Delta Dental Enterprise Resource Planning Computer System Upgrade Sponsor: Mr. Gary Radine

By: Edan Carignan, Caroline Rashidi, Shane Nath

�1

November 30, 2015

Table of Contents

�2

Executive Summary ……………………………………………………………………… 3

Abstract …………………………………………………………………………………… 4

Financing The Project Using 100% Cash ………………………………………………. 5

Maximum Debt …………………………….…………………………….……………….. 9

Delayed Completion of Project ………………………………………………………….. 13

Delayed Layoffs …………………………………………………………………………… 18

Re-Upgrade of Project …………………………………………………………………… 21

Possible Outcomes ………………………………………………………………………. 23

Recommendation ………………………………………………………………………… 28

Sources …………………………………………………………………………………… 31

Appendix ………………………………………………………………………………….. 33

Executive Summary

History Delta Dental is a non-profit organization founded in 1954 with a mission to increase access to

oral healthcare. The company originally operated in California, Oregon, and Washington. Led by

Washington Dental Services, Delta Dental began to define the future of dental coverage with

employee benefits programs within organized labor unions. Twelve years later, Delta Dental

Plans Association coordinated dental programs for customers with employees across the United

States. Between 2000-2015, Mr. Gary Radine has served as President and CEO of the Delta

Dental Enterprise and has doubled both enrollment and gross revenues during this time.

Currently, Delta Dental operates in all 50 states and serves over 59.5 million people in more than

97,000 groups.

Project Constraints Delta Dental has $300 million in surplus capital which cannot go below $200 million, otherwise

the company’s capital structure could be in question. If this were to happen, the company’s A-

credit rating could be downgraded. Since Delta Dental is a privately held corporation, it cannot

issue debt through bonds or sell stocks to the public. The company’s only method of raising

capital is through external funding, which is limited to $80 million for a three year period.

Management prefers the project to be funded by a combination of cash flows from operations

and borrowings from the bank. If necessary, management is willing to invest initial capital which

could affect future earnings.

�3

Abstract Delta Dental needs to decide if it can afford to upgrade its 30-year-old computer system to

accommodate constantly changing technology and customer requirements in order to maintain

a competitive advantage. If so, the company needs to decide how to finance such an upgrade

without jeopardizing its capital requirements as required by state regulators and its outside rating

agency. The company needs to determine how to properly handle various internal and external

factors, such as its rating agency, and the diminution of liquid capital, which could negatively

affect the acquisition of new customers. This analysis explores six possible scenarios and

outcomes the company may face while implementing this project. The following report contains

scenarios showing possible outcomes if the company chooses to finance this project using all

cash, maximum debt allowed, the implications of taking longer for the company to follow

through on employee layoffs as a result of a successful implementation, a delayed completion of

the project, and if the project needs to be redone in the near future.

�4

Financing The Project Using 100% Cash

Delta Dental has over $300 million in cash reserves with a steady cash inflow of an

additional $20 million each year. Since the company is looking to implement a new Enterprise

Resource Planning (ERP) computer system, this scenario explores the outcomes and some

implications if the company were to finance this project using only cash. In business, when we

talk about financing a project, it is not just a matter of if a company can afford to make a

purchase, but rather what is the best way to do so. Aside from talent, cash is the most valuable

asset any company can have, as it is the most liquid of any financial asset. Cash not only gives a

company the option to make a purchase, but it is also used as a factor when credit rating

agencies determine the rating for a company. Cash is also used to calculate how much leverage

a company has, which will later be discussed in more detail. And finally, for any business, cash is

something to be used only when it is the best option to finance something. It is important for any

business executive to remember that holding onto cash is a lot easier than trying to earn it back.

Delta Dental’s computer system upgrade project is expected to cost over $100 million in

the first three years alone. This cost estimate includes hardware, hardware maintenance,

software development, software maintenance, travel, and training costs for the developers. It

appears that the company has more than enough cash to buy this system. Although this is true,

spending one third of the company’s cash on one project can be detrimental to the company’s

cash position and financial stability. By funding this project solely with cash, risk becomes more

prevalent than if the company were to use a combination of cash and debt. The company has a

strict policy to not allow cash reserves to go below $200 million. If cash reserves were to go

below this threshold, the company’s credit rating could be in jeopardy. Credit ratings, also

known as credit worthiness, is defined by Investopedia as “An assessment of the

creditworthiness of a borrower in general terms or with respect to a particular debt or financial

obligation.” To simplify, a credit rating defines the reliability of a borrower to avoid default on loan

obligations. Considering Delta Dental has a top credit rating of an A-, this allows the company to

easily borrow large sums of cash with low interest rates. If Delta Dental decides to finance this

project using only cash, it would not only go below its $200 million cash reserve threshold, it

�5

would also negatively impact the company’s credit rating and possibly make it more difficult to

borrow money at favorable interest rates in the future.

