How to curtail the rising cost of disaster recovery by moving to the cloud

If a disaster struck your company, could you recover? Do you have a place to store your data so it’s safe and accessible, and do you have a way to recover it after a disaster without bankrupting the company?

Investing in redundant infrastructure and hiring specialized staff to protect yourself is hard to justify in today’s business climate, especially when the rising cost of disaster recovery pushes other critical projects to the back burner. But the answer may be in the cloud, says Ram Shanmugam, senior director of product management for Recovery Services at SunGard Availability Services.

“Recovery in the cloud is offering customers reliable and cost-effective options to increase application availability,” says Shanmugam. “It’s no longer a matter of do you need higher application availability but how can you do it effectively and efficiently compared to traditional recovery models.”

Smart Business spoke with Shanmugam about the advantages of outsourcing disaster recovery to the cloud.

Why is the cloud advantageous?

Organizations require consistent and reliable availability of their recovery infrastructure to match the business value of their full range of applications and data. These range from mission-critical to less critical. Disruption and outages in the availability of mission-critical applications do the most damage to organizations financially and in terms of impact on quality of service, lost reputation and competitive advantage. To design and implement a recovery plan, the IT organization must determine the recovery point objective (RPO) and recovery time objective (RTO) for each mission-critical application. The RPO is the amount of down time and data loss the company is willing to sustain after a disaster, and the RTO establishes the timeline and priority for restoring critical business processes and applications. Finally, to meet the RPO and RTO requirements, the IT organization must invest in space, capital equipment and software, and hire experienced staff to replicate or back up data, then try to ensure recovery by executing rigorous testing protocols.

In contrast, cloud-based recovery offers a reliable and affordable alternative for achieving RPO and RTO requirements and ensuring higher availability for mission-critical applications. Cloud-based recovery solutions offer access to low-cost or pay-as-you-use recovery infrastructure, which can be provisioned on demand to recover mission-critical applications in the wake of failure events, with sufficient security and guaranteed performance.

What should executives consider before outsourcing disaster recovery to the cloud?

* Cost savings is a significant driver.

* RPO/RTO. Companies often forsake their RPO/RTO requirements because in-house solutions are cost prohibitive. The cloud offers the ability to significantly improve application availability in a cost-effective manner.

* Reliability. The ROI of a recovery environment is in the reliability of its performance at the time of disaster. Compared to in-house solutions, managed cloud solutions offers higher reliability in recovery of mission-critical applications after failure events, with sufficient security and guaranteed performance.

* Skilled resources. In-house recovery solutions require investment in talent to support the infrastructure. In contrast, the cloud eliminates the need for that investment, freeing up resources to focus on value creation.

Does migrating to the cloud create a loss of flexibility?

No. In fact, the cloud allows IT organizations to optimize their investment and resources by offering configurable options to meet the individual availability objectives of each application or business process.

IT organizations also have the flexibility to customize a cost-effective hybrid recovery environment by integrating cloud with dedicated internal infrastructure to support availability of large, complex applications and business processes.

What should CIOs consider when evaluating prospective partners?

Ask these questions to evaluate potential cloud partners when considering cloud-based recovery options.

* Does it offer meaningful service level guarantees for recovery of mission-critical applications? Can it reliably recover mission-critical applications in the wake of failure?

* Does it support heterogeneous computing platforms (e.g. Windows, Linux) and hybrid architectures that meet the recovery needs of the entire IT portfolio?

* Does the staff have hands-on disaster recovery experience? Has it recovered from a disaster? Does it understand the entire disaster recovery lifecycle? Can it provide audit-ready test reports?

* Can the partner support a broad portfolio of RPO/RTO requirements in its cloud solution? Does it provide options for high availability, as well as less critical applications, in a heterogeneous environment?

* What is the range of options supported for moving data to the cloud? Does it use monitoring and automation tools to ensure rapid and effective response to failures?

* Can the cloud partner handle your current and future needs? Can it expand and contract on demand, handle sudden growth or support large amounts of application data?

* Can clients pay as they go?

Is data in the cloud secure?

A cloud partner should offer multiple levels of security and service options to fit your needs. For those concerned that some data are too sensitive for the cloud, despite security, they can use a private cloud, while selecting a shared cloud for everything else.

One size doesn’t fit all, so a cloud partner should offer a range of private, hybrid and physical environments to make sure your data is secure and can be recovered after a disaster.

Ram Shanmugam is the senior director of product management for Recovery Services at SunGard Availability Services. Reach him at [email protected]


Health care reform

An Employee Retirement Income
Security Act (ERISA) pre-emption
clause that normally gets very little
attention may come under discussion as
part of the legislature’s 2009 health care
reform agenda, posing the potential for
significant cost increases in employer-sponsored group health care. ERISA preemption allows employers to provide uniform health benefits to employees in different states and jurisdictions. Without it,
employers could be subject to state and
local benefit mandates, premium taxes, systems and other requirements.

