How to successfullytransition to HR BPO

Christine BriodyGianni Giacomelli

Part 2/3Design the organization

By:

Quantifying the retained organizationChristine Briody,Senior Director of Global Consulting, ADP

Designing the retained organization from a technology perspectiveGianni Giacomelli,Head of Strategy and Marketing, SAP BPO

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Designthe organization

Quantifying the retainedorganization

Christine Briody’sBiography

Christine Briody,Senior Director of Global Consulting, ADP

Christine is Senior Director of Global Consulting and is responsiblefor supporting the Sales effort in the global Employer Servicesmarketplace. Christine has a background in operational and servicemanagement. She joined ADP in the UK in 1995 and headed upthe Managed Payroll Service department for UK and Ireland.From there she moved into a European role working as a StrategicAccount Manager for key accounts within ADP. Christine is based inthe UK but travels extensively mainly across Europe.

She can be reached at:contact@globalhrstudio.com

Stepping up in HR transformation, and more specifically HR outsourcing, raises fundamental questions and implies to agree on the processes and activities to keep in-house and the ones to reengineer and outsource. More generally, HR transformation is mainly about deciding on the organization to implement to fit the new business needs.

Designing and managing your retained team correctly is a critical factor for the success of your overall HR outsourcing business plan. In particular, the ability to achieve significant staffing efficiencies is typically the key to achieving the financial objectives expected from the outsourcing relationship. This is often the most difficult and poorly planned aspect of the transition to outsourcing HR.

Quantifying the retainedorganization

The roles and responsibilities that your organization will need to retain during and after transition of HR services will depend on a number of related factors:

Scope of services that you will be outsourcing•Day-to-day processes that will be left behind for your retained team•Complexity of Business Unit structure•Diversity of your current information systems and/or service suppliers•Expected timeline for the transition to your vendor•Number of manual tasks that will be automated by outsourcing•

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Quantifying the retained organization

Quantifying and designing the retained organization go hand in hand withthe project’s business case and require adopting a structured approach.

To assist you in designing the retained organization that will best fit your requirements,we have developed a model that can also enable you to better predict your return on investment.Please note that your ability to achieve the optimum retained organization will largely depend onthe success of your governance model.

The roadmap to design the retained organizationbegins with the definition of the project’s scope(service model, tasks to outsource, and project’sfootprint). Your internal staff and the servicesupplier then follow up by assigning the tasksthat must be performed (based on your negotiated statement of work).

Next, roles and responsibilities that define retainedjobs, positions and headcount are completed byadjusting your organizational structure and puttinginto place a continuous improvement process.

1 How to design the retained organization

The retained organization roadmap

Define the project scope

Define activities to outsource or retain

Define positions / headcount

Establish new organization structure

Continuous improvement /process re-design

Build job descriptions / competencies

This is the fundamental phase in the designof your future organization. You must understandyour service supplier’s business model, determinethe extent of your footprint, and decideon the functions to be outsourced.In-depth understanding of your supplier’s servicemodel is the key to that phase of the project.

In order to get a clear picture of the future organization, it is usually good to start by focusing on how the work gets done today.

A task/time audit (“1 to 31 Approach”) of yourcurrent activities will help you understand whereoutsourcing will generate the greatest benefits.

It is essential to map your HR organization with yoursupplier’s responsibility matrix (also called servicedefinition or statement of work). The responsibilitymatrix describes what needs to stay in your organization and what comes under the

The service level you will opt for may vary from one country to another or from one regionto another. For example, Processing Services maybe fine for countries where you are well acquainted with local legislation, while Managed Services may best suit countries where your knowledge of the local environment is less well developed.

supplier’s responsibilities. This will also provideyou with a sharper focus on tasks that shouldremain local and the ones that can be grouped and performed at a regional or global level(in shared services centers, for example).

In some organizations, collecting informationon activities and roles, processes, and jobdescriptions may take more time than availableand even be very difficult to validate. For thesecompanies, their analyses will be basedon assumptions that may require adjustmentsin the business case for the retained organization.

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Understand and define your project’s scope

Which activities can be outsourced

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The illustration below provides an example of a detailed portion of the responsibilitymatrix for payroll Managed Services.

Where?

SSC

LOCAL

LOCAL

Who?

Client

System and Application Services and Maintenance

Processes

The Responsibility Matrix

Data Management

Payroll Time Data Inputs

Employee Self Service / Manager Self Service (if applicable)

Pre-Payroll Processing

1 • Confirm timely funding of accounts for dispersal of employee payroll through agreed upon bank.