While considering the importance of a credit rating, it is also important to assess the

impact a project can have on a company’s leverage. Financial leverage and risk are very closely

related. Financial leverage is used to increase the return on investment (ROI) for investors. Since

Delta Dental is projected to have a steady cash inflow of $20 million per year, it is wise for the

company to continue to borrow capital to maintain its capital structure. Two ways a company

can measure growth are internal growth and sustainable growth. Internal growth means a

company continues to reinvest its earnings (net income) to grow the business. When this option

is chosen, financial leverage continually declines as the company continues to have a lower

debt and in turn a lower leverage ratio. Sustainable growth happens when a company continues

to grow while borrowing or issuing debt to maintain its capital structure; a consistent ratio of

liabilities to assets. When a company increases the amount it borrows in the same proportion as

its leverage ratio from previous years, it is able to scale efficiently. Using only cash and no debt

to finance the computer system upgrade would impair the company’s ability to efficiently scale

and could negatively impact the company’s credit rating.

Delta Dental’s leverage ratio is 0.54, as measured by using the company’s 2014 annual

report. This is calculated by taking total liabilities ($1,101,313,000) and dividing it by total assets

($2,027,482,000); as seen in the balance sheet on page 8. There are multiple ways to measure

a leverage ratio but this is the only way to do so with the ‘Condensed Combined Balance Sheet’

found in the company’s 2014 annual report. The ratio is simply saying that for every $0.54 of

liability, the company has $0.46 in assets. If the company chooses to finance this project using

only cash, the leverage ratio will decrease.

Table 1 shows the top 10 Health Insurance and Managed Health Care companies by

market capitalization. Market capitalization, also known as market cap, is calculated by taking

the current share price of the company and multiplying it by the total shares outstanding.

Although this metric will not be as useful for a non-public company such as Delta Dental, it is

important to understand that the largest and most successful health insurance companies are

being used as comparisons. The leverage ratios for these companies can be found in the

�6

second column of Table 1. The average ratio is 0.67, which is substantially higher than the ratio

of Delta Dental (0.54). By using these companies as a comparison, there is clearly an

opportunity for Delta Dental to take on debt and increase its leverage ratio to be more closely

leveraged to its competitors.

It is our team’s recommendation for Delta Dental to avoid paying for this project using

only cash and to consider using a combination of cash and debt. Reintroducing the

aforementioned reasons, using all cash would have the following negative effects on the

company assuming the $20 million cash inflow is highly likely to occur. The company may go

below it’s $200 million threshold, its credit rating may be downgraded, ROI may decrease, its

capital structure could be jeopardized, and the company’s leverage ratio could decline even

further below the industry average. By using too much cash, the company would also not be

planning for any uncertainty in the future and could potentially increase the company’s risk.

�7

Comparable Companies Leverage Ratio (L/A)

United Healthcare (UNH) 0.61

Wellpoint (WLP) [acquired by Anthem] 0.63

Aetna (AET) 0.72

CIGNA Corp. (CI) 0.80

Humana (HUM) 0.60

Centene Corp. (CNC) 0.70

Health Net, Inc. (HNT) 0.71

WellCare Health Plans (WCG) 0.67

Healthspring (HS) [acquired by Cigna] 0.47

Molina Healthcare (MOH) 0.77

Average 0.67

Table 1

�8

Balance Sheet 2014 2013

Cash and cash equivalents $228,848 $259,866

Marketable securities $924,669 $822,444

Receivables $551,925 $467,550

Property and equipment, net $246,344 $250,685

Other assets $75,696 $74,846

Total Assets $2,027,482 $1,875,391

Liabilities and General Reserves

Unpaid claims and claims adjustment expenses $446,314 $427,721

Accounts payable and accrued expenses $286,972 $283,034

Deferred revenue $78,160 $71,796

Refundable customer balances $163,809 $162,877

Accrued retirement benefits $65,835 $70,817

Other liabilities $60,223 $59,309

Total Liabilities $1,101,313 $1,075,554

General reserves $926,169 $799,837

Total Liabilities + Owners Equity $2,027,482 $1,875,391

in thousands

Maximum Debt

Debt financing is cash borrowed from a lender at a fixed rate of interest with a

predetermined maturity date. Since Delta Dental is a non-profit corporation, they lack the ability

to issue debt. Its only option is to borrow from an institutional lender at 5% interest rate per year

for a total of $80 million. The requirement for the computer system upgrade project is to pay

back the loan in full by year 3 as a balloon payment. While there is no right or wrong answer in

financing this project, there are major external and internal factors that need to be addressed

when financing with debt.

Before being able to weigh the benefits and consequences of financing this project using

the maximum debt allowed, we must look at the external factors in play. The current

macroeconomic situations will shift the effectiveness of debt financing. The stock market is the

barometer for judging the country’s economic health. Since the market crash of 2009, the S&P

is up approximately 200% and the Dow Jones Industrial Average more than 165%. With all the

major indices reaching peaks, unemployment at historical lows, and inflation in relative check, it

seems safe to say the economy is healthy (ProfitConfidential). Financing in debt is risky therefore

Delta Dental must weigh the economical conditions before considering this option.

The internal factors that need to be analyzed are the volatility of the future cash flows and

how the regulators are going to assess the company if debt is taken on. If the future cash flows

of Delta Dental were at risk then taking on debt would not be the best financing method. Since

cash flows are constant at $20 million per year, taking on debt is a feasible option. The next step

is to decide if taking on debt will lower the A- credit rating of Delta Dental. By taking an $80

million loan, Delta Dental is taking on a risk that can jeopardize how credit rating agencies view

the company.

