Trends in Employee Benefits Software

By ALLEN MONROE

Effective management of employee benefits has grown increasingly important over the past decade. Row Henson, Director of Product Strategy for PeopleSoft in Pleasanton, California, tells us, "Employees are increasingly viewed as a company's most strategic resource. 30% of average people cost is for benefits. Outside the U.S., benefits may amount to as much as 60% of total costs of employee compensation." Says Henson, "Benefits and total compensation is how you attract and retain people. At some companies, employees can pick and choose how to receive the value of their total compensation, selecting from such untraditional components as extra vacation time, periodic sabbaticals, or care of dependents. The concept of flexible benefits is increasingly becoming one of flexible compensation."

In order to improve the delivery of benefits and manage their cost, many companies are directing greater attention to computer software. More than 50 software vendors offer products that promise greater efficiency and effectiveness in delivering benefits packages. Due to the wide range of options typically available in today's benefits programs, such software is both sophisticated and complex in design. Fewer companies are electing to maintain their own home-grown, customized systems, running on mainframe computers. Hoping to benefit from the software industry's economies of scale, they are increasingly looking toward the vendors of packaged computer software to provide the needed systems.

System Capabilities. The types of benefits addressed by employee benefits software packages are:

Some of the functions that most full-featured employee benefits systems provide are as follows:

"Because of corporate downsizing and right-sizing, a major trend right now is employee self service," says Mike Haninen of GENESYS. Advanced functions of some benefits systems include employee access to their benefits information through kiosk and interactive voice response capabilities. Employees can obtain their own benefits profile, change emergency contacts, apply for open job positions, update their record for newly-obtained skills and education, and participate in open enrollments. On some systems, employees can model alternative pension scenarios by entering potential retirement dates.

Executive report writers, featuring advanced color graphics with "drill-down" capabilities for varying levels of detail, are being added to the leading systems. These functions enable better and more-timely recognition of cost trends and planning of benefits options. The importance of an easy-to-use system is stressed by Mary Bakken, Manager of Human Resource Information Systems at Multifoods in Minneapolis. Says Bakken, "We gained the desired improvements in functionality with Cyborg's change to a Windows-interface product a year ago. The Windows interface enhances the ability of the 'casual' (e.g. management) user to access the system. Our wish list includes imaging, especially of employee enrollment forms."

Leading vendors are competing to add capabilities that take advantage of new and emerging technologies. Imaging technology promises to fulfill managers' dreams of the "paperless office." Until recently, imaging has been perceived by many as an attractive, but impractical system feature. This is due to the large amount of computer file storage required for imaging such records as employee photographs, medical x-rays, and incoming correspondence. Many corporate computer networks have lacked the required "bandwidth" to transmit the very large files usually required for imaging. However, recent advances in compression technology promise to reduce the file size associated with imaging, and fiber optic networks are multiplying corporate data transmission capacities.

An important trend in benefits system design is the extension of software to include the re-engineering of workflow processes and the use of "intelligent agents" to trigger activities and regulate processes, such as benefits open enrollment. The system remembers deadlines for completion of important steps of each process, and sends email messages to supervisors and employees to remind them of upcoming deadlines. If deadlines are about to be missed, the "intelligent agent" can forward information to responsible managers.

"Internet" technology also is playing an important part in the future of benefits systems. According to Mike Hanninen, Director of Strategic Systems at GENESYS Software Systems, "We've been surprised at the amount of use and positive feedback provided by our customers who have used our Web server for conference schedules and product announcements. We've gotten a lot of feedback from our customers. Future applications using the Internet will include "chat sessions" and an integrated bulletin board."

Deb Edlund, Brand Manager of Lawson Software, says we should expect that "the Internet will provide an added degree of communication to people working in non-traditional workplaces. By integrating the Internet into their systems, companies avoid the high costs of extending their wide area networks and email systems into people's homes or temporary offices. For the 'virtual workforce,' systems using the Internet facilitate access to benefits information and enrollment. Such systems foster inter-corporate collaboration and respond to employee needs for communication with co-workers."