3 • Load pay variation data.

4 • Verify data loads.

5 • Monitor work/non work time; monitor annual leave.

6 • Calculate termination payments.

7 • Validate and approve termination payment calculations.

Payroll Processing

Post-Payroll Processing

Leave Management

Termination Management

O�-Cycle Processes

End-of-Month Activities

Client Relationship Management

End–of-Year Activities

Other Payroll Activities

2 • Create, maintain and distribute Payroll Schedule for each country on a calendar year basis.

Client Service Supplier

Type of Service Delivered: Managed Services

Service Supplier

Service Supplier

Service Supplier

Service Supplier

Client

Client

The Payroll Managed Services Responsibility Matrix (extract)

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Once you have established your current tasks,you can get a better grasp on how the work will change once you outsource. It is important to recognize that some activities are destined to remain within your retained organization.

These activities typically include core functions

such as HR strategy, process design, executiverecruitment, and aspects of compliance andindustry-specific functions related to the growthof your business. Core retained functions mightalso include oversight of certain HR and payrollfunctions, such as data validation, payrollauthorization, and escalated issue management.

. Request funding from tax and garnishment

. ACH return, step payments, and reversals

. Reconcilement of bank statements

. Check paid inquiries

. On-line ACH transfers

. Files and Remit Escheated checks

. Collect change request requirements from business units, with the exception of ad hoc reporting

. Provide functional requirements to application maintenance team

. Complete acceptance testing on developed change requests

. Coordinate user acceptance testing with business units

. Provide Tier 3 case management support for taxes, garnishments, banking, stock options

. Provide instructions for resolution to processing team and customer service team

. Create training programs and materials

. Create content for payroll related communications

. Deliver training to payroll services team

. Interpret BU policies impacting pay

. Provide required procedural updates to the customer service payroll specialist

. New hire reporting

. Worksite reporting

. Special projects

. Create year end calendar

. Design corporate payroll policies

Banking

Change Requests

Tier 3 Support

Training and Communications

BU expertise

Other

Area Responsability

. Validate garnishment order

. Set up Employee garnishment deduction information into HRIS

. Store garnishment order

. Audit deductions are taken according to order

. Balance deductions/payments monthly

. Monitor garnishment remittance services

. Answer employee and agency inquiries/interrogations

. Create/send answer and notice letters

. Interpret legs/regs; Ensure compliance with garnishment legs and regs

. Conduct data validation

. Monitor Tax remittance services

. Interpret legs/regs; Ensure compliance with tax legs and regs

. Researche inquiry

. Document and tracks inquiry

. Respond to agencies

. Resolve disputes

. Inform Payroll Operations of issues/changes as needed

. Reconcile return

. Processe Stock Options

. Creat M&A checklist

. Work with corporate, HRIS, BUs and acquired companies on transition of payroll

. Coordinate entry of payroll related data into HRMS with processing team

Garnishments

Taxes, including Stock Options

Mergers &Acquisitions

Area Responsability

As part of the statement of work, your service supplier will have to provide you with a detailed list of the activities it expects to perform and those thatwill continue to be part of your organization.

Sample activities/responsibilities of the client’s retained team

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Outsourcing HR means changing the roles and tasksof your retained HR staff. With most administrativeand transactional actions moved to your servicesupplier, you are able to focus on supporting yourcompany’s core business.

One common example of an impacted jobfunction is that of the payroll administrator.For many organizations, the payroll administratorplays a broad role, performing activities such asanswering employees’ questions, tracking checksand deposits, reconciling payrolls, processingchanges in pay, and ensuring compliance withtax filing and other regulatory bodies.

Successful organizations take full advantageof the outsourcing model to shift the majorityof these administrative activities to their provider,while refocusing on more strategic managementactions such as design of compensation andincentive plans. For many organizations, this oftenmeans that the current administration team maynot have the required skill sets to transition intothe new roles.

A similar impact can be expected for the HR andbenefits partners, with certain administrative/tran-sactional responsibilities eliminated and replacedby the opportunity to deliver higher added-valueservices to the Business Unit’s customers.

This shift in roles raises the issue of whetherto retain and re-train existing staff or to hire peoplewith more relevant skills. A critical step in thisdecision process is to create new job descriptionsaligned with the tasks and roles to be assumed by the retained team. Your service supplier’s responsibility matrix and your internal vision for your department should be the basis for these descriptions.

