Building a Business Case for Outsourcing - …

1 Building a Business case for OutsourcingEmployee Benefits Administration & Payroll OutsourcingDecember 9, 2003 Donald Glade Donald Glade SOURCING ANALYTICSSOURCING in outsourcingTrends in outsourcingqqWhat is a Business case ?What is a Business case ?qqComponents of a successful Business caseComponents of a successful Business case3 Trends in Outsourcing The Outsourcing SpectrumTraditional Co-sourcingBPOO utsourcing Spectrum Transactional Employee Support Web capabilities Responsibility sharing Systems driven Portable & scaleable Cost minus Entire shop What s includedImportant QuestionsWhat are the reasons for Outsourcing ?What is HR?What are current costs?Who calculates cost?4 Manage Information -Audit and Control, HR Information Interface Access, HR Information Maintenance, HRIS Development and Maintenance, Management Reporting, Performance MeasurementPlanning and Policy -Change Management, Quality Programs, Compensation & Benefits, Compliance Oversight, Employee Communications, Global Workforce Coordination, Market Data Maintenance, Organization Design, Outsourcing / Vendor Management, Policy & Procedures, Staffing Levels, Strategic Business Partnering, Strategy Development, Succession Planning, Work & Family Strategies, Work Rules Development, Workforce Design, Workforce Diversity.

2 Workforce Financial ManagementSource &Select External Recruiting Internal Staffing Job Design & Evaluation New Hire Orientation Offer & Screening Orient and Assimilate Performance Planning Promotional Orientation Temporary ServicesDevelop &Counsel Employee Assessment Employee Relations Performance Management Professional and Personal Development TrainingReward &Retain Benefits Administration Compensation Management Employee Assistance Services Employee Financial Planning Employee Retention Incentive-Base Compensation Programs Recognition Programs Wellness Programs Workers CompensationRedeploy &Retire Expatriate Management Outplacement & Career Transition Relocation/Expatriate Counseling Administration Retiree Processing and Counseling Terminated Employee Processing Transfer and Reorganization Processing5 Firms Outsourcing PayrollThe Outsourcing SpectrumPayroll Outsourcing - G2N39%61%OutsourcedIn-HouseTax Filing & Deposits48%52%OutsourcedIn-HousePrinting W2s and 1099s46%54%OutsourcedIn-HouseSource: ADP Market Research, 20026 Payroll TrendsPayroll TrendsReasons Given for In-house ProcessingThe Outsourcing SpectrumqqControlControl39%39%qqLower CostLower Cost35%35%qqPrefer InPrefer In--HouseHouse16%16%qqPayroll ComplexityPayroll Complexity14%14%qqFlexibilityFlexibility 10%10%Source: ADP Market Research, 1999 and 20027 Payroll TrendsPayroll TrendsTop Payroll Issues Have Not ChangedThe Outsourcing SpectrumqqTaxesTaxes32%32%qqAccuracyAccu racy23%23%qqTimelinessTimeliness15%15%qq Compliance/Regulations/LawsCompliance/Re gulations/Laws14%14%qqTime & AttendanceTime & Attendance10%10%qqTechnologyTechnology9% 9%Source: ADP Market Research, 1999 and Tax ComplianceThe Outsourcing SpectrumqqToday: Tax Codes Are Complicated and Changing Today.

3 Tax Codes Are Complicated and Changing RapidlyRapidlyq1,900 plus changes to the US tax code since 1995q7,500 plus federal, state and local tax jurisdictionsq45,000 total pages of federal tax rulesqResulting in million employment tax penalties annuallySource:: Institute for Policy Innovation, 20029 Firms Outsourcing BenefitsThe Outsourcing SpectrumFSA Administration67%33%OutsourcedIn-HouseOp en Enrollment19%81%OutsourcedIn-HouseCOBRA Administration60%40%OutsourcedIn-HouseSo urce: ADP Market Research, 2002 Employee Call Center15%85%OutsourcedIn-House10 Firms Outsourcing HRThe Outsourcing SpectrumHRIS112%88%OutsourcedIn-HousePer sonnel Administration28%92%OutsourcedIn-HouseSc reening & Selection166%34%OutsourcedIn-HouseSource s: 1 ADP Market Research, 20022 Gartner, 2002 Recruiting226%74%OutsourcedIn-House11 What is a Business CaseThe Big PictureqqAn exercise in logicAn exercise in logicqqA compelling argument for changeA compelling argument for changeqqA justification for actionA justification for actionDoes this make sense?

