuring and cost reduction. Outsourcing seemed a means to do that, particularly with regard to staff functions.

I think it's moved beyond that. There's a decision made by an organization to outsource and it's a mix of factors. Clearly cost is part of that. Another factor is the way that the organization views the HR function. If delivery of benefits to their employees is not considered core to improving that organization's results, they've been pushing this stuff out the door.

The third major component is technology. As there's been much more choice in benefit plans, systems that were in place before just couldn't handle it. So clients had to make decisions about reinvestment.

Many clients are deciding that it doesn't make any sense for them to reinvest (in new technology) when they can go to an organization that spent that money and spread it over an entire book of business.

What types of employers are most likely to outsource?

I don't think there's a type. Our clients are very large to medium size to smaller organizations. Probably the growth in the next few years is going to be in the 5,000 to 20,000-employee range.

It's probably a multi-location employer that likely has had benefits activities spread around several locations and there's some efficiency by centralizing them. That probably rules out the single location hospital or bank unless they've got a technology need that's different.

A number of our clients are looking at restructuring, spinning off things, buying new things and they are much more nimble when they can turn to us.

What are the advantages of outsourcing from an employer's point of view?

Outsourcing allows the client's HR function to focus on more strategic, value-added activities. I would say that's the number one value that we bring. Also, there's a consistency of answers, a consistency of customer service and quality. And compliance clearly is part of why we're hired.

The next big thing is the access to newer technology. The next new benefit trend or direction -- we're ready to do it.

How do corporate benefit managers' jobs change when they outsource benefit administration functions? What happens to corporate benefit managers' departments?

Its going to vary by the employer. The operational tasks are certainly the first to be outsourced, and that's where you're going to see some redeployment of those people or some reduction of staff. There may have been dozens of people doing clerical tasks and that's gone.

However, for the benefit managers themselves, and usually for a few other key staff members, it's likely that they get a chance to refocus time and energy on being strategic. And there's still the need to work with the service providers.

What types of benefit functions can be outsourced?

Benefit outsourcing today includes 401(k) plans, all types of defined contribution plans, defined benefit pension plans, flex plans, and broadly health care and group benefit plans.

We keep doing more for the client than we were originally hired to do. So now we're doing employment verification for mortgages, charitable contributions, new hire processing, policies and procedures. Those are all types of emerging things that a client might ask us to do.

What type of performance standards should an employer expect from its outsourcing vendor?

There should be a core set of performance standards that are measured for all clients so these standards can be benchmarked against the entire provider data base. Those would be operational, customer service type of standards. So the client should know how well it's being served compared with that provider's group of clients.

The second area would be a willingness to measure key areas specific to the client's needs or concerns.

The third would be an openness to financial risk as a result of meeting, exceeding or not achieving performance standards. If a client wants to put some fee to financial risk, there ought to be an upside for exceeding performance and there ought to be a downside when you don't make it.

A fourth area would be implementation. Is that organization willing to guarantee that they're going to meet the dates the client hired them to meet?

Stay focused on the key measurements. Probably something in the area of five to 10 measurements of performance standards at the start is adequate and just agree that you're going to build them over time. The right ones are going to emerge from the discussions you've been having on an ongoing basis with the client.

Is the outsourcing business profitable?

There is a rap on the business itself that nobody's making money. Hewitt Associates is profitable in its outsourcing business. It's funding the investments that we need and being profitable at the same time.

With that said, the outsourcing business has proven to be difficult for lots of people to make money in. There are investments in real estate, technology, people and training those people. The implementations are an investment in themselves. The market doesn't pay fully for the cost of implementation.

Have technological advances promoted outsourcing benefits administration?

I think to a certain extent the advances in technology have driven outsourcing. Clients just didn't want to keep making the investment necessary to add all the features necessary to offer their employees that competitive benefit package, that next plan design, or take advantage of the next technology tools. That's one twist.

The other twist is that the technology is clearly an enabler. If we had to answer every phone call, do every transaction just with people, we couldn't build the buildings fast enough. Voice response and the Internet are enablers of outsourcing. The integrated data bases that we've been able to create are enablers of outsourcing. So the technology's both a driver and an enabler of the outsourcing trend.

Consultants and others have made enormous financial investments in benefit outsourcing centers. If employees can get their questions about their benefit plans answered via the Internet, why would employers need consultants to run call centers?

The Internet is only a small part of what we're doing in the outsourcing relationship. The Internet is an access into employee information much like voice response is an access. It's got some opportunities to be a tool that you can use more effectively in some ways than voice response. For example, for things like modeling of a flex election or modeling financial security, its got much more capability than what you can do through the phone.

But the Internet does not deal with all the other things that are needed to support the outsourcing relationship or to provide benefits to the employee. It doesn't do all the kind of back room things that are necessary to create a loan from a 401(k) plan or write checks. It's not the recordkeeping system.

The Internet actually could increase the volume of interaction on benefits, not decrease it.

There are a couple of parallels you could draw to other emerging technology.

What did ATMs do to the banking industry? ATMs did not decrease the number of tellers; ATMs increased the overall access and transactional banking that went on. What happened with cellular phones? They didn't really decrease what we were doing at home; they just made us have more phone conversations. It's possible that's the way the Internet might take us.

Are we going to have fewer people answering questions from employees directly? So far, we haven't seen that and we don't think that's the direction.

Right now we're taking over 100,000 phone calls a day at Hewitt Associates for those 110 clients. About two-thirds of those are going into voice response. Those could be inquiries about 401(k) balances, moving money, doing flex enrollments or other kinds of transactional type things. One third of those calls actually end up with a benefits center associate on the phone.

I think the Internet is going to expand the total amount of interaction on benefits and only somewhat affect the redistribution of how these calls come in. I suspect the Internet is going to have more of an impact on the voice response piece than on the live portion.