“Congress has been setting the stage for
this debate and the outcome has huge implications for employers because more than
100 million employees are currently covered by ERISA-governed health insurance
plans,” says Travis Brashear, Group and
Health Care Practice Leader for Watson
Wyatt Worldwide. “A recent decision by the
9th Circuit Court has caught everyone’s
attention and heightened the need for
employer vigilance and action.”

Smart Business asked Brashear about the
potential impact from ERISA pre-emption
reform and the steps employers should take
to monitor and influence the outcome.

How does ERISA pre-emption benefit
employers?

Companies with employees in multiple
states can offer a single group health plan
because ERISA pre-empts any state or local
laws that might dictate different coverage
requirements. Plan consolidation saves on
administrative costs and also reduces premiums because it allows a company to
leverage its entire employee population for
experience purposes. In addition, ERISA
pre-emption affords employers the autonomy to design health care plans and wellness
programs that fit the company’s budget and
employee population. Today, employers are
encouraging employee wellness because
doing so reduces claims and costs. A key
design feature calls for customizing the program and incentives based upon the demographic profile, claims experience and motivation of each employee group. Employers
could lose these valuable cost management
tools under ERISA pre-emption reform.

How could ERISA pre-emption reform impact
employers?

Besides having to comply with differing
state and local requirements, ERISA preemption reform could have the biggest
impact on employers with self-insured plans
because it would give states more authority
over those plans. Employers could also be
impacted by pay-or-play statutes, similar to
the one in Massachusetts, which leverages a
minimum per employee insurance contribution on employers. While we can only estimate the financial impact of eliminating the
pre-emption clause, we can look to Texas
for some indication of the potential cost.
Texas currently has more than 55 mandates
relating to health insurance and compliance
is costing in-state employers an additional 5
to 7 percent per year. The complete impact
may be hard to estimate because cost
increases often result from a measure’s
unintended consequences.

What are some of those unintended consequences?

Beyond the impact of direct costs,
Congress may not realize the negative
impact of eliminating ERISA pre-emption
on two of the Obama administration’s top
priorities: reducing the uninsured and
improving the health of the population. For
example, employer dollars invested in
improving the health of the work force may
now have to go towards additional administrative costs, or to subsidize the claims cost
associated with complying with each state’s
mandated benefits. Or worse, faced with the
task of attempting to comply with thousands of mandates across the country, many
large employers could opt to drop health
insurance altogether.

What’s the impact from recent court decisions?

Recently, the 9th Circuit Court ruled that
ERISA did not pre-empt San Francisco’s
Health Care Security Ordinance, which
requires local employers to make specific
health care expenditures on behalf of their
employees. Employers should monitor the
ultimate ruling, which will be rendered by a
full panel of judges from the 9th Circuit
Court of Appeals, because it may influence
how other courts view ERISA pre-emption.

What actions should employers take now?

The debate has just begun, so employers
have time to monitor the situation and
potentially influence the outcome by taking
these steps:

  • Be aware and be involved.

    Talk with your company’s advisers, consultants, professional associations and trade
    associations about the impact of ERISA preemption reform. Let your voice be heard.

  • Calculate the impact.

    Understand how reform might impact
    your business and the bottom line.
    Communicate your findings to your representative and be sure to point out any unintended consequences Congress may have
    overlooked.

TRAVIS BRASHEAR is the Group and Health Care Practice Leader for Watson Wyatt Worldwide. Reach him at (713) 507-1747 or
[email protected].

Look before you leap

Unpaid leave, reduced workweeks, benefit reductions, hiring freezes and enter-prisewide salary decreases are just a
few of the measures being considered by
global employers to achieve short-term savings. But employment regulations vary by
country, making it difficult to institute universal cost savings measures. While reducing
employee benefits programs may drive short-term cost savings, highly skilled employees
may leave for better offers or more stable
work environments. Reducing benefits may
also damage the company’s reputation and
have a longer-term impact on recruiting and
retention. Employers should investigate
every opportunity to save money through
effective administration before reducing
employee benefit programs.

“In some countries, decreasing benefits
may be extremely difficult or prohibited, or
doing so may require employee consent,”
says Linda Tran, international HR consultant
for Watson Wyatt Worldwide. “A review of
global HR programs may provide insight
into plans that are not being administered
effectively.”

Smart Business spoke with Tran about
how employers can achieve reductions in
administrative costs before resorting to benefit plan reductions.

What are the barriers to enacting global cost
reductions?

In countries where there is a strong presence of collective bargaining agreements or
work councils, decreasing benefits may be
prohibited due to acquired rights. In many
countries, such as Mexico and Korea, severance plans are mandatory, so it may be more
cost additive for a company to terminate its
employees. Brazil has laws requiring minimum salary increases for all employees,
which curtails across the board salary reductions. These issues illustrate why it is so
important for multinational employers to
drive administrative efficiencies.

What should employers do to leverage savings from multinational pools?