Many benefits come from financing the computer system upgrade with $80 million in

debt. With more liquid cash, Delta Dental will reduce any issue than can derive from the lack of

free cash flow. These issues can vary from lawsuits to other ongoing projects. By having more

cash on hand Delta Dental will have a cash safety net in case something negative happens or if

a new venture or upgrade is suddenly needed. According to World Bank, interest rates for the

�9

average private corporations are 3.3% (WorldBank). With the current economic situation and

historically low interest rates, now would be the best time for Delta Dental to finance through

debt. One of the strongest assets of Delta Dental’s computer system upgrade is timing.

In Table 2, the financials of the loan payback and full-time employee reduction are

highlighted. In year 3, Delta Dental must pay off the loan with a balloon payment of nearly $78

million. At this time, the initial full-time employee reduction will begin. By year 4, the 400

employee reduction will be completed. A total of $38 million will be saved instantly if the

employee reduction program efficiently happens. This timing of the layoffs and balloon payment

is a strong benefit. With the cash inflow transition, the balloon payment will not affect the cash

surplus as much as if the company were to only repay the loan. After the loan is paid back Delta

Dental will have paid close to $1 million in interest to the lender.

By avoiding any future risk and creating a cash safety net while leveraging low interest

rates, Delta Dental would be taking full advantage of the current economic condition. Max debt

financing highlights many pros but also has some negative consequences.

Maxing out the loan is very risky for Delta Dental’s businesses operations. Table 2

highlights the large balloon payment that is due in year 3. By taking out such a large amount, the

risk of not being able to pay it back or being late can be severely harmful. Coupled with other

negative situations, such as an increase in insurance claims can inhibit free cash flow and cash

surplus. With a decrease in cash, Delta Dental may not be able to repay the loan without

jeopardizing its credit rating and cash on hand as a whole. If this was to coincide with another

negative event, the entire company could be in jeopardy.

�10

Line Item Year 1 Year 2 Year 3 Year 4

Cash Surplus $300,000,000 $397,850,000 $417,850,000 $371,875,000

Cash from Operations $20,000,000 $20,000,000 $20,000,000 $20,000,000

Borrowed Capital $77,850,000 -$77,850,000

FTE Reductions $11,875,000 $26,125,000

Total $397,850,000 $417,850,000 $371,875,000 $418,000,000

Table 2

Taking on an $80 million loan also leverages Delta Dental significantly. Currently Delta

Dental’s credit rating is an A- determined by A.M Best's credit rating. This score is described as

“excellent” and assigned to insurance companies that have an excellent ability to meet their

ongoing insurance obligations. Leveraging too highly puts the company at risk of a credit rating

downgrade. A.M Best rates credit by the Best Adequacy Capital Ratio (BCAR) model, which has

3 different components: business profile, operating performance, and balance sheet strength.

The BCAR model takes into account four broad risk categories: asset risk, insurance risk,

interest rate risk, and business risk to provide an opinion of an insurer’s financial strength and

ability to meet its ongoing obligations to policyholders. A.M best has forecasted the U.S

insurance market as “stable,” conveying that there are no major changes forecasted for

economic conditions and regulatory environment.

In the scenario of borrowing $80 million, the business profile of Delta Dental would not be

harmed. The economy is stable and future impairments to hinder Delta Dental by policy or

financial trends are unlikely. Similarly to business profile, operating performance will be not being

affected if this scenario is implemented. The consistent $20 million in operating cash flow

demonstrates the stability of their operating performance, taking out a loan does not jeopardize

operating cash flows.

Out of the four types of risk, taking on $80 million in debt increases two of them for Delta

Dental. One of them is asset risk, which is measured by the risk of default and illiquidity, which

would be negatively viewed from the credit rating agency if this scenario was implemented. Delta

Dental’s business risk is also significantly increased due to the highly leveraged nature of

financing through maximum debt. The competitors in the market also factor in on business risk.

By increasing leverage, they are externally conveying that something is wrong with the company.

This would be viewed negatively on their balance sheet, with in increase in debt.

In the scenario of taking an $80 million loan to finance Delta Dental computer system

upgrade, it is clear that taking on debt can prove to be a huge benefit and while taking too much

debt can be a significant risk. Financing the upgrade through 75% of debt and 25% of cash will

lead the project's NPV to ($103.5) million and the project would take over 7 years to pay back if

�11

all the funds from the operating cash flow were used every year. The outcome of borrowing $80

million could create a risky atmosphere for Delta Dental to operate in and is not recommended.

�12

Delayed Completion of Project

A 2013 Enterprise Resource Planning (ERP) Report by Panorama Consulting Solutions

stated that 59% of ERP projects exceeded their budget and 53% took longer than expected to

complete, while receiving only 50% of the anticipated benefits. This scenario will discuss the

implications of reasons project may take longer than expected to complete as well as

unanticipated additional costs. Since this project is expected to have variable costs such as

annual hardware maintenance, software licensing, software development maintenance, and

travel costs for developers, a delay in the completion of the computer system upgrade will

certainly negatively affect the future cash flows of this project. In addition to the project

dependent costs, if the project were to take longer, it could delay full-time employee layoffs. By

delaying layoffs, the company will have to continue paying the employees that could have been

terminated due to the completion of this project. One of the main objectives of the computer

system upgrade, aside from remaining competitive, is reaching the goal of running the company

efficiently. The delay of this project could result in having additional expenses as well as keeping

employees on payroll for more years than anticipated; resulting in millions of dollars of

unexpected costs.