Jim Candler, Managing Director of Personnel Information Systems at Federal Express, asks, "How are you going to integrate all the networks that exist all over your company and in my company and all the rest of them?" He then observes, "The simple solution to that is the Internet, because it's already there. It just has a couple of problems that we need to solve. And there's so many millions of dollars being spent on that I can guarantee you somebody's going to solve it. It's the path of least resistance."

Software Vendors. In listing the top 100 independent vendors of software of all types, "Software Magazine," in July, 1995, includes nine companies providing human resources and employee benefit software products. They include large, enterprise-wide software developers as Oracle Corp., SAP AG, and PeopleSoft. Others, such as Computer Associates, Dun & Bradstreet Software Services, J.D. Edwards, and Software 2000 are known for a wide variety of software and related services, of which benefits software packages are not the largest component. The majority of the revenues of two other top 100 vendors, Lawson Software and Cyborg Systems, derive from the sale and support of employee benefits and human resources software.

The product offerings by these largest vendors often consist of integrated "suites" of software modules. A typical suite includes three components: Payroll, Benefits, and Human Resources. Companies like SAP, Oracle, PeopleSoft, and others provide suites that integrate with modules supporting other, non-H.R. enterprise-wide functions, such as manufacturing and finance. Other modules may support new or specialized technologies, such as Document Imaging and Workflow Engineering.

Another group of software vendors offer benefits-only systems that also target substantial companies having at least 1,500 lives covered by benefits plans. Addressing the complexities inherent in certain employers' benefit programs, these companies, such as such as SBC Systems Co., Inc., have developed systems which may focus on details not adequately served by the larger, integrated system developers. For example, SBC's software has a strong focus on traditional defined benefit plans. Such plans can present a greater challenge to software designers because their design tends to be more varied than many contemporary programs, and often incorporate many details that are unique to any given plan sponsor.

Costs per software module can vary greatly, depending on the degree of complexity of the application and on the scale of system implementation. Software modules of the largest, most-integrated systems can range in cost from $35,000 to more than $100,000. Integrated software "suites" may cost from $100,000 to $300,000+ for a company having 1,500 or more employees. More importantly, an industry "rule of thumb" is that the cost of the software package typically amounts to only one-third of the total costs of software and services. The remaining two-thirds of non-hardware costs cost includes the time and expense incurred when researching and evaluating potential systems, converting data from the previous system, implementing the new system, training the users, and integrating with other corporate systems. The expense of purchasing and maintaining computer hardware, peripherals such as printers, and communications equipment represents yet an additional investment. It is not uncommon for the top 1,000 companies to invest upwards of $1-2 million in hardware and software designed for payroll, benefits, and human relations functions.

Only a fraction of the quality software vendors specializing in benefits-related software make the list of the top 100 vendors of software of all types. Some of the smaller vendors compete directly with the larger ones for the Fortune 1,000 companies as potential clients. However, other small or medium-sized software developers offer well-designed packages that have excellent functionality, sometimes at a lower cost than the fully-integrated "suites." Many target a broader market segment of companies with far fewer than the 1,500 employee target of the largest vendors.

According to the U.S. Department of Labor, 90% of all employee benefits plans filed with the Internal Revenue Service and reported to the Department of Labor involve 25 lives or less. 70% of such plans are filed by plan sponsors having 10 or fewer lives. The smallest plan sponsors usually contract with consultants or third party administrators to handle their employee benefits systems requirements.

Medium-size benefit plan sponsors are finding that recent improvements in benefits software are making it more attractive to consider acquiring software for use in-house. Software developers are increasingly upgrading their systems to incorporate "GUIs" (graphic user interfaces). Many of the newly re-designed systems are capable of running in relatively user-friendly "Windows" or Macintosh environments on ever-more-powerful personal computers and local area networks. A number of software design companies have developed relatively inexpensive software modules that are limited to specific types of benefit plans.

