Building a Business Case for Outsourcing

Employee Benefits Administration & Payroll Outsourcing

December 9, 2003

Donald Glade Donald Glade SOURCING ANALYTICSSOURCING ANALYTICS

dglade@sourcinganalytics.comdglade@sourcinganalytics.com

2

Agenda

qq Trends in outsourcingTrends in outsourcing

qq What is a business case?What is a business case?

qq Components of a successful business caseComponents of a successful business case

3

Trends in Outsourcing The Outsourcing Spectrum

Traditional Co-sourcing BPO

Outsourcing Spectrum

• Transactional• Employee Support• Web capabilities

• Responsibility sharing• Systems driven• Portable & scaleable

• Cost minus• Entire shop• What’s included

Important Questions

What 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 Measurement

Planning 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, Workforce Financial Management

Source &Select

¨ External Recruiting

¨ Internal Staffing

¨ Job Design & Evaluation

¨ New Hire Orientation

¨ Offer & Screening

¨ Orient and Assimilate

¨ Performance Planning

¨ Promotional Orientation

¨ Temporary Services

Develop &Counsel

¨ Employee Assessment

¨ Employee Relations

¨ Performance Management

¨ Professional and Personal Development

¨ Training

Reward &Retain

¨ Benefits Administration

¨ Compensation Management

¨ Employee Assistance Services

¨ Employee Financial Planning

¨ Employee Retention

¨ Incentive-Base Compensation Programs

¨ Recognition Programs

¨ Wellness Programs

¨ Workers’Compensation

Redeploy &Retire

¨ Expatriate Management

¨ Outplacement & Career Transition

¨ Relocation/Expatriate Counseling Administration

¨ Retiree Processing and Counseling

¨ Terminated Employee Processing

¨ Transfer and Reorganization Processing

5

Firms Outsourcing PayrollThe Outsourcing Spectrum

Payroll Outsourcing - G2N

39%

61%

Outsourced In-House Tax Filing & Deposits

48%

52%

Outsourced In-House

Printing W2s and 1099s

46%

54%

Outsourced In-House

Source: ADP Market Research, 2002

6

Payroll TrendsPayroll TrendsReasons Given for In-house ProcessingThe Outsourcing Spectrum

qq ControlControl 39%39%

qq Lower CostLower Cost 35%35%

qq Prefer InPrefer In--HouseHouse 16%16%

qq Payroll ComplexityPayroll Complexity 14%14%

qq FlexibilityFlexibility 10%10%

Source: ADP Market Research, 1999 and 2002

7

Payroll TrendsPayroll TrendsTop Payroll Issues Have Not ChangedThe Outsourcing Spectrum

qq TaxesTaxes 32%32%

qq AccuracyAccuracy 23%23%

qq TimelinessTimeliness 15%15%

qq Compliance/Regulations/LawsCompliance/Regulations/Laws 14%14%

qq Time & AttendanceTime & Attendance 10%10%

qq TechnologyTechnology 9%9%

Source: ADP Market Research, 1999 and 2002

8

1.9K1.9K 7.5K7.5K45K45K

9.5M9.5M

Payroll Tax ComplianceThe Outsourcing Spectrum

qq Today: Tax Codes Are Complicated and Changing Today: Tax Codes Are Complicated and Changing RapidlyRapidly

q 1,900 plus changes to the US tax code since 1995

q 7,500 plus federal, state and local tax jurisdictions

q 45,000 total pages of federal tax rules

q Resulting in 9.5 million employment tax penalties annually

Source:: Institute for Policy Innovation, 2002

9

Firms Outsourcing BenefitsThe Outsourcing Spectrum

FSA Administration

67%

33%

Outsourced In-House

Open Enrollment19%

81%

Outsourced In-House

COBRA Administration

60%

40%

Outsourced In-House

Source: ADP Market Research, 2002

Employee Call Center15%

85%

Outsourced In-House

10

Firms Outsourcing HRThe Outsourcing Spectrum

HRIS1

12%

88%Outsourced In-House

Personnel Administration2

8%

92%

Outsourced In-House

Screening & Selection1

66%

34%

Outsourced In-House

Sources: 1ADP Market Research, 20022Gartner, 2002

Recruiting2

26%

74%

Outsourced In-House

11

What is a Business CaseThe Big Picture

qq An exercise in logicAn exercise in logic

qq A compelling argument for changeA compelling argument for change

qq A justification for actionA justification for action

Does this make sense?????

12

What is a Business CaseConsiderations

qq How does your organization justify change?How does your organization justify change?

qq What financial return is expected?What financial return is expected?

qq What is culturally valued?What is culturally valued?

qq Is there a standard format for business case presentation?Is there a standard format for business case presentation?

qq Who needs to approve the business case?Who needs to approve the business case?

qq Who should be involved?Who should be involved?