It is said that almost an infinite number of things can go wrong when upgrading a

computer system like this, which is why it is so important for any company to be very thoughtful,

strategic, and patient with their implementation. An important question to ask is what would

require the project to take longer? There are a few common mistakes when upgrading to a new

ERP system that companies make. Some of the most common mistakes of a new

implementation are poorly defined requirements, change in management during the

implementation, choosing a vendor based solely on a sales pitch, and lack of training. The

following will provide a more in-depth explanation on the implications of each mistake and how

to take steps to mitigate the problem.

�13

Poorly Defined Requirements One of the biggest challenges that companies face when conducting an ERP

implementation is the lack of planning. Too often, companies learn about the results and

outcomes that they want as a result of the project but do not take the time to fully understand

and appreciate the complexity of such a task or if it is even possible. One critical step to take

before any implementation is to first understand the requirements and the functionalities of the

product the vendor is offering. Even more importantly, this helps the company understand

whether or not that specific vendor/product offering will even satisfy the company’s needs. The

most common problem that arises from this is the infamous and dreaded “scope creep.” A

company, for example, will hire the wrong vendor, go through the steps of working with the

vendor, implement as many of the prepackaged features and tools they thought would satisfy

their requirements only to realize that much more custom development will be needed. If this

situation arises, the company can end up spending a lot more money on developers than

originally anticipated. In a worst-case scenario, a company can pick an ERP vendor based on a

sales pitch only to find out that the salespeople were “selling” the product more than helping the

customer understand how it will work with the company’s data. An example of this was in the

2005 dispute between SAP and Waste Management, in which Waste Management claimed SAP

was not delivering on its promises and SAP was claiming that Waste Management was "failing

to timely and accurately define its business requirements," and not providing “sufficient,

knowledgeable, decision-empowered users and managers to work on the project.”

One of the steps companies can take to mitigate such a problem is to devote a team

specifically to the ERP implementation. This is sometimes referred to as an ERP Evaluation

Team. It is composed of various members from across the company who are the most

knowledgeable about the organization within the company they represent. This team will be

responsible for overseeing the project, the stakeholders, relationship with the vendor, product

knowledge, and researching whether the company implementing the system will need additional

help from outside consultants.

�14

Because Delta Dental is looking to implement the ERP system, it has the most to lose

and because of this the company should take as many precautionary measures to understand

the migration and implementation to a new ERP system.

Change In Management During Implementation It is critical that C-level executives are actively involved in the ERP implementation.

Secondly, the company should gain “buy-in” from the employees working on and using a

project. When both upper and middle management believe in the project, there is a higher

chance of involvement and dedication. As mentioned earlier, an implementation team is highly

advised but should not be the only group of people working on the project. If, for example, an

implementation team was chosen and a member of the team decided to leave the project or the

company, it would be very difficult, expensive, and time consuming for Delta Dental to find a

replacement with the same experience and project-specific knowledge.

Just as diversification is key to risk mitigation with financial investments, diversification of

knowledge can also be used to mitigate project risk. This can be done by advocating for more

than the implementation team to be involved in the project. When knowledge is spread from one

person to another, Delta Dental is at less risk of losing the only person in the company that may

know something specifically for that project.

Choosing A Vendor Based Solely On A Sales Pitch As previously stated, ERP migrations can be extremely complex and hard for many

employees to fully understand the magnitude of such a project. Because of this problem, it can

become an attractive option for employees who are in charge of a project to choose an ERP

vendor based on their reputation and sales pitches rather than a system that can truly and

accurately satisfy the company’s requirements.

There are a few ways for a company to avoid such a problem. The first and most critical

step is to spend the time to gather a full list of requirements for the new system. An in-depth

evaluation of exactly what the company needs should be included, as well as the outcomes

Delta Dental would like to see for their business processes. By doing this due diligence, the

�15

company then knows what they need and are not sold on the ideas of what is possible.

Distinguishing between benefits and features is very important. A feature is something that the

product can do and a benefit is something that the product can do for you. Sales people will

tend to focus on the features rather than the benefits and although that may help them close a

deal, it may not be the best solution for Delta Dental in the long run.

By taking the time to understand what Delta Dental will need, it will be able to go into

meetings and briefings with confidence in knowing exactly what they are looking for. It can be

easy to be enamored by features but in reality, a feature does not mean anything if it is not

applicable to Delta Dental’s needs.

Lack Of Employee Training Many problems can arise when employees are not properly trained on a new ERP

implementation. Employees can become very unhappy because they can come into a job that

they have been doing for a long time and can all of a sudden find themselves not knowing how

to use a new system. This can easily lower employee morale and can result in increased

turnover. Companies do not like high turnover because it makes it harder to attract new talent

due to a damaged reputation. The hiring process can also be costly. Employees like to do well in

their jobs because it gives them a sense of pride and accomplishment and if they are unable to

be successful in their jobs, there can be a decrease in productivity. By having a well thought out

training program, employees will feel confident in the work that they are doing and increase

productivity as a result. A lack of training can also present a risk to company data. If employees

are not properly trained on how to access the data they are responsible for, this can present

opportunities for the mishandling of sensitive information.