Multinational pooling combines your company’s local country insured benefit contracts under a global pooling arrangement,
aggregating your claims experience, leveraging your purchasing power and creating cost
savings through annual dividends. Here are
four steps employers should take to achieve
savings from multinational pools:

 

  • Establish a program. If your company
    isn’t participating in a multinational benefits
    pool, consider contracting with a pooling network. Consider a feasibility study to see
    which contracts should be added to the pool
    and the potential savings.

     

     

  • Renegotiate contracts. If your company’s
    multinational pooling contract hasn’t been
    reviewed recently, it may be possible to
    reduce the risk and administrative charges,
    especially once the company’s combined risk
    experience is established. Negotiate multi-year contracts and rate guarantees or request
    additional services to reduce internal administrative burdens as a way to achieve savings.

     

     

  • Review each country’s experience.
    Remove countries that are consistently
    incurring losses to improve your company’s
    overall experience and increase dividends.

     

     

  • Review your dividend payments. If pool
    dividends are too high, it may mean that your
    company’s local country premiums are too
    high. Optimize the opportunity to reduce premiums where it makes sense.

 

Can benefit plan audits yield savings?

Now’s the time to get your arms around
your company’s global benefits offerings.
Focus initially on auditing large countries
that have significant claims or liabilities,
where the impact may be greatest. One company saved $2 million just by removing ineligible dependents on its local health care plan.
Conducting an eligibility audit on expatriate
programs may uncover employees who have
double coverage from both a local country
plan and an international plan. There may be
cost savings by consolidating plans and leveraging your company’s purchasing power.

How can employers assure that benefits
expenditures are delivering ROI?

Sometimes employers offer certain benefits because they believe the plans attract and
retain talent. Employee surveys may reveal
that some plans are not delivering their
intended value and the benefits can be eliminated without damaging employee relations
or impairing recruiting. Consider implementing vendor scorecards and work with your
vendors to ensure that measurable goals are
being implemented and tracked on an annual basis. Pick two or three key metrics for
each vendor and hold them accountable.

Given the economic climate, what other
steps should employers take?

Given the instability of some insurance
providers, this is an excellent time to reassess
your vendors and ensure you have the best
providers based on your current business
needs. Also look for opportunities to negotiate more favorable rates. Employers need to
know how some of the recent insurance
industry changes will impact their benefits
programs or multinational pooling contracts
and have alternatives in mind, in case more
changes occur. Put governance procedures
in place requiring corporate approvals for
changes in compensation and benefits so
they aren’t adding significant costs. Also
watch for upcoming legislation that will
impact global actuarial plans.

LINDA TRAN is an international HR consultant for Watson Wyatt Worldwide. Reach her at [email protected] or
(713) 507-1759.

401(k) fee due diligence

Plan sponsors have an ongoing fiduciary responsibility to ensure that
fees charged for 401(k) plan administration are both necessary and
reasonable; in fact, failing to do so
exposes employers to potential liability.
But, deciphering the administrative
charges from the often complex fee
structures used by record keepers can
be difficult, and when investments are
achieving healthy returns, fee due diligence often flies off the radar. Given the
recent downturn in the markets, retirement plan administrative fees have come
under increased scrutiny from participants, reminding sponsors that they
have an obligation to validate both the
ROI and the competitiveness of the
charges.

“Right now, every dollar matters,” says
Linda Wauson, Retirement Practice Consultant with Watson Wyatt Worldwide.
“If your company is paying too much, it
lowers the rate of return for participants. Plan sponsors should dig deep to
understand the charges, validate the
competitiveness of the fees and document their findings.”

Not infrequently, a review of the fees
reveals participants are paying significantly more than the services should
cost. This can amount to hundreds of
thousands of dollars per year for a large
plan.

Smart Business spoke with Wauson
about what steps plan sponsors should
take to validate the reasonableness of
retirement plan administrative fees.

How are plan administrative fees paid?

Record keepers are typically paid
through a portion of the plan’s investment fund’s expense ratio, called revenue sharing or soft dollars, and through
hard dollar per-participant fees. In addition to receiving revenue sharing
through the investment fund expense
ratio, record keepers can also receive
revenue sharing from the investments
through subtransfer agent fees, per-participant fees based on the number of participants investing in the fund, commissions and yet other fees. Record keepers
often earn the majority of their fees
through revenue sharing. During times
when assets are growing either through
investment returns or new money going
into the plan, such as employee contributions, employer matches and employee rollovers, the revenue sharing also
grows, and these soft costs can get away
from plan sponsors.

What steps should plan sponsors take to
assess the reasonableness of an administrator’s fees?

Annually, plan sponsors should review
what they are paying their record keepers for administrative services by asking
their record keepers to disclose all revenue they’ve received for their services
and explain how the revenue was developed, requesting a separate breakout of
any monies the record keepers received
from revenue sharing.

Add the hard dollar fees and the
revenue sharing together, divide the
total by the number of participants and
compare against the average participant
charges paid by other companies. It’s
important to consider that the following
factors also determine a company’s
administrative charge: the plan’s complexity (such as making deductions from
multiple payrolls or calculating complex
contribution matching formulas), the
total assets under management, the
number of participants and the service
levels your company requires, such as
the number of employee meetings conducted by the record keeper.

