© Copyright 2006 Rogers Publishing Ltd. The following article first appeared in the January 2005 edition of BENEFITS CANADA magazine.
Large-scale HR business process outsourcing is in its infancy in Canada. Instead, outsourcing providers are targeting the mid-size market, designing integrated pension and benefit administration services as demand from plan sponsors grows.

CIBC came to a daunting realization in 2000. Due to numerous mergers and acquisitions over the years, the bank was like many large corporations in Canada: it had scores of legacy human resources systems and processes in place which were essentially unnecessary. “By 2000, what we had was over 30 HR systems,” says Hugh MacDonald, vice-president of strategic alliance management with CIBC’s HR division in Toronto. “We had literally over 1,000 HR processes, many of which duplicated other processes.”

The bank also had five different payrolls and different groups of staff on each payroll. “What we needed to do was clearly rationalize all that duplication and simplify things and make it better,” he says.

CIBC didn’t want a short-term solution. It wanted to reinvent its HR service delivery through the creation of an e-HR system—an integrated digital administrative system for HR—which would streamline human resource operations and reduce duplication. The company also wanted self-service for its staff, with all managers and employees involved in their own HR transactions.

“Clearly we needed to have one global system,” says MacDonald. “We needed one HR system that would do transaction processing across the organization.” He says the company wanted a system that “would work from Japan to New York, from Toronto to London, U.K., and all points in between.”

In March of 2001, CIBC signed a seven-year deal worth $227 million with EDS to do much of its backoffice HR transaction processing and other e-HR projects that would lead CIBC to digitize its HR operations. It was Canadian HR business process outsourcing (BPO)history in the making.

The CIBC deal—an example of the most comprehensive form of outsourcing—still dwarfs much of the HR outsourcing activity that has occurred in Canada in the three years since. There have been some other large-scale BPO arrangements—Air Canada(Exult), B.C. Hydro(Accenture), and Bank of Montreal (Exult)have followed suit— but the full BPO approach to outsourcing is still occurring sporadically, as larger players enter the picture.

Instead, a more piecemeal approach to benefits and pensions outsourcing is the norm among smaller and mid-size plan sponsors. And outsourcers of all sizes are competing in this market, attempting to snag a piece of the emerging business.

Plan sponsors are certainly biting. While the outsourcing of certain functions has been around for over a decade, the complexity of HR functions—brought on by regulatory pressures—has certainly grown, necessitating more streamlined systems. As well, the smooth and effective delivery of information to plan members has become a focal point for sponsors and they are increasingly looking for ways of simplifying how they deliver this information. Add to that the need for more sophisticated technology, and the cost of insourcing becomes prohibitive.

“All that’s really happened is there’s an acceleration of that very first seed idea that ‘we’ll find someone else to do this outside our organization,’” says John Sanders, a managing consultant at Hewitt Associates in Toronto.

According to a study by Watson Wyatt Worldwide, conducted in March 2004, of 127 Canadian firms of varying sizes, 14% of the firms completely outsource the overall function of the pension plan, with 79% blending the “insourcing” and outsourcing of pensions. On the healthcare side, 4% of firms completely outsource their group health plans, with 77% combining insourcing and outsourcing.

The study finds the functions most likely to be outsourced include defined benefit(DB)payment processing(80% of sponsors), and maintaining DB data and calculating benefits(71%). Group healthcare plans were least likely to be outsourced(18% of companies).

“We’ve seen more activity and interest in DB outsourcing in Canada than in other fields,” says Jean-Pierre Provencher, chairman at Aon Consulting in Toronto.

HR outsourcing in Canada can essentially be broken down into three—albeit fluid—groups of end-to-end outsourcers, consultants and insurers. One group consists of large information technology firms, such as EDS, IBM, Hewitt Associates(which recently merged with U.S.-based Exult), and Accenture. These players are the large-scale, U.S.-originating outsourcers who are typically the fusion of IT capability and HR outsourcing expertise.

These end-to-end outsourcers tend to focus on the provision of claims processing, call-centre operation, portal management, employee self-service Web components, compensation administration and employee contact management, using sophisticated technology to deliver these services. They frequently outsource an entire operating unit for a fixed period of time in what’s called in the business a “lift and shift.”

In the case of CIBC, this meant about 200 CIBC employees were moved over to EDS and offered new positions with the company. In this manner, CIBC had expert staff familiar with the company’s way of doing business who were going to be trained by the outsourcing provider.

Another approach in end-to-end outsourcing is the “transformational approach,” says Sanders. He describes it as a way of replacing or transforming existing processes through outsourcing, to make them more efficient and more technologically streamlined. In this approach, new technologies, new people and new processes are brought in and introduced, rather than having former staff retrained and legacy systems merely updated.

End-to-end outsourcing can offer firms a complete package of solutions through one provider, which can effect cost savings and integrate various administrative functions within a company. It can prevent companies from outsourcing benefits administration to one provider, pensions to another, and payroll to yet another outsourcer. Plus, there is the sophistication of the technology, which can standardize the ways tasks are delivered.

“Technology was a main issue for them,” says Bob Hakeem, vice-president, HR business outsourcing at EDS in Toronto, of the CIBC deal. “By partnering with EDS, they were able to avoid a significant capital-cost outlay.”