For example, DATAIR Employee Benefit Systems of Westmont, Illinois, offers specialized DOS-based software modules for as little as $395 each for Defined Benefit Plans, Section 125 (Cafeteria) Benefits, ESOPs, and Defined Benefit plans, but not including such other benefits functions as medical, HMO, or term life administration. If a particular vendor's products match most of the needs of a small or medium-size plan sponsor, and the number of employees to be represented in the database is not excessive, then a workable system can be assembled at a reasonable cost. Assuming several modules are required for the typical benefits program, full systems of this type typically entail an outlay of at least $5,000-$10,000, plus the costs of integration, implementation, and hardware. Overall costs, including computer hardware, implementation, and training, can range from $15,000 to $100,000.

Understanding Software Architecture. Over the past few years, there has been a dramatic shift in software design to incorporate the purported benefits of "client/server" technology. In concept, a client/server systems design distributes computer processing power between system users' desktop computers (the "clients") and a more powerful, centrally-located computer (the "server") used to store and process the large databases of information required for administering employee benefits. The purpose is to improve the processing speed and responsiveness of the system in handling complex reporting requirements.

Older, "file server" designs treated users' desktop computers more like "dumb" terminals, simply relaying commands and requests over a communications network to a central, mainframe computer. Large amounts of "raw" information would be exchanged between the desktop and the central processor over the network, resulting in slow response times. By comparison, a well-designed client/server system "pre-processes" much of the user's request for information before transmitting it over the network. This simplifies and specializes the tasks to be performed by the larger, "server" computer. In some designs, there are multiple tiers of servers, each specializing in one task, such as presentation of data, processing of application logic, and database access, enabling extremely rapid processing at each step.

The "client" processor, usually a desktop personal computer, typically incorporates an intuitive, user-friendly graphical user interface ("GUI") such as Windows(, OS/2(, or Macintosh(. Using simple "point-and-click" technology, HR staff and employees are able to choose from "menu" selections, enter data, obtain answers to queries, and print reports with little or no training in how to use the software. The client processor creates a standardized set of database commands that can be sent over the network to immediately search the database on the "server" processor. Rather than send back all of the data needed for the answer to a query, the server typically sends back just the answer to the query.

The "server" processor or processors typically run on network operating systems such as UNIX, Windows NT(, or Novell. The more popular client/server architectures support a variety of "SQL" relational database products, such as ORACLE(, SyBase(, Informix(, and DB2( (for IBM mainframes). "SQL," an acronym for "standard query language," is an industry standard is defined by ANSI (American National Standards Institute) that facilitates the development of software that can access data from a variety of computers and systems. Many "flavors" of SQL are emerging as database developers seek to optimize their product. Migration from one version to another is "manageable." By conforming to a SQL standard, companies avoid unnecessary duplication of data in systems designed for different users and purposes. Thus payroll and benefits data entered in a Benefits system is accessible to a full range of other applications, such as Financial Reporting, that are capable of accessing a SQL database.

Conformance with other industry standards offers important benefits. These standards include:

Adherence to these standards makes it possible to achieve interoperability between a system designed for administration of employee benefits and office desktop productivity suites that support word processing, spreadsheet, graphics, presentation, and communications.

Selecting a System. Most benefits plan providers rely on extensive assistance from system integrators and consultants in selecting a system. Top priority should be given to choosing a system solution that meets a high percentage of the prospective users' functional requirements, rather than giving excessive weight to technical design and features of the software. According to Bill Berry, President of The Consulting Team in West Palm Beach, Florida, "The key is to put your analysis of requirements as the number one priority. The biggest mistake has been to let technology be the main guide to your decision. If you do the right job in analyzing your needs, you have the basis for evaluating how well any vendor's software will fit. You will have managed the internal expectations of the prospective users of the system."

Berry also comments that, although the client/server architecture is rapidly emerging as the most popular system design, specific user requirements can result in selection of another approach. In fact, some companies are moving back from client/server technology to a mainframe. Typically, for companies having more than 5,000 to 10,000 employees, some client/server systems become strained. However, this threshold may be increasing as small computers become ever more powerful.