Lastly and most importantly, when employees are not properly trained on the computer

systems, customer service decreases. Customer service is not only for customer facing

employees, it is also a product of the behind the scenes operations. The faster that employees

can learn how to efficiently process claims on the backend and manipulate any set of data they

are responsible for will certainly increase the customer experience and reduce the chance of

losing customers. By increasing the efficiency, each employee will be able to get more work

�16

done in a given day. This will also result in cost savings because less employees will be needed

for the same amount of work.

Conclusion There are a few common mistakes mentioned in this section are only some of the ones

that companies make. It is important that Delta Dental spends the time to fully understand and

appreciate the magnitude of such a project, be informed and learn about the specific

requirements needed for the company’s specific needs, have an action plan for a possible

change in management during an implementation, choose the right vendor, and properly train

employees at the completion of the project. Taking the time to understand and properly

implement a project can result in a much smoother experience for both the employees and the

customers. This will allow the company to be on the favorable side of the statistic the next time

Panorama Consulting Solutions conducts a survey on recent ERP implementations.

�17

Delayed Layoffs

With 54% of ERP projects exceeding their expected completion dates and receiving only

50% of the anticipated benefits, the likelihood of a delay in layoffs is extremely high. Layoffs are

the temporary suspensions or permanent termination of a group of employees for business

reasons, such as when certain positions are no longer necessary or when a business slowdown

occurs. This scenario will discuss the short-term and long-term financial implications of delaying

laying off employees. An extension in layoffs for Delta Dental would be prevalent for many

reasons such as the project taking longer than expected to complete, the system not as efficient

as originally anticipated, or taking longer for employees to adjust to the new ERP system. The

original plan for Delta Dental was to reduce 125 full time employees in year 3 and 275

employees in year 4. Since financing a large upgrade can have uncertain outcomes, we

estimate the full-time employee reduction to extend into Year 6 as presented by Table 3 below.

We forecast only 100 employees being laid off in Year 3, 150 employees in year 4, 100

employees in Year 5, and 50 employees in year 6 as highlighted in Table 3. As discussed in the

“Delayed Completion of Project” section, an overtime and over-budget ERP system upgrade is

likely. These numbers convey the layoff extension of 2 years and over-budget by $28.5 million. It

is critical that the short-term and long-term implications of layoffs are addressed. The FTE

reduction is a direct outcome of the progress of the system upgrade. The result of delaying

layoffs will be an increased cost to the company.

�18

Line Item Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

Cash Surplus $300,000 $397,850 $417,850 $369,500 $403,750 $433,250

Cash from Operations $20,000 $20,000 $20,000 $20,000 $20,000 $20,000

Borrowed Capital $33,216 -$33,216

FTE Reductions $9,500 $14,250 $9,500 $4,750

Total $353,216 $417,850 $414,134 $403,750 $433,250 $458,000

Table 3, in thousands

Short-Term Effects The short-term effect of delaying layoffs is that the ROI drops immediately. By delaying

300 layoffs in year 3, Delta Dental is paying an extra $28.5 million to the employees that should

have been laid off, while only receiving the benefit of $9.5 million of the employees that have

been laid off. The $28.5 million could have been added to cash surplus in the earlier years but

cannot as a result of the delay. This is computed by adding all the employees that would not be

laid off at the planned times multiplied by their annual salaries. This becomes an unforeseen cost

that is an expensive burden to have to pay. As costs begin to rise so does risk. The delay of

layoffs also puts an increasing strain on the balloon payment that is due in year 3. With the lack

of cash inflow, the large payment due to creditors can lead to financial stress and ultimately a

drop in Delta Dental’s credit rating. Alongside paying an extra $28.5 million in payroll in year 1,

Delta Dental could also face organization behavioral issues that come along with layoffs.

Delta Dental of California currently has around 3,200 employees. With a reduction of 400

employees, the employee size would drop by 12.5%. The size of this layoff within a short

amount of time could disrupt the work atmosphere and create a fear that remaining employee’s

jobs could be in jeopardy. Layoffs can be perceived as a violation of the psychological contract

between an organization and its employees, resulting in decreased trust and greater stress in

the workplace. The negative effects of the survivors of the layoffs could be decreased

commitment and productivity. Since employee morale could be decreased, workplace

productivity is bound to suffer, and the psychological effect of the layoff will remain, which could

be detrimental to Delta Dental’s organizational performance.

Long-Term Effects In the long-run, organization equilibrium will eventually return. This process ranges in time

depending on the atmosphere of the offices. Ultimately, ROI will have dropped and millions of

more dollars will have been spent to compensate for the delay. Something for the C-level

executive to think about will be how the company’s employees will react when the new

upgrades are brought into discussion. New upgrades or a change in process will strike the

thought of layoffs. This employee fear in the long-run is not good for the culture of Delta Dental.