4 ????12 What is a Business CaseConsiderationsqqHow does your organization justify change?How does your organization justify change?qqWhat financial return is expected?What financial return is expected?qqWhat is culturally valued?What is culturally valued?qqIs there a standard format for Business case presentation?Is there a standard format for Business case presentation?qqWho needs to approve the Business case ?Who needs to approve the Business case ?qqWho should be involved?Who should be involved?13 What is a Business CaseThe playersqqSize of capital request Size of capital request qqAsk one question: Ask one question: Who can derail this process once it s Who can derail this process once it s begun? begun? qqHR, finance, IT, legal, procurement, HR, finance, IT, legal, procurement, divisional personnel, stake holdersdivisional personnel, stake holders14 What is a Business CaseComponents of a Business CaseqqWhat needs to changeWhat needs to changeqqWhy it needs to changeWhy it needs to changeqqProcess used to decide how to change itProcess used to decide how to change itqqHow will we be better off financiallyHow will we be better off financiallyqqNonNon--financial ways we will be better offfinancial ways we will be better offqqWhat is the final recommendation What is the final recommendation 15 What is a Business CaseComponents of a Business CaseqqDifferent componentsDifferent componentsqqDifferent formatsDifferent formatsqqWhat is typical?

5 ??What is typical???qqExecutive SummaryExecutive SummaryqqCase for ActionCase for ActionqqProcess UndertakenProcess UndertakenqqFinancial AnalysisFinancial AnalysisqqNonNon--Financial AnalysisFinancial AnalysisqqRecommendationRecommendation16 Business case ComponentsExecutive SummaryqqFirst in the Business caseFirst in the Business caseqqLast to be writtenLast to be writtenqqRecap salient points of Business Recap salient points of Business casecaseqqFollow format of rest of Business Follow format of rest of Business casecaseqqLiberal use of bullets & white spaceLiberal use of bullets & white spaceqqRemember, this is an executive Remember, this is an executive summarysummaryqqHow much detail do your execs How much detail do your execs want?want?qqLevel of detail appropriate to Level of detail appropriate to audienceaudience A well written executive summary should write itself 17 Business case ComponentsCase for Action If it If it ain tain tbroke, why fix it?

6 Broke, why fix it? qqRelate examples of how it s brokenRelate examples of how it s brokenqqWhat is the cost to the company in What is the cost to the company in time, expense, risk, service levels, time, expense, risk, service levels, organizational agilityorganizational agilityqq Why do anything? Why do anything? 18 Business case ComponentsCase for ActionFundamentally: Why Outsource??Fundamentally: Why Outsource??qqImportant in setting future expectationsImportant in setting future expectationsqqThese are the items upon which success or failure These are the items upon which success or failure will be judgedwill be judged19 Why Outsource?I want to focus on my core businessI ve got to get my risk under controlWe can t react quickly enough to change!Headcount reductionCosts!Customer complaints!CustomerComplaints!Headcount reduction20 Business case ComponentsProcessqqDescribe the process Describe the process undertakenundertakenqqIndicate parties involvedIndicate parties involvedqqIndicate reasons for key Indicate reasons for key decisionsdecisionsqqDescribe analysis usedDescribe analysis usedIn/out/co decisionRFPdistributionContractnegotiati onProposalevaluationSite visitsDuediligenceprocess21 Business case ComponentsFinancial AnalysisqqDifferent tools availableDifferent tools availableqqDependent on company expectationsDependent on company expectationsqqUnderstanding current costsUnderstanding current costsqqROI Analysis ROI Analysis cost of capital cost of capital qqTCO AnalysisTCO AnalysisqqBaselineBaseline22 Business case ComponentsFinancial Analysis -Today There is A Measurement GapqqOnly 16% of senior financial managers Only 16% of senior financial managers are confident in their grasp of ROI are