13

What is a Business CaseThe players

qq Size of capital request Size of capital request

qq Ask one question: Ask one question:

“Who can derail this process once it’s “Who can derail this process once it’s begun?”begun?”

qq HR, finance, IT, legal, procurement, HR, finance, IT, legal, procurement, divisional personnel, stake holdersdivisional personnel, stake holders

14

What is a Business CaseComponents of a Business Case

qq What needs to changeWhat needs to change

qq Why it needs to changeWhy it needs to change

qq Process used to decide how to change itProcess used to decide how to change it

qq How will we be better off financiallyHow will we be better off financially

qq NonNon--financial ways we will be better offfinancial ways we will be better off

qq What is the final recommendation What is the final recommendation

15

What is a Business CaseComponents of a Business Case

qq Different componentsDifferent components

qq Different formatsDifferent formats

qq What is typical???What is typical???

qq Executive SummaryExecutive Summary

qq Case for ActionCase for Action

qq Process UndertakenProcess Undertaken

qq Financial AnalysisFinancial Analysis

qq NonNon--Financial AnalysisFinancial Analysis

qq RecommendationRecommendation

16

Business Case ComponentsExecutive Summary

qq First in the business caseFirst in the business case

qq Last to be writtenLast to be written

qq Recap salient points of business Recap salient points of business casecase

qq Follow format of rest of business Follow format of rest of business casecase

qq Liberal use of bullets & white spaceLiberal use of bullets & white space

qq Remember, this is an “executive” Remember, this is an “executive” summarysummary

qq How much detail do your execs How much detail do your execs want?want?

qq Level 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’t broke, why fix it?”broke, why fix it?”

qq Relate examples of how it’s brokenRelate examples of how it’s broken

qq What 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 agility

qq “Why do anything?”“Why do anything?”

18

Business Case ComponentsCase for Action

Fundamentally: Why Outsource??Fundamentally: Why Outsource??

qq Important in setting future expectationsImportant in setting future expectations

qq These are the items upon which success or failure These are the items upon which success or failure will be judgedwill be judged

19

Why Outsource?

I want to focus on my core business

I’ve got to get my risk under control

We can’t react quickly

enough to change!

Headcount reductionCosts!

Customer

complaints!

Customer

Complaints!

Headcount reduction

20

Business Case ComponentsProcess

qq Describe the process Describe the process undertakenundertaken

qq Indicate parties involvedIndicate parties involved

qq Indicate reasons for key Indicate reasons for key decisionsdecisions

qq Describe analysis usedDescribe analysis used

In/out/co decision

RFPdistribution

Contractnegotiation

Proposalevaluation

Site visits

Duediligenceprocess

21

Business Case ComponentsFinancial Analysis

qq Different tools availableDifferent tools available

qq Dependent on company expectationsDependent on company expectations

qq Understanding current costsUnderstanding current costs

qq ROI Analysis ROI Analysis –– cost of capital cost of capital

qq TCO AnalysisTCO Analysis

qq BaselineBaseline

22

Business Case ComponentsFinancial Analysis - Today There is A Measurement Gap

qq Only 16% of senior financial managers Only 16% of senior financial managers are confident in their grasp of ROI are confident in their grasp of ROI from HR technology investments. from HR technology investments. ––MercerMercer

Sources:1. “Human Capital Management: The CFO’s Perspective,” CFO Research Services and Mercer, February 2003.2. “ Transforming HR for Business Results,” Mercer, July 2003.

Great Extent2%

Considerable Extent16%

Minimal Extent33% Moderate

Extent33%

Not at All14%

HR Executives Financial ExecutivesVery Effective

3%

Effective13%

Neither Effective nor Ineffective

34%

Ineffective32%

Very Ineffective18%

qq Only 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. –– MercerMercer

23

Business Case ComponentsFinancial Analysis – Example

qq Multi Divisional CorporationMulti Divisional Corporation

qq Each division in a different HRIS environmentEach division in a different HRIS environment

qq Desired standardizationDesired standardization

qq Looked to new software and approachLooked to new software and approach

ABC Capital Appropriation Request24

Cost/Benefit Analysis

g Benefits - Hard Dollar Savings

• Hard dollar savings are derived from two main sources:

– A headcount reduction of 81.6 in the H.R. function; and

– Savings from elimination of legacy systems costs such as licenses, maintenance, system support, etc.

• Many of these reductions will be accomplished by encouraging increased use of flexible staffing arrangements such as modified and part-time H.R. 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 17.7% IRR.

ABC Capital Appropriation Request25

Cost/Benefit Analysis

g Benefits - 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 81.6 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 system.

ABC Capital Appropriation Request26

Cost/Benefit AnalysisHard Dollar Savings Projection

Annual Value Annual Total H.R. Headcount* (loaded salary)* Legacy Savings** Annual Savings

ABC0.7 $48,048 $0 $48,048

Div A 0.9 $61,776 $0 $61,776

Div B 17.2 $1,180,608 $0 $1,180,608

Div C 22.4 $1,537,536 $990,000 $2,527,536

Div D 9.8 $672,672 $32,500 $705,172

Div E 22.0 $1,510,080 $0 $1,510,080

Div F 8.6 $590,304 $585,000 $1,175,304

Total ABC 81.6 $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.

** 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 savings.

ABC Capital Appropriation Request27

Cost/Benefit Analysis

g Total 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 charges.

ABC Capital Appropriation Request28

Cost/Benefit AnalysisCost and Allocations for XYZ

Divisional

COSTS Budget Allocation

One-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 appropriation

ABC Capital Appropriation Request29

$0

$5,000,000

$10,000,000

$15,000,000

$20,000,000

$25,000,000

1 5 9 13 17 21 25 29 33 37

Months

Cumulative Costs

Cumulative Savings

Payback point

Cost/Benefit Analysis

Payback Period for XYZ 25 months

30

Business Case ComponentsNon-Financial Analysis

qq Describe the non financial reasons for changeDescribe the non financial reasons for change

qq Risk management Risk management –– more important since Sarbanes/Oxleymore important since Sarbanes/Oxley

qq Service levelsService levels

qq Corporate agilityCorporate agility

qq Catalyst for changeCatalyst for change

qq Core competenciesCore competencies

qq Fixed and determinable costFixed and determinable cost

qq Leveraging technologyLeveraging technology

31

Business Case ComponentsRecommendation

qq Now 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?

qq Where in the business case should this be?Where in the business case should this be?