An important step in the selection process is determining whether a "best of breed" benefits-only system or an integrated HR or enterprise-wide system is most capable of fulfilling your requirements. Sometimes, considerable economies can be realized by integrating departments and functions, such as benefits and payroll.

Chris Hedges, First Vice President in charge of Human Resource Management Services at First Nationwide Bank in West Sacramento, CA. previously used an outside service for payroll and used a Nomad hierarchical database on a mainframe computer to track employee benefits. The result, she felt, was inadequate control and duplicate data entry. She commenced a vendor selection process in 1989. with a high-level requirements analysis. The list was narrowed to 5 vendors. Then, in December, 1990, the GENESYS system was purchased, and it went live in October, 1991. According to Hedges, "We wanted the same software package for benefits and payroll. There is a daily interface between benefits and payroll. Thus we only have to do data entry once. We have been able to reduce staff from 38 to 19 through integration of staffing and implementation of the system. We used to have separate benefits and HR departments, each with their own separate systems. We also had a payroll systems area and a payroll department. Now, our people have a broader scope, fewer supervisors, and less total work."

A contrary view is taken by Bill Berry. "Benefits has become so sophisticated that benefits systems solutions are becoming separate from enterprise-wide computing. There are specialized systems addressing benefits that are much better than the integrated systems addressing combinations of payroll, benefits, and human resources. If the 'all-in-one system' sacrifices capability for the benefits function, then we would tend to look at the benefits-only systems."

Jeff Comport, Research Director for Gartner Group's Administrative Applications Strategies, observes, "The cost of integrating 'best of breed' applications is very high today. Clearly, in the market, we see that the integrated vendors are winning, particularly in client/server. But, ultimately, no single vendor can be the expert in every kind of business and every kind of operation.... There's going to come a time when we have to have best of breed functionality in some operational and administrative areas, perhaps on a division level."

The traditional way of designing or selecting a system begins with identifying the needs of prospective users of the software. Full determination of your needs, including flow-charting of your sources and uses of data, and full delineation of the various reports you use and generate for others, can involve a considerable expenditure of time, and may require the assistance of a systems analyst. With the advent of "packaged software" and flexible report writers available from by third party system developers, significant shortcuts are available.

A useful methodology is to begin with identifying your most pressing priorities, and those of the likely users of a system. If you wish, you may expand this with a tentative "wish list" of what you would hope to accomplish with a system. A "mind-expanding" visit to industry trade shows can help to acquaint you with what's being accomplished with contemporary technology. Another good source of information is the Internet Web sites of major software vendors and consultants. Next, you should outline the principal sources of information you need, and the people who receive information or analysis that you produce. You should identify existing systems that are used to facilitate these activities. Then determine your annual processing requirements by size of workforce, as well as the number and type of benefits plans. You should give particular attention to the more complex defined benefits plans, and any "legacy" benefit plans applying to divisions or subsidiaries which have been acquired. Lastly, it is important to identify any existing computer hardware that you and other potential users of a system already have, and any connections that might exist to local area networks or outside information services.

All of this information can be summarized in a printed format, and labeled, "Preliminary Outline of Employee Benefits System Requirements." Copies should be provided to no fewer than five potential systems vendors. Because there are nearly fifty systems that are designed for benefits applications, your first real challenge is to narrow the field. It is helpful to obtain assistance from your company's information technology group, in organizing the information to be provided to systems providers and in evaluating their capabilities. Most employee benefits plan providers choose to retain an outside consultant who is knowledgeable about the various risk management systems. The consultant helps to narrow the choices down to a "short list" of systems most likely to fulfill your company's objectives, and then develops a more formal specification of system requirements and a "Request for a Proposal" to be completed by the vendors on the "short list."