At least every two to three years, compare the record keeper’s fees to market
rates for similarly sized plans and service packages. Both HR consulting firms
and record keepers can provide benchmark data for comparison purposes, but
sponsors should also solicit competitive
bids every five to seven years, compare
the findings and then document the
results.

What actions should plan sponsors take if
they find that the plan’s administrative
costs are too high?

Sponsors should review their existing
contracts and negotiate lower fees or
more services from their record keeper.
Another option is to consider lower
share class funds, which will generate
less revenue sharing and provide plan
participants a higher rate of return. If
renegotiation attempts fail, sponsors
should consider initiating a bid process
and find a new record keeper.

Lastly, remember to document your
steps and the results, because sponsors
have the burden of demonstrating that
they have followed a prudent process.
It’s not necessary to have the lowest
rates, but assuring that the charges are
reasonable is a plan sponsor’s fiduciary
responsibility.

LINDA WAUSON is a Retirement Practice Consultant with Watson Wyatt Worldwide. Reach her at [email protected] or
(713) 507-1753.

Customize the experience

It’s getting harder for corporations to communicate with their employees, as distributed work forces span multiple time
zones around the globe. At the same time,
studies by Watson Wyatt Worldwide confirm that effective communication is a vital
component to successfully drive employee
engagement and increase productivity. By
using the company’s intranet as a robust
framework, best practice companies are
engaging workers with interactive, customized online experiences that not only
provide employees with communications
and resources but encourage the sharing of
best practices and mentoring in real time.

“The more personalized and relevant each
employee’s experience is with the company’s intranet, the more engaged they are,”
says Michael Rudnick, Global Practice
Leader, Intranets and Portals, at Watson
Wyatt Worldwide. “An intranet has always
been a place to post static content, but
capabilities like blogs, wikis, tagging and
user-generated videos hook passive users
and capture their enthusiasm.”

Smart Business spoke with Rudnick
about how companies can drive employee
engagement and productivity through collaborative intranet strategies.

How does customizing the user experience
drive engagement?

Until a few years ago, intranets were really just a place to house information; users
didn’t log in and the experience was the
same for everyone. Employees really want
both personalization and customization.
The new strategies tailor the experience for
each user with content that is relevant and
targeted, which gets them inside the company and participating at a much deeper
level.

Which strategies are most effective?

Create communities around projects,
clients, ideas or topics; employees can join
the groups and share daily updates and best
practices. Community members can also
post content about their work and employees throughout the company can comment
and ask questions; even executives can
read about what’s going on and weigh in.

Give employees the opportunity to follow
key leaders across the company and converse with them through blogs. E-mail is
viewed as formal, one-way communication
from executives; when an executive blogs
and is authentic in his or her communications employees are more likely to engage
and participate.

How does technology drive productivity?

Blogs, wikis and applications like Twitter
connect dispersed employee groups
through real-time, rapid communications.
These technologies also use a less formal
communications style, which enhances
sharing and productivity. If your company
has invested in a productivity enhancing
application such as customer relationship
management, employees drive sales and
customer service employees toward the
application every time they log in through
customized landing pages.

Finally, during tough economic times,
employees want to help the company, but
they can become worried about the company’s situation and be less productive.
When executives communicate more frequently and transparently, they can allay
employee fears and keep them focused
and productive.

How can executives assess the effectiveness
of their company’s intranet strategies?

There are several ways to measure the
effectiveness of your company’s intranet
strategy. An intranet log analysis will show
which pages are being viewed, how often,
for how long and by whom; this measures
the usability and the level of employee
adoption. Increases in comments and
employee participation often dovetail with
increases in employee engagement levels,
so monitor those. If the site’s search data
indicate that employees are frequently
searching for the same information or
forms, make that information easier to
find, perhaps through a link on the home
page, especially if employees are still making calls to departments like HR and
accounting to seek help. Increases in
employee self-service and fewer calls validate the technology’s effectiveness and
impact in driving productivity.

How can executives assess the ROI?

To measure technology’s impact on business outcomes, correlate each business
unit’s performance goals with its intranet
activity and the participation levels of its
users. Do employees in the most successful units also participate more? Do those
units also have the highest productivity or
customer satisfaction levels? Over time,
data trends will develop that correlate the
use of a collaborative intranet with
employee engagement and the bottom line.
It’s harder to link soft cost savings to technology, but when employee participation
levels and the bottom line are both directionally correct, CEOs can confidently
make the connection.

MICHAEL RUDNICK is the Global Practice Leader for Intranets and Portals at Watson Wyatt Worldwide. Reach him at (203) 977-6206
or [email protected] or follow him at www.twitter.com/michaelrudnick.