Detailed job descriptions should include:• Description of the job and activities to be performed• Required skills and educational background

After the required roles have been defined and thenew job descriptions created, formal competencyassessments and interviews with the existing staffcan identify the right talent within the organization.

4 What skills/competencies are needed in the new organization

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Reports to: Governance DirectorRole: responsible for managing the service level

agreements, reporting on trending,

change control and process impact analysis.

Experience & Education:

. 8 - 10 years �nance and/or accounting

. CPA and Advanced degree preferred

. Signi�cant experience with the management or operations of outsourcing and third party contracts

. Demonstrated understanding of legal contracts

. Procurement of sourcing experience

. Administrative and project management experience

Attributes & Characteristics:

. A business/commercially-focused, results-oriented manager with strong listening, �nancial management, and communications skills

. Consultative and client-oriented

Responsibilities:

. Manage all �nance and contract-related aspects of the outsourced services

. Track client assets used in delivery of services

. Establish and maintain mechanisms to quantify and track business-value delivered

. Collaborate with Client Finance and Accounting to develop, socialize and implement acceptable allocation mechanisms

. Responsible for the communication, lock down, and monitoring of value realization with business units

. Responsible for the veri�cation, reconciliation, and payment of all SP invoices; monitor SP contract compliance

. Lead in negotiations of or adjustment to SP contract; Manage the Benchmarking process

. Advise on savings calculations, business case development; Review and assess project business cases

Area Responsability

Example: Contract Manager job description

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Here is one example of what can happen when you combine outsourcing efficiencies with retained organization design.

A company with 9,000 employees spread acrossthe U.S. has outsourced payroll administrationand HR information technology, including the HRIS,a new applicant management system and time andattendance. They also redesigned their processesto take advantage of efficiencies gained from onlineemployee and manager self-service. They engagedstakeholders early and focused not only on theapplications and the processes, but alsoon role definition.

Excluding those employees who worked in payrollor in the employee service center (operations nowoutsourced), the HR team has been reduced from 88to 62 people. «They no longer do tasks suchas applicant tracking or labor rules compliancereporting. Their focus is on a different level of work,which includes change management, workforceplanning and talent management”the HR Director reports.

An anticipated reduction in headcount is oftencentral to the business case for moving to an HRoutsourcing model. The trick is to determine whatthe right reduction should be.

Many organizations rely on an activity-basedanalysis to estimate the volume of work that will behandled by the retained team. This activity analysisattempts to estimate volumes or transactions thatstill need to be handled, including the strategic andmanagement functions necessary to operate theoutsourced functions.

Your service supplier can typically provide muchof the information needed to estimate thoseactivities based on due diligence during the salesprocess as well as a statement of work that definesthe activities that will be retained by your team.This is generally a good guideline, but you maywant to back it up by other analyses done byyourself and/or outside consultants.

In activity-based analyses, organizations generallyestimate how many transactions and/or activitiesone person actually handles during a specific period

of time, compared with the number of transactionsthat could be processed over that same periodof time. In fact, there are many factors that maymake this estimate unique to the client’s situation,including:

• Transaction complexity• Data input quality• Degree to which policies are standardized and

harmonized• Workforce diversity • Vendor consolidation• Position control in place

Direct comparisons of headcount before and afterimplementation may not be viable due to changesin how new jobs and functions are defined. In somecases, total headcount may not seem to go down,but the organization will see a marked improvementin overall productivity and effectiveness.In other instances, there is a significant reductionin headcount, not just in the functionsoutsourced, but also in the broader HR organizationdue to strategic realignment.

5 How to determine the retained headcount

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There may be no such thing as a “typical” impact on labor since the outcome is highly dependent on the organization’s structure, previous degree of centralization, functions (and scope) being outsourced and (very important) the assertiveness in redefining new roles and responsibilities. However, some useful industry estimates can serve as benchmarks for business planning and execution purposes.

The Everest Research Institute, a leading supplierof HRO research and analysis, estimates that theaverage staff reduction for an outsourced HRengagement is 54%. This impact is spread across

the various job types within a department, with greatest impact coming at the admin support level(75% reduction) and the least impact at the seniormanager/executive level (20%).

According to Everest, organizations in the topquartile of labor savings have achieved a 76% overallreduction in headcount, made possible by a 91%reduction in administrative support roles.Interestingly, these same top-quartile organizationsactually experienced an increase in senior manager/executive roles (+7%). This is likely attributable to a successful shift from an administrative to a strategic, high-value focus for the organization.