Key Selection Criteria. Important criteria for selecting a system provider include:

Cost / Benefit Evaluation. In order to gain corporate approval of the expenditure for your system, you should plan from the outset to document the financial benefits that will be gained through the increased effectiveness and productivity that will result. The benefits then should be compared against the costs, including the ongoing costs of hardware maintenance, supplies, and software support. Typically, the hardware and software package costs are amortized over a number of years, so each year's effective cost may be as little as one-seventh of the acquisition cost. The rate of return for some systems may be difficult to quantify, because a substantial part of the benefits may include improved employee morale and loyalty, as well as other intangibles that are hard to measure.

According to Barbara Noti, Senior Research Analyst in Meta Group's Application Development Strategies Service, speaking at HRMS Expo95, "If you're moving to client/server to save money, don't. Just forget that argument; it won't fly. There have to be some other productivity issues.... The productivity variable does play out, but over the long term, and in ways that are hard to quantify.... Although the process of implementing client/server remains painful, I would take the position that you're going to have no choice. The day will come when you take a look at your [undocumented] 15-year old HR system running [on a mainframe] and you'll have to wonder whether on New Year's Eve, 1999, it's going to blow up in your face."

System Implementation. The planning process for implementing a system is as important as the steps in selecting the software. Usually the implementation and training process is responsible for two-thirds of the software cost. In addition, computer hardware may need to be purchased, or existing hardware upgraded with appropriate memory, disk capacity, network adapter cards, graphics cards, and backup media. If a local area network is to be installed, some wiring may be necessary. Each activity needs to be planned, scheduled, and budgeted.

According to a recent PeopleSoft white paper, "While ... new software will certainly bring exciting and rewarding changes to your organization, it won't remedy all of your organizational challenges. To meet certain objectives, you may need to look deeper into your organization for new solutions. And the implementation of a new system presents you with an ideal opportunity to reduce the complexity of your business systems, policies, and processes that have resulted from years of inflexible systems."

"In practically every ... implementation, managing change of both systems and business processes is the most difficult challenge at hand. After all, with the implementation of a new system, you're modifying the infrastructure of many jobs.... Also, be sure to go into your project with a positive attitude. Plan for and expect change. Be flexible. Be creative. Have fun. And in the end, you'll have a dynamic infrastructure where your people, software, hardware, communication technologies, and business processes all work in harmony to help you manage information in ways you've never done before."

Training is another important consideration. Typically, the system provider or system integrator will provide training to your on-site users of the system. Systems using contemporary graphical user interfaces require considerably less training than older, text-based systems. The most important element for success is effective management of people's expectations in all stages of the systems selection and implementation process. Training and communication are vital components of the process.

Avoiding Pitfalls. Systems development efforts do not come without a considerable development price tag. Due to a more complete product and a more rigorous set of standards, it takes a lot more money to create a competitive benefits system today. The cost to develop sophisticated Windows and client/server applications easily can run into the millions of dollars. The result is likely to be a consolidation among benefits system providers. Companies which are marginally profitable or are owned by parent organizations that are financially-strained are unlikely to make the transition. Some benefits managers will face the prospect of owning "orphaned" systems, which, due to a reduced volume of new business by their providers, will experience less ongoing support and development. Or, due to mergers with other systems providers, it may be necessary to convert to the system marketed by the successor company. With this in mind, it is more important than ever to assess the commitment and capability of a prospective system provider to remain at the cutting edge of technology

The Human Factor. Software and technology are constantly changing. What is much less likely to change, however, is the basic human engineering of products and the people in the organizations that support them. Important factors to consider include the look and feel of using a system, and the ease of obtaining support and help from the vendor's organization. Some companies selecting systems tend to avoid consideration of vendors that have a "user-unfriendly organization," making people difficult to access. Anyone who has become "trapped" in a voice mail system's "endless loop" has a real appreciation for the importance of not taking technology too far or ignoring the needs of ordinary people that use the systems.


Copyright ( 1996 RISK & INSURANCE. 747 Dresher Road, P.O. Box 980, Horsham, PA 19044-0980
Reproduced with permission of David Shadovitz, Editorial Director (215) 784-0910.
The content herein is a portion of "A Bonanza for Benefits," appearing in RISK & INSURANCE, February, 1996.

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