Know the score

The numbers supporting a causal relationship between employee health,
improved productivity and a robust bottom line are persuasive. The 2007/2008
Staying at Work report, conducted jointly
by the National Business Group on Health
(NBGH) and Watson Wyatt Worldwide,
found that companies with the most effective health and productivity programs
experienced 20 percent higher revenue per
employee, 16 percent higher market value
and 57 percent higher shareholder returns.

But getting to those results is a journey,
and many employers struggle to document
progress toward the returns promised by
employee wellness plan vendors.

“Many employers have viewed wellness
savings as a leap of faith, because they’ve
struggled to demonstrate proof of impact
in hard dollar terms,” says Jason Mahler,
FSA, MAAA, consultant for Group and
Health Care at Watson Wyatt Worldwide.
“It’s not possible to document concrete
ROI until you are at least a couple of years
into your program and may not be fully
realized until around year five, so employers should begin measuring intermediate
outcomes from the very beginning.”

Smart Business spoke with Mahler
about why employers should use scorecards and interim measures to track wellness program ROI.

Why is documenting wellness program ROI
challenging?

It can take four to five years for a full
claims history to develop, and programs
like weight or smoking cessation and
chronic disease management don’t produce immediate returns. Also, first year
costs may actually rise due to program
implementation fees and employees taking
proactive health management steps, like
seeing doctors for chronic diseases.
Essentially, there’s a chain of events that
must occur to reach the desired financial
returns. First, employers must encourage
employee behavior changes, employees
must make the changes and sustain them,
then their health improves and, ultimately,
that reduces claims, costs and lost work
time.

What are the first steps?

Employers should not wait to begin
measuring their program, but should measure intermediate outcomes from the very
beginning. First, establish your company’s
goals and get stakeholder buy-in. Next, set
intermediate metrics that demonstrate the
plausible linkage between program interventions and targeted outcomes, which is
called the value chain. The measures
should be customized based upon the
employee population and the company’s
claims and expense history; however,
reviewing industry norms might also be
helpful in establishing initial goals.

What should the scorecard include?

Include metrics all along the program
value chain and provide an executive summary of all program results. Besides tracking outcomes, the scorecard facilitates discussions around continuous improvement
and helps benefit managers customize and
improve the program to achieve the greatest value for their specific population.

Don’t just compare your results against the
goal and be satisfied; as you go along raise
the bar because that will drive the company’s eventual ROI.

What value chain links should employers
track?

It’s important to track detailed data from
the wellness vendor in order to achieve
the promised ROI. Here are the value
chain links that should be measured:

 

  • Employee participation. It’s not
    enough to know how many employees
    sign up to participate; you need to know
    how many follow through and their
    engagement levels. Are they reading information, participating in conference calls
    or attending meetings? Are they opting out
    of the program and, if so, why?

     

     

  • Clinical and lifestyle compliance.
    Employees must practice improved health
    behaviors, so employers should track
    macro-level behavior trends, such as
    whether diabetic employees are having
    annual physician reviews of their blood
    sugar levels or whether employees with
    chronic conditions like asthma are being
    treated. Eventually, those employees will
    need fewer visits to emergency rooms and
    miss less work.

     

     

  • Clinical control. Track whether the
    clinical outcomes are actually improving.
    For example, are blood sugar levels
    among diabetic employees stable and have
    some been able to eliminate insulin?

     

     

  • Utilization and financial metrics.
    Finally, measure the ROI. Did your
    employees take fewer trips to the emergency room resulting in lower costs? Are
    the numbers of claims and the average
    costs decreasing? Are employee sick days
    declining?

 

Setting interim goals and tracking results
will ensure that employers achieve the
promised ROI from employee wellness
programs.

JASON MAHLER, FSA, MAAA, is a consultant for Group and Health Care at Watson Wyatt Worldwide. Reach him at (713) 507-1796
or [email protected].

Meet pension obligations

During the “perfect storm” earlier in
the decade, equity markets and
interest rates fell, and pension plan deficits soared. As a result, companies
had to report higher pension expense
and balance sheet liabilities and divert
additional cash to fund up the plan.

This storm highlighted the risk pension
plans can pose to an organization, but it
also taught us the prudence of implementing risk management techniques
that would have dampened the effect of
the tough economic conditions and
thereby its effects on company finances.
Many companies have not implemented
effective risk management techniques
and as equity markets have dipped again
recently, sponsors again find themselves
in the difficult position of choosing
between funding capital projects or the
pension plan. With the introduction of
changes to accounting rules and new
pension funding requirements, which
require fully funding a pension plan
within seven years, the inherent volatility of pension plans is further highlighted
and so is the need to effectively manage
their risk.

“One of the single most effective means
of financially managing these plans often
given inadequate attention by employers
is the investment allocation of the plan’s
assets,” says Anthony Scattone, Senior
Retirement Consultant for Watson Wyatt
Worldwide. “Failure to match a plan’s
asset allocation to the company’s financial goals results in risk and reward disparity and will impact the amount of cash
that will need to be infused into the plan
over the next 10 years.”