7 Confident in their grasp of ROI from HR technology investments. from HR technology investments. MercerMercerSources:1. Human Capital Management: The CFO s Perspective, CFO Research Services and Mercer, February Transforming HR for Business Results, Mercer, July 2003. Great Extent2%Considerable Extent16%Minimal Extent33%Moderate Extent33%Not at All14%HR ExecutivesFinancial ExecutivesVery Effective3%Effective13%Neither Effective nor Ineffective34%Ineffective32%Very Ineffective18%qqOnly 16% of senior HR executives Only 16% of senior HR executives feel their firms are effective in feel their firms are effective in achieving ROI from HR technology achieving ROI from HR technology investments. investments. MercerMercer23 Business case ComponentsFinancial Analysis ExampleqqMulti Divisional CorporationMulti Divisional CorporationqqEach division in a different HRIS environmentEach division in a different HRIS environmentqqDesired standardizationDesired standardizationqqLooked to new software and approachLooked to new software and approachABC Capital Appropriation Request24 Cost/Benefit AnalysisgBenefits -Hard Dollar Savings Hard dollar savings are derived from two main sources: A headcount reduction of in the function; and Savings from elimination of legacy systems costs such as licenses, maintenance, system support, etc.

8 Many of these reductions will be accomplished by encouraging increased use of flexible staffing arrangements such as modifiedand part-time employees and job sharing where appropriate. These savings alone will provide a 25 month payback on ABC s investment in the XYZ system with a Capital Appropriation Request25 Cost/Benefit AnalysisgBenefits -Hard Dollar Savings Total annualized direct savings from both staff reductions and elimination of legacy systems will exceed $7,208,000. Data was provided by ABC Human Resources for 86 planned headcount reductions that was solicited from the divisions. Theheadcount savings of recommended here is derived from the extension of Div E s process mapping and analyses. These results are much more specifically associated with the value of installing the XYZ Capital Appropriation Request26 Cost/Benefit AnalysisHard Dollar Savings ProjectionAnnual Value AnnualTotal Headcount*(loaded salary)*Legacy Savings**Annual $48,048$0 $48,048 Div $61,776$0 $61,776 Div $1,180,608$0 $1,180,608 Div $1,537,536$990,000 $2,527,536 Div $672,672$32,500 $705,172 Div $1,510,080$0 $1,510,080 Div $590,304$585,000 $1,175,304 Total ABC $5,601,024$1,322,500 $7,208,524* Source: Div E s process improvement savings assumptions and calculations with loaded average salary of $55,000 plus 33% for benefits.

9 ** Legacy savings for Div D are associated with legacy system maintenance, licenses, software, etc. and Div F s with avoidance of budgeted training system and legacy Capital Appropriation Request27 Cost/Benefit AnalysisgTotal cost is estimated to be $11,214,730 and involves: Installation of XYZ for (division s) and ABC. Construction of a ABC Data Warehouse for common reporting, Training System development, and Severance costs that are incorporated in the #### restructuring Capital Appropriation Request28 Cost/Benefit AnalysisCost and Allocations for XYZ Divisional COSTS BudgetAllocationOne-time start-up costs$1,100,000 ABC$200,000$238,196 Div A$400,000$466,898 Div B$0*$316,456 Div C$1,170,000$1,730,788 Div D$1,556,830$1,935,999 Div E$4,000,000$4,915,816 Div F$1,287,900$1,610,578 Data Warehouse$1,000,000 Training System$500,000$11,214,730$11,214,730* Covered under a separate appropriationABC Capital Appropriation Request29$0$5,000,000$10,000,000$15,000, 000$20,000,000$25,000.

10 00015913172125293337 MonthsCumulative CostsCumulative SavingsPayback pointCost/Benefit AnalysisPayback Period for XYZ 25 months30 Business case ComponentsNon-Financial AnalysisqqDescribe the non financial reasons for changeDescribe the non financial reasons for changeqqRisk management Risk management more important since Sarbanes/Oxleymore important since Sarbanes/OxleyqqService levelsService levelsqqCorporate agilityCorporate agilityqqCatalyst for changeCatalyst for changeqqCore competenciesCore competenciesqqFixed and determinable costFixed and determinable costqqLeveraging technologyLeveraging technology31 Business case ComponentsRecommendationqqNow that all of the analysis is complete, what is the Now that all of the analysis is complete, what is the recommended course of action?recommended course of action?qqWhere in the Business case should this be?Where in the Business case should this be?