�19

Conclusion In a utopian world, Delta Dental would not be faced with the issue of laying off

employees, but when attempting to run a large corporation as efficiently as possible, layoffs will

be necessary. This scenario conveys the layoff extension of 2 years and over-budget by $28.5

million as a result. Layoffs create short-term and long-term consequences that can hinder the

organizational performance of Delta Dental, but are ultimately necessary. Delaying layoffs is not

an ideal situation, but for many reasons can be mandatory. Taking the time to understand the

implications of delaying layoffs can save Delta Dental from hindering the performance of its

organization.

�20

Re-Upgrade of Project

We all have witnessed how technology is evolving every day, and how companies try to

keep up with this evolving technology in order to stay competitive. The technological revolution

during the past few years has forced many companies to make significant investments in

computer upgrades and IT infrastructure, which has led to accelerated productivity and growth

within companies. In order for companies to make these advancements, it is imperative that

management stays aware of the newest technology. Management should connect frequently

with their internal IT staff, outside experts, and customers to continually evaluate technology-

related risks which can be changing rapidly (Jeff Drew). Since rapid change in technology has

become the biggest source of pressure on companies, there is a possibility that even after

implementing a new computer system, Delta Dental will need to re-upgrade its computer system

before the end of the useful life of the original implementation.

Another reason that could result in the re-upgrade of Delta Dental’s computer system is

the need for the company to stay competitive and increase its share of the market. Delta Dental

is committed to providing exceptional service to all of its customers and this is one of the main

reasons that it has a huge market share. According to a survey conducted by Long Group, Delta

Dental is the market leader in Dental insurance and has the most extensive network and three

out of four dentists in the USA work within Delta Dental’s network. Delta Dental provides

exceptional customer service by providing quick responses to customers and processing claims

quickly and accurately. Delta Dental is also brokers recommended brand since it offers rate

stability, excellent customer service, and processes the claims quickly (The Long Group).

Through Northeast Delta Dental’s Guarantee of Service Excellence, customers are

guaranteed an unsurpassed level of customer satisfaction. This is a major factor in Delta Dental’s

success. Customers are offered refunds if their services do not meet high standards that are

expressed in their guarantee (Delta Dental). Delta Dental was able to use this service guarantee

strategy to beat most competitors and create a very high entry barrier. After implementing this

program, Delta Dental’s market share has increased from 20 percent in all three states to 43

percent in Maine, 53 percent in Vermont, and 50 percent in New Hampshire (Service quality

�21

institute). If any of the competitors come up with a computer system, software, or an application

which possesses the potential to change the structure of the share and revenue in the market,

Delta Dental management will need to initiate the appropriate response which might require the

re-upgrade of their computer system.

With rapidly evolving technology, most companies have increased their annual budgets

for computer upgrades. Based on computerworld’s annual forecast survey in 2015, 43% of

survey respondents stated they have increased their computer upgrade and IT budgets for their

companies. This increase in budgets includes customer-facing technologies, Mobile tools, and

applications.Mobile spending is on the top five budget items for 2015 which has been identified

by the responders in the survey. There are a lot of opportunities on the infrastructure and custom

application development which could be an area that Delta Dental might focus on in regards to

its mobile application during the re-upgrade of its computer system. There are some general

mobile applications for dental and oral health that are available for dentists and patients to use.

If any competitors start implementing and using these applications, it could be a competitive risk

to Delta Dental.

Because of all these reasons, it is possible that Delta Dental might need to re-upgrade its

computer system before the end of its useful life. The re-upgrade is estimated to cost 30% of

the initial computer upgrade. Hypothetically, if Delta Dental had to re-upgrade their computer

system or implement any new software into its newly upgraded system in year six, the result will

be an additional $31 million in expenses. In year six, Delta Dental will still be paying $6.8 million

annually for the main upgrade of its computer systems. This includes $3 million for software

licenses, $3.5 million for software development maintenance, and $300,000 for hardware

maintenance. Therefore, spending another $31 million for the re-upgrade might put the project

in jeopardy. If this scenario had to happen and considering the company will have $438 million in

cash, Delta Dental can use the optimal financing ratio to finance it.

�22

Possible Outcomes

The following scenarios focus on a few key possible outcomes as a result of the new

ERP implementation. One of the more prominent goals of the computer system upgrade is the

reduction of full-time employees. Within the first four years of the project, Delta Dental is

expecting to reduce its full-time employee count by 400. This would result in over $38 million in

annual savings, assuming each employee is worth the given $95,000. Since this upgrade is

expected to increase revenues for Delta Dental, the company can use the additional funds to

increase its marketing budget, expand its presence in the mobile space by including additional

features for an increased customer experience, invest in research and risk assessment for

preventative treatment and claims minimization, lower insurance premiums for customers, and

possibly invest some of the company’s extra cash in low risk short-term securities.

Invest In Marketing And Promote The Brand Between 2013 and 2014, the company grew its customer base by approximately 8%,

leading to an additional 5 million enrollees. The upgrade of the computer system will allow the

company to increase its marketing budget to continue to expand its customer base. With all of

these new customers and features that will come with a new computer system, it is important to

understand what types of features the company can market, how to manage the inflow of

phone calls, and manage the increased amount of traffic to Delta Dental’s website with their

mobile devices. In order to keep up with the fast pace of technology and competition, it is

advisable for the company to be competitive in reaching its customers via mobile platforms.