Smart Business spoke with Scattone
about liability-driven investing and how
the multi-faceted investment strategy
enables plan sponsors to create value
and manage risk.

What are the most effective means of managing pension risk?

The three primary risk management
techniques that sponsors can employ
include making adjustments to the plan’s
benefit design, the sponsor’s long-term
funding policy and the plan’s asset allocation. The last technique has generally
received the least attention and offers
the most opportunity for sponsors to
improve their risk management and
financial performance. It begins with
recognizing that assets and liabilities are
out of sync, and that one size doesn’t fit
all. Calibrating your plan’s asset allocation model to comport with liabilities
through liability-driven investing (LDI)
is a solution that is overlooked by
employers.

What is liability-driven investing?

LDI is a commonly used term that
describes the strategy of managing the
plan’s assets in light of the plan’s liabilities. Traditionally, most sponsors have
invested the plan’s assets like they
would any other asset portfolio, generally allocating 65 percent of the assets in
equities and 35 percent in fixed income,
without consideration of the liabilities
they are intended to meet. Ultimately it
is the relationship between a plan’s
assets and liabilities that drive plan
costs. Rather than managing only one
side of the equation that drives plan costs, LDI seeks to manage both assets
and liabilities.

What does an LDI portfolio look like?

LDI does not mean that sponsors
should invest all or most of the plan’s
assets in fixed income, although this is a
common misperception. LDI will mean
different things to different sponsors. A
sponsor’s financial goals with respect to
cash flow and expense, its time horizon,
and its plan’s funded status will drive the
right LDI strategy.

How do you determine the right LDI?

To find the ‘right LDI,’ sponsors should
undertake an asset-liability matching
study, or ALM. In an ALM, the plan’s
assets and liabilities are modeled under
thousands of potential economic scenarios, and expectations for the cash flow,
pension expense and the associated
volatility are quantified. This modeling
process examines these expectations
and the associated risk under multiple
asset allocations, generally considering
the split between equities and fixed
income, and the use of long duration
fixed income or even derivatives.

Rather than thinking in terms of asset
returns, this type of analysis helps sponsors make asset allocation decisions
based on the bottom line — the cost
(contributions, expense, etc.) and risks
of the plan. This step is critically important since studies show that more than
90 percent of asset returns are driven by
the strategic asset allocation and less
than 10 percent are driven by the choice
of particular investment managers.
While many spend significant time and
energy on the latter decision, not enough
time is spent on the more strategic decision of how assets are allocated to the
broad categories of asset classes.
Sponsors undertaking an ALM must be
careful to engage advisers who have the
specialized expertise in both pension
assets and liabilities.

ANTHONY SCATTONE is a Senior Retirement Consultant for Watson Wyatt Worldwide. Reach him at (713) 507-1737 or
[email protected].

Change management

The rising cost of healthcare has driven
an increasing number of companies
toward high deductible health plans (HDHP). In 2002, just 2 percent of companies opted for HDHPs, according to data
collected by Watson Wyatt Worldwide; by
2008, 47 percent of the surveyed companies
had switched to the plans or added an
HDHP to the their medical plan offering.

Current 2008 health savings account
(HSA) requirements for HDHPs feature
high annual deductibles, a minimum of
$1,100 for individuals and $2,200 for families, but they also differ fundamentally from
traditional plans, because they require
employees to be savvy health care consumers and to take responsibility for their
own wellness. Those new responsibilities
just add to the change management challenge for employers.

“Health insurance is constantly evolving
in an effort to manage rising costs, and
HDHPs are a growing cost control
approach,” says David Kang, Texas Communication Practice Leader for Watson
Wyatt Worldwide.

Smart Business spoke with Kang about
how to create and execute an effective
communication strategy around the change
to HDHPs.

What are employee concerns about HDHPs?

Unless employees understand why the
change is necessary and how it may benefit
them, most tend to see the move to HDHPs
as a reduction in total rewards. This leads
to low morale, possible work force unionization, but most importantly, low engagement, which reduces employee productivity and company profits. It can also result in
the turnover of key employees, who might
turn to another company with a similar plan
but a better communication approach to its
benefit programs.

What constitutes an effective communication
plan?

An effective communication plan will
have specific goals that are aligned to a
company’s HR strategy and key business
imperatives. The next step is to establish a
communication process and identify the
media that will reach the targeted audience, execute and then measure the plan’s
effectiveness.

With HDHP plans, much of the communication needs to be centered around
employee education and managing employee expectations, because you’re teaching
people new concepts and a plan design that
may be quite unfamiliar to them.

Employees need to understand three key
components: the health plan design, how to
be smart health care consumers and how to
manage their own wellness. To communicate these components to employees effectively, you need a comprehensive plan.

What are the best communication tactics?

Initially, the CEO should announce the
change to the company and explain the reasons behind it, and have his or her senior
leadership team on board with the concept.
Next, HR should lead the education
process with the support of line managers.
Based on our research and experience,
face-to-face communication invites personal interaction and opportunities to field
employee follow-up questions to effectively
manage the education process.