While end-to-end outsourcing has seen a bit of play in Canada, many providers feel the size of the market limits the number of deals. They say there are too few big firms looking for large-scale outsourcing deals to really make this segment of the market take off.

“It’s a scale issue,” says Jan Grude, CEO, Mellon Consultants Ltd. in Toronto. “In the U.S. for example, most companies like ours typically go after firms in excess of 10,000 employees. Now, we have very few of those in Canada, so you have to limit your appetite.”

While end-to-end outsourcing deals have been few and far between, the mid-market firms in the under 5,000- employee range, have seen the most action. And it’s the part of the market end-to-end providers, consultants, insurers and even traditional payroll administrators are vying for.

One group of companies competing for business from plan sponsors are consulting firms such as Aon Consulting, Mercer Human Resource Consulting, Towers Perrin, Watson Wyatt Worldwide, Morneau Sobeco and Mellon Consultants. But this group also includes such companies as HR BPO providers who offer some of the same outsourcing packages as their smaller-scale competitors.

The consulting firms focus on three main areas: actuarial, benefits and compensation. DB outsourcing is also a main product line with a few providers offering defined contribution(DC) outsourcing.

While not possessing the technological might of their larger BPO competitors, many consultants offer IT platforms. They also have the ability to provide call-centre administration in many cases, and can provide the client with personalized websites. However, the outsourcing approach is more strategic, with deals targeting one or two of a company’s administrative areas, rather than the whole package.

“We have a lot of mid-sized organizations looking to us to provide these administration/outsourcing services simply because they don’t have either the staff, or the appropriate balance to deal with this or they don’t have the tools,” says Aon’s Provencher. “Administering a pension today is somewhat complex and they don’t want to invest in the technology to provide it in-house.”

Morneau Sobeco—which offers outsourcing of DB or DC plans, as well as group RRSPs or DPSPs, non-registered savings plans and employee stock purchase plans— says much of its business is devoted to personalized outsourcing arrangements for clients. According to Randal Phillips, executive vice-president at Morneau Sobeco in Toronto, clients have the ability to choose what investment managers they want to deal with, and what custodial firms they want to work with. Morneau Sobeco’s role is to build the outsourcing offering.

“What we are really doing is providing a recordkeeping and administrative service and we’re also providing an online Web self-service capability to plan members and we’re backing that all up with customer service centres that support the plans,” says Phillips.

Though it doesn’t offer DC, Mercer Human Resource Consulting offers DB and benefits administration outsourcing under its service delivery model. “It includes pension administration, benefits administration; we do targeted call centres and it’s all linked together with something called Tractus control, which is our customer management workflow imaging application,” explains Susan Parsons, a principal with Mercer in Toronto. “It’s all fully automated.”

Also entering this market are the large group insurers— namely Sun Life Financial, Manulife Financial, Great- West Life—and investment firms such as Fidelity Investments. This group focuses largely on DC recordkeeping, benefits administration, money purchase plans and group RRSPs. The operative word in this camp is integration. These traditional full-service suppliers are busy merging their pensions and benefits offerings in comprehensive packages.

According to Dominique Mailloux, vice-president, Total Benefits with Sun Life in Toronto, many clients have long been asking for integrated administration. “They’re looking for an organization that can help them maximize their return on benefits and pension program investment.” To that end, Sun Life created a Total Benefits division, with the express purpose of delivering the outsourcing—via one channel—of a sponsor’s benefits and pensions systems.

Mailloux says the insurer’s new technological capabilities allow plan members to access their benefits and pension information online, through one access ID and password. For those services that it does not offer, Sun Life partners with DB pension plan providers, stock-option and flexible-benefits providers.

Manulife, which refers to the holistic approach of joint benefits and pension outsourcing as “total convergence,” says the aims of the fusion are better plan sponsor and member experiences. “Total convergence is effectively taking the full services core offerings that we have in our group health and life area and taking the core offerings that we have in our group pension and group RRSP area and employee ownership plans …and integrating a number of key deliverables there to enhance the plan sponsor and the plan member’s experience,” says Barry Noble, vice-president, group pension distribution, Canadian pension operations, Manulife Financial in Toronto.

Also getting into the whole HR outsourcing field are firms that have traditionally only administered payroll. One example, Ceridian, recently signed an agreement with OpenText, an enterprise content-management firm, to manage its employee-recruitment process. The deal— emblematic of the growing recruitment outsourcing trend in the U.S.—will mean Ceridian will provide the company with such services as candidate identification, background screening and interview management.

As more and more companies ramp up their outsourcing services, there could be a battle in the smaller to midsized market in the next few years, as end-to-end outsourcers, consultants, group insurers and other new entrants follow the demand for these services. With the need for advanced technology, clear member communication and ongoing cost reduction, there are signs the number of sponsors who turn to outsourcers for help will grow. “We do think that there is going to be increased demand, that this is going to evolve and that it is an area of strategic importance to both our group benefits and group pensions organizations,” says Noble.

But although Canadian companies have started on the path to outsourcing, it’s still an industry in its early days. “It’s a topic that is gaining a lot of attention and a lot of interest,” says Aon’s Provencher. “We’re probably going to hear a lot about it in the years to come.”

Anna Sharratt is associate editor of BENEFITS CANADA.