Every day, more and more people are using smartphones and mobile applications. According to

statistics cited in an article on Yahoo!, 57% of Americans use their smartphones every day. A

recent study by eMarketer revealed mobile will overtake desktop for US search ad dollars in

2015, rising from $8.72 billion to $12.85 billion (Neale-May). There will be 156 million mobile

phone search users in the US, representing 49% of the population. Mobile apps are likely to

play a more prominent role in the online marketing experience as more consumers become

adapted to using smartphones as their primary internet browsing devices.

�23

Delta Dental can use mobile ads to promote its brand, as mobile ads have many

advantages. First, they require a lower budget than TV and print ads. Second, mobile ads have

a variety of performance metrics. This feature can enable Delta Dental to measure the ROI since

all the required metrics to measure the performance of the ads are included in the mobile

platform. Third, mobile ads allow for testing. Delta Dental can run multiple versions of the same

ad to see which version is more effective. Because of all of the advantages of mobile ads, we

recommend that Delta Dental capitalize on the opportunities of mobile advertising. As Greg

Stuart, the CEO of Mobile Marketing Association has emphasized, companies need to care

more about mobile marketing because mobile is arguably the closest a company can get to the

consumer because it is very personal and persuasive.

Mobile Platform As previously mentioned, mobile spending is one of the top five budget items in 2015 for

many companies. This presents an opportunity for Delta Dental to increase its presence in the

mobile space. Delta Dental currently has an application on the Google Play Store and one on the

Apple App Store. In the mobile applications, customers can view their mobile ID cards, view

coverage and claims information, use the Dental Care Cost Estimator, use the toothbrush timer,

and search for local dentists (Delta Dental). While searching for local dentists, customers can call

to schedule an appointment via phone call. Through our personal experiences with mobile

applications, we would advise Delta Dental to integrate the following features into its mobile

application because these advancements would increase the user experience.

• The Delta Dental mobile app can be used by the patient to request appointments,

contact the office, or refer the dentist to a friend without having to make a phone call.

There is a much higher chance that a customer will in fact make the appointment if he or

she does not have to call. Often times, people are not in an environment that allows them

to speak out loud or on the phone, and for this simple reason, many people will not

schedule the appointment. Allowing the customer to schedule the appointment in the

application presents another opportunity. After a successfully scheduled appointment,

�24

the application can present the customer with a clickable link to add the appointment to

their mobile calendars.

• When emergencies happen during non-office hours, patients require accessibility to

emergency dental support, and most of the time a dentist needs more information than

what a voicemail message can convey. To solve this problem, Delta Dental can use an

app which can facilitate an easy communication between the patient and the dentist.

Patients can use the app to directly report emergencies to their dentists and receive

emergency instructions.

• Dentist can use the Delta Dental app to communicate complex information about

patient’s health by using images which can be uploaded to the app.

• The Delta Dental Mobile App can also be used to archive patient’s history and

procedures at the point of completion so that patients have records of what procedures

have been performed.

Investing In Research And Risk Assessment Another way for Delta Dental to increase its revenue is to reduce the number of submitted

claims by early detection of common risk factors and diseases in oral health. Delta Dental

management looks at dentistry as an evolving industry beyond the drill and fill approach when it

comes to dental hygiene. Currently, Delta Dental is using a risk management model that can be

used as a tool to teach individuals preventive techniques. Delta Dental started the risk

management tool in 2013, and in 2014 it began to collaborate with the University Of San

Francisco School Of Dentistry by implementing a survey to see if dentists are recommending this

tool to their patients. Implementing this computer system upgrade will result in additional

revenue which could allow Delta Dental to start investing more in this area. By expanding the risk

assessment program, Delta Dental will not only improve its enrollee’s oral health, but also

decrease the number of claims. Currently, Delta Dental is offering MyDentalScore.com, which

was developed to help patients get a free Dental Score for their oral health and also estimate the

risk for oral cancer. Patients can then discuss their estimated Dental Scores with their Dentists.

Delta Dental can integrate the more advanced version of this tool into its mobile app which could

�25

send patient’s scores instantly to their dentists to see if any urgent care is required. Investing in

this area and making an easy to use mobile application will dramatically improve patient’s oral

health and save on healthcare costs by reducing the number of claims submitted to Delta

Dental.

Lower Insurance Premiums For Customers Based on an article published in The New England Journal of Medicine, about 31% of

spending in healthcare is administration costs. It is costly for healthcare providers to interact with

insurers, pay bills, and check for types of eligibility and coverage. If this new system can

automate some of these administrative functions, Delta Dental can save on administrative costs

and as a result, decrease insurance premiums for its customers. Delta Dental can automate

generating bills online automatically and sending them to the patient’s mobile App. After patients

receive their bill in their App, they can pay via a credit card that is attached to their app’s

account. This simple upgrade can eliminate many of administrative duties and save costs.

Decreasing insurance premiums will make Delta Dental insurance more competitive and as a

result, Delta Dental can attract more enrollees and expand its market share.