Employees won’t grasp all the new concepts and nuances at once, so employers
must be prepared to provide educational
tools not just prior to enrollment, but
throughout the year. We find electronic
media such as: videos, Flash videos and
Podcasts to be very effective channels to
reinforce key messages and sustain the ongoing employee education process. Post
these materials on the company intranet if
possible since people learn at different
paces and they may need to review the
materials again.

What’s the timing for the communications
plan?

Ideally, launch the marketing aspects of
the plan one year before open enrollment.
Train your managers first so they can be the
change agents and educate employees with
HR’s support. Once the new plan is in place,
CEOs can monitor the plan’s effectiveness
by reviewing employee HDHP adoption
rates and their participation rates in complementary behavior change and risk
assessment programs. Conduct focus
groups and include questions about HDHPs
in the company’s employee satisfaction survey to gauge the plan’s effectiveness and
employee attitudes about the change.

What messages should be communicated to
employees about HDHPs?

Start with the positives. Preventive care is
often fully covered and employees’ health
care premiums may even decrease. Employees should feel more empowered to
manage their own health with an HDHP,
and if you provide employee incentives
around weight loss and smoking cessation
as part of the program, they should feel supported in their quest to live long, healthy
lives. Effective communication is not a silver bullet for the rising cost of health care,
but it will educate employees and help
them understand the reasons behind the
change to an HDHP.

DAVID KANG is the Texas Communication Practice Leader for Watson Wyatt Worldwide. Reach him at (214) 530-4201 or
[email protected].

Let it grow

Building a national company is the
dream of many entrepreneurs, but
launching a new franchise or opening a distributed group of sales offices means
securing real estate in new areas, and that
requires knowledge of the local market.

In the past, many executives created infrastructure and hired staff to procure and manage commercial real estate as part of an
expansion plan, yet those staff members
often turned to local real estate brokers for
marketplace expertise. Now, smart CEOs are
finding they can secure the knowledge without the overhead by outsourcing their company’s real estate function.

“Operating a national real estate portfolio
can be overwhelming,” says Jerry Lehman,
CCIM, SIOR, president and broker for
Prudential CRES Commercial Real Estate
SFL and executive vice president for
Prudential CRES National Services Group.
“It’s time-consuming and it’s expensive. No
matter the size of the company, if your reach
moves beyond your local neighborhood, it’s
possible to outsource everything from site
selection to lease management without
increasing costs.”

Smart Business spoke with Lehman about
the advantages of achieving growth without
increasing overhead by outsourcing your
company’s real estate department.

Which commercial real estate functions can
be outsourced?

The entire scope of the real estate department can be outsourced, including market
surveys, initial site selection, the due diligence process, property inspections and
ongoing lease management. The services can
also include monitoring lease expiration
dates, negotiating lease renewals and conducting day-to-day communication with
landlords about needs like increasing the
parking spaces at a remote sales office. Many
national commercial real estate companies
offer turnkey outsourcing programs.

What are the advantages of outsourcing?

Real estate is a local business. While you
can review local area demographic data such
as population, income and age when considering a new location, selecting the perfect
spot requires a composite analysis of data
and human intelligence. Unless you’re familiar with the local market, you won’t know
about recent changes in property use, new
roads, proposed exit ramps or if employers
are leaving the area and why. The most critical player is the local agent who must understand your business needs and match them
to the local market. In most cases, internal
real estate staff members will turn to local
agents for that knowledge and expertise, so
outsourcing further leverages your buying
power, reduces overhead and gives you a
committed relationship with a national network of agents located in major urban and
secondary markets. While you’ll work with a
number of agents, you’ll have one contract to
manage and you’ll work through the company’s account managers and regional directors. They’ll become experts in your business, your real estate needs and your long-term business objectives and then transfer
that knowledge to the local agents, when you
need to secure a new location.

What are the costs and the potential savings?

There’s no cost to your company because
the landlord or seller pays agents’ commissions. The result is a huge savings opportunity; at most, you might need a small internal
team of one or two people to manage the outsourcing relationship, educate the account
managers about your business requirements
and manage your company’s portfolio of leases. I’m familiar with one large retailer that
manages a portfolio of 1,600 store locations
with an internal staff of only three people.
Without outsourcing, it would take a minimum of 50 people to manage a global real
estate portfolio of that size.

Will outsourcing change the fiduciary relationship between brokers and clients?

If you choose to outsource your company’s
real estate department, the broker’s fiduciary
relationship will remain with you, the buyer.
Typically in a real estate transaction, the
landlord or the seller pays the broker’s fees,
so the industry standard is that others pay
the costs associated with the broker. The
party who pays and the agency relationship
are not necessarily related in commercial
real estate transactions.

What selection criteria should CEOs consider
when selecting an outsourcing partner?

