building a business case for outsourcing - sourcing...
TRANSCRIPT
Building a Business Case for Outsourcing
Employee Benefits Administration & Payroll Outsourcing
December 9, 2003
Donald Glade Donald Glade SOURCING ANALYTICSSOURCING ANALYTICS
[email protected]@sourcinganalytics.com
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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
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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?
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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
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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
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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
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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
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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
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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
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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
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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?????
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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?
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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
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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
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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
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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”
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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?”
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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
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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
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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
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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
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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
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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
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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
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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?