6 What is the typical impact on labor

Average HR staff reduction by job type (percentage)

Sr. Man

ager/

exec

utive

Manag

er

Genera

l for f

uture

cons

iderat

ion/fo

llow-u

pSME

75%

52% 50%37%

20%

Admin

supp

ort

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Wrap-upQuantifying and designing the retained organization go hand in hand •with the project’s business case and require adopting a structured approach.It is essential to map your HR organization with your supplier’s responsibility matrix.•Successful organizations take full advantage of the outsourcing model to refocus •on more strategic management actions.A critical step is to create new job descriptions aligned with the tasks •and roles to be assumed by the retained team.It is reasonable to expect a 50% reduction in force in the functions •that are being outsourced.Even though your have outsourced an entire function, •it is still necessary to retain internal staff.

With these points in mind, it is reasonableto expect a 50% reduction in force in the functionsthat are being outsourced. Why not 100%? It is important to remember that, even though you have outsourced an entire function, it is still necessary to retain internal staff that will be responsible for strategic planning, vendor management, and support as well as other defined retained team responsibilities. This is even truer for international organizations that have to cope with country-related specificities that must be taken into account when the time has come to outsource. Will those specific country-related processes be covered in the HR outsourcing contract?

For example, travel expense management is nota part of payroll in Switzerland. International

outsourcing deals can scope out that specific process as part of the current payroll service, forcing the client company to keep it in-house.

In China, payslips have to be printed on rice paperand stamped by the administration at the end ofeach fiscal year.

In Belgium, educational leave is included in payroll,but this administrative task may have to continue tobe handled in-house even after the HRO contracthas been signed.

As a consequence, your service supplier shouldprovide you with a list of optional and/or scoped-outtasks country by country in order for you to be ableto conduct a detailed check of your entities.

Top quartile staff reduction by job type (percentage)

Sr. Man

ager/

exec

utive

Manag

er

Genera

l for f

uture

cons

iderat

ion/fo

llow-u

pSME

91%77% 74%

39%

-7%

Admin

supp

ort

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Designing the retainedorganization from a technology perspective

Gianni Giacomelli’s Biography

Gianni Giacomelli, Head of Strategy and Marketing, SAP BPO

Gianni Giacomelli is Head of Strategy in the BPO business unit of SAP. He joined SAP in late 2004, and has more than 16 years of experience in organizational development, transformation strategy and related services. He has served in companies such as Boston Consulting Group, Danone and Datamonitor, and in US-based consulting firm Everest prior to joining SAP. He is a widely published thought leader in the outsourcing/offshoring/G&A transformation space. He holds a degree in Economics and Business from the University of Florence, Italy and EME Business School of Strasbourg, France, and a Masters in Organizational Behavior from London Business School.

He can be reached at: contact@globalhrstudio.com

Business processes are delivered by combining workflow, the right people, and the appropriate technology. These three elements, designed to work together, ensure effective service delivery.

Often when process transformation fails, a pattern emerges: the experts and decision-makers across these three domains have not been working properly with each other.

In the case of outsourcing, which involves managing the relationship with a service provider, there is an even greater potential for dysfunction

if the right governance model is not put in place, especially during contract negotiation and implementation.

Essentially, it is necessary to ensure that the required skills and objectives that are clearly defined for all the parties involved are in place at the beginning of the HR transformation journey. Changing direction too late, for example when the discussions hit the implementation phase at the local level, will create new issues because it will lead to deviation from holistic objectives.

Designing the retained organization from a technology perspective

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Specifically, with regard to technology, three types of decisions need to be made:

Whose technology is to be maintained or implemented in respectively the retained HR organization • and in the outsourced one? For example, retained-organization employees can now use the technology that is proposed by the service provider (often software-as-a-service).

Who is to drive and who is to own the configuration of that technology – client or provider?•

How to coordinate the retained processes seamlessly with those that are outsourced?•

Whose technology is it?

Here, the decision is to choose who owns the technology. Whoever owns the technology can redeploy it – at least theoretically. A couple of scenarios may occur:

When the provider owns the technology, 1. the contractual agreement sets out how that technology can be used. This prevents dilution in service quality or changes in process workflows unless pre-agreed. It also means that the possibility exists for the provider to re-use the technology with other clients. This can generate cost savings.

If the client owns the technology, it can 2. be redeployed by the client upon completion of the provider’s mission. However, the client is contractually obliged to ensure the provider has access to the technology required for service delivery.