Select a company with a strong geographic
reach and extensive commercial real estate
experience, because you want to select a
partner that has some muscle in the field and
the resources to manage an outsourced
engagement. Review the company’s locations to make sure it has an office in the cities
and countries where you plan to expand.
Understand their account management
structure, because once the contract is in
place, those people are vital to the success of
the relationship. You’ll want to know if you’ll
have a single point of contact and how they
communicate information about your needs
to brokers located across the country or the
world. Consider checking references to validate a potential vendor’s experience and
commitment. Then sit back and enjoy the
benefits of growth without the expense.

JERRY LEHMAN, CCIM, SIOR, is president and broker for Prudential CRES Commercial Real Estate South Florida and executive vice
president for Prudential CRES National Services Group. Reach him at (561) 995-8887.

People power

The bad news is the national economy is
in a down cycle; the good news is Bay-area CEOs learned valuable lessons during the last downturn, so this time, the regional impact should not be as deep nor as long.

Not only has the local economy continued
to diversify away from its Web-tech dominance since the slump of 2001 and 2002, but
more technology companies are offering
goods and services globally, which helps
cushion the impact from slowing U.S. markets. Companies are much leaner going into
this downturn. With fewer anticipated layoffs, CEOs should embrace the glass-is-half-full attitude and find ways to emerge from the
downturn quickly by motivating workers and
reaping productivity benefits.

“CEOs should avoid knee-jerk retrenchments because what we learned during the
last downturn is that broad-based layoffs not
only make it harder to recover, they actually
delay the process because they negatively
impact morale and restrict opportunities to
capitalize on rebounding markets,” says Rick
Beal, managing consultant for Watson
Wyatt’s San Francisco office. “Instead, CEOs
should focus on engaging their people to help
the company pull out quickly.”

Smart Business spoke with Beal about
how CEOs can maximize human capital during turbulent economic times.

How can CEOs maximize human capital during downturns?

In the past, new technology helped the
economy emerge from recessions because it
drove productivity improvements. This time,
it is more likely that productive human capital will set the pace. To achieve ROI, CEOs
should review best practices for aligning talent with business plan achievement:

  • Align human capital with areas that drive
    the business model and make sure you are
    adequately staffed to support improvement.
    Shifting even a few hours a week from
    administration to selling activities, for example, could lead to as much as $225 million in
    additional revenue for a company with 1,800
    new business developers.

  • Focus employees on metrics that reward
    achievement of the business strategy. You get
    what you measure so measurements are the
    key to driving productivity improvements.

  • Develop talent. Employees who acquire
    new skills are more productive, so revisit
    your talent management strategy and make
    certain all employees are in the right roles
    and are developing the right skills.

In sum, motivate and reward employees to
achieve the business plan by creating line of
sight between the plan and their actions,
development and rewards. Make sure to
communicate progress often.

What are the best ways to engage employees
when times are tough?

Watson Wyatt’s Work USA study finds that
employers with highly engaged employees
report $276,000 productivity per employee,
compared with $236,000 per employee for
those with low engagement. For a company
with 20,000 employees, high engagement levels translate to $800 million more in revenue.

CEOs can motivate employees by linking
pay to individual and company performance,
so now’s the time to set revised goals and
review the effectiveness of compensation
plans. Also, use enhanced metrics to measure and monitor performance improvements, supported by software if possible.
Even though software is an investment,
today’s talent management tools are enablers
of the business plan and CEOs will get a
return many times over in the long run.
Remember cash isn’t the only key to motivating employees. Some are motivated by work-life balance or other lifestyle benefits, so provide the flexibility to managers to engage
each individual on terms meaningful to them.

Should CEOs cut bonuses rather than reduce
head count?

While it’s tempting to think the point of variable pay programs is to allow employers to
simply cut bonuses when times are tough,
retaining and motivating top-performing individuals can pay huge dividends. Try to first
make sure to use your compensation dollars
to differentiate based on performance. Then
find other ways to save money, for example:

  • Look for health plan savings; dig deep to
    find hidden savings opportunities tied to
    employee wellness and productivity.

  • Run a financial analysis on all open positions to assess whether they increase revenue or overhead and only fill positions that
    positively impact revenue.

  • Use more consultants and contingent
    workers for specific short-term projects.

  • Increase opportunities for employees to
    implement ideas to increase efficiency.

What are the best practices if head count
reductions become necessary?

During the last recession, CEOs thought
that retained workers would have increased
loyalty regardless of the severance provided
to those terminated. In fact, the opposite was
true. Many of those remaining felt their coworkers had been treated unfairly, morale
was poor and, when combined with a lack of
resources, only delayed the companies’
recovery. If you must reduce head count,
treat people fairly and have a consistent severance policy. Be surgical in your reduction
approach and don’t make deep cuts in areas
that generate revenue or influence the company’s future, such as R&D. Also remember
to pay attention to the people who are left
behind, or as soon as times get better, they’ll
be the next ones out the door.

RICK BEAL is the managing consultant for Watson Wyatt Worldwide’s Northern California offices. Reach him at (415) 733-4100 or
[email protected].