Discussions about technology ownership can have unexpected consequences. Whoever owns the technology must recognize that process requires certain parties to have access to specific functionalities and/or data; otherwise, service delivery will break down. Identifying points where this can occur prevents surprises later. For example, access to an employee’s master data, identifying elements like personal and organizational data related to a specific employee, is necessary in many outsourced processes, even though in some cases the master data repository may stay within the client’s organization.

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Designing the retained organization from a technology perspective

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Who drives and who owns the configuration?

How to integrate seamlessly what stays in and what goes out?

The second important decision is to determine who drives and who owns the configuration of the selected technology.

From a legal perspective, configuration is considered Intellectual Property (IP). But from a business perspective, configuration is often modified according to specific processes to be handled by the software.

On the one hand, the party driving the configuration has the possibility to personalize the software to accommodate some business rules and process flows. On the other, the party who owns the Intellectual Property has the right to re-use the developments beyond the specifications in the BPO contract.

When the client drives the configuration, it is possible to dictate to the provider, at least to some degree, how the service will be run.

Regardless of the ownership of the technology and its configuration, there is still a need for the process to function seamlessly end-to-end. In practical terms, the service provider needs to act as the client’s extended enterprise. A number of failures in reaching such results stem from the inability of the parties to design an appropriate technology integration architecture that ensures data integrity and avoids latency.

In some cases, this outcome may be provoked by the difficulty of building interfaces or by the fact that data are not maintained properly on either side. For example, if the client does not require certain

This is often the case for processes that impact the client’s employees, a common occurrence in HR.

Nevertheless, if the client drives the configuration too far, it might limit the provider’s opportunity to template the process. This in turn would diminish the client’s ability to enjoy the benefits of a one-to-many service model. Although the client can decide to avoid change management, there is a risk that the provider will be unable to deliver economies of scale, process optimization and more cost-effective labor.

Another consequence of who drives the configuration is that the clients’ retained organization will be different. If the client is simply asked to provide the boundaries of the process (e.g. expectations of input-output), in-depth expertise in the process steps that fall within the provider’s scope will not be necessary.

data fields to be constantly updated by their employees (e.g. address, number of children, etc.) or if those fields do not exist in the client’s retained system, the employees’ personal data transmitted to the provider might be incomplete or inaccurate. It is important to note the difference between interfacing and integrating.

Consequently, deciding where to draw the line between the two organizations, i.e. what is retained on the client’s side and how it integrates with the provider’s side, is a critical act and requires intense scrutiny from the business process and IT specialists from both organizations.

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3

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Below is an example of the importance of deciding what is kept on each side:

Service for a General and Administrative process such as HR is typically delivered in tiers.

Tier 0 is usually self services, pulling real-time data from applications and databases. Here, technology enables strong economies of scale.

Tier 1 is the layer of call/contact center clerks who rely on scripted processes to respond to queries.

Tiers 2 and 3 include more specialized staff who require access to policy repositories as well as reporting and other analytics. Here, economies of scale are even lower and the cost of complex operations is high.

The client and the provider need to decide who takes which part of the technology for which layer. Unintended consequences of poor decision making can be the following:

% Transactions Tier 0Self-Services

Tier 1Contact center

Tier 2Generalist sta� Tier 3 Experts

Scale e�ects

Cost

per u

nit

Volume

% Cost

IT-related

Wrap-up

Deciding where to draw the line between what is retained •and how it integrates with the provider’s side, is a critical act. Business processes are delivered by combining workflow, the right people, •and the appropriate technology. These three elements, designed to work together, ensure effective service delivery. With regard to technology three types of decisions need to be made: •whose technology is to be implemented, who is to drive and own the configuration, how to coordinate the retained processes seamlessly with those that are outsourced. All have implications on the sustainability of a BPO relation. Technology should not be a constraint, but to avoid surprises it is critical •to bring the CIO’s team into the loop upstream when retention of technology is decided. 17

In case something does not work correctly, the HR transactions cannot be handled by the lower tiers, which in turn generates a heavier workload for these tiers and finally results in higher total cost.

Technology should not be a constraint, but to avoid surprises it is critical to bring the CIO’s team into the loop upstream when deciding retention of technology is decided.

% Transactions

Scale e�ects

% Cost x 1,5 x 2 x 3

IT-enabled/-supported

e.g. insu�cient integration ofportal into back end that leaves

queries unanswered

e.g. insu�cient integration ofcontact center into back end,

limiting the e�ectiveness of callcenter agents

Notes:

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Notes:

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