Investing In Money Market Securities The main purpose of short-term investments for corporations is to maintain a pool of

liquid assets. Investing in money market securities protects the corporation against unexpected

demand for cash because short-term investments can be converted to cash quickly. After

implementing this project, Delta Dental can use some revenue and invest in short-term

investments like money market accounts or Treasury bills. Investing money in short-term

securities is conservative because not only is there is a return on investment, but if there was an

economic downturn and cash was needed, the money would not be tied in a long-term

investment. The company can also have this source of capital for future growth opportunities.

Growth opportunities have always been considered one of the dominant reasons for a

company’s capital structure. The liquidity of a company (working capital) can influence the

growth opportunity of Delta Dental. The working capital of the company should be kept optimal

�26

for the operation of the company, and should be weighted to the growth of the company

(Bundala). The growth opportunity of the company is the desired outcome of the company. This

is why Delta Dental can invest some of this money in money market securities to have quick

access to capital when needed.

�27

Recommendation

Our research has taught us many things about ERP implementations and these include

some of the possible negative side effects of undergoing such a project, how a project can cost

more than expected, take longer than anticipated, some of the benefits companies can expect

to see from a finished product, and some forward thinking ideas for the company to consider

after receiving the benefits of an ERP upgrade.

Applying this knowledge specifically to the Delta Dental company, our ultimate

recommendation is for the company to finance this project with a combination of cash and debt.

We came up with the recommendation of 32% debt and 68% cash (as seen in Table 4).

Assuming the project will cost the expected $104 million in the first 3 years, Delta Dental will

borrow over $33 million for the first three years and pay the debt back as a balloon payment in

year 3 (per the loan terms).

Our research has also shown us that employee layoffs rarely go as planned and are more

often than not delayed. Taking this into consideration, we are estimating that Delta Dental will

complete 80% of the anticipated layoffs, resulting in a $9.5 million savings in year 3 and $21

million in year 4. By taking out a smaller loan proportion compared to the company’s leverage

ratio, this allows Delta Dental to make up some of the costs of borrowing money with full-time

employee layoffs. We advise the company to have a strict layoff policy if the ERP implementation

is as successful as desired.

Overall, we recommend the company to not borrow too little or too much cash and to

time the full-time employee layoffs with the balloon payment of the loan as a way of having a

minimal impact to its capital structure and financial health. By maintaining the company’s

financial health, this will also have a minimal impact, if any, to its credit rating.

Aside from strategically financing this project, the company needs to consider the other

common problems associated with ERP implementations. As previously mentioned, most ERP

upgrades do not present the desired outcomes executives wish to see. Because of this, many

companies will have a dedicated ERP Evaluation Team. This team is in charge of overseeing the

project, the project’s stakeholders, vendor relationships, and deciding whether or not outside

�28

and more specialized help is needed. Having an evaluation team will allow Delta Dental to feel

confident that a group of educated people who have expertise in these types of implementations

can successfully navigate through any of the challenges a project like this may present.

After the project is successfully completed, Delta Dental may see additional revenues and

a leaner business as a result. We recommend for the company to have an action plan for what

do with the additional funds to continually grow the business. Some options can include invest

in marketing, add more features to the mobile application to increase user experience, invest in

research and patient risk assessment to minimize claims, and invest in short-term securities.

Lastly, if Delta Dental use our recommendations as guidelines, we believe the company will have

a successful ERP upgrade with minimal impact to both the company’s operations and financial

well-being, as well as giving it the option to grow the business in years to come that will have a

benefit to the company and its customers.

�29

�30

Tabl

e 4,

in th

ousa

nds

Ben

efit

Year

1Ye

ar 2

Year

3Ye

ar 4

Year

5Ye

ar 6

Year

7Ye

ar 8

Year

9Ye

ar 1

0

Cas

h Su

rplu

s$3

00,0

00$3

53,2

16$3

73,2

16$3

69,5

00$4

10,4

00$4

60,8

00$5

11,2

00$5

61,6

00$6

12,0

00$6

62,4

00

Cas

h fro

m O

pera

tions

$20,

000

$20,

000

$20,

000

$20,

000

$20,

000

$20,

000

$20,

000

$20,

000

$20,

000

$20,

000

Borro

wed

Cap

ital

$33,

216

-$33

,216

FTE

Red

uctio

ns$9

,500

$20,

900

$30,

400

$30,

400

$30,

400

$30,

400

$30,

400

$30,

400

Tota

l$3

53,2

16$3

73,2

16$3

69,5

00$4

10,4

00$4

60,8

00$5

11,2

00$5

61,6

00$6

12,0

00$6

62,4

00$7

12,8

00

Cos

t

Har

dwar

e-$

10,0

00

Har

dwar

e M

aint

enan

ce-$

300

-$30

0-$

300

-$30

0-$

300

-$30

0-$

300

-$30

0

Softw

are

Lice

nse

-$10

,000

-$3,

000

-$3,

000

-$3,

000

-$3,

000

-$3,

000

-$3,

000

-$3,

000

-$3,

000

Softw

are

Dev

elop

men

t-$

15,0

00-$

55,0

00

Softw

are

Dev

elop

men

t Mai

nt.

-$3,

500

-$3,

500

-$3,

500

-$3,

500

-$3,

500

-$3,

500

-$3,

500

-$3,

500

Trav

el C

osts

for D

evel

oper

s-$

500

-$1,

500

Trai

ning

Cos

ts-$

5,00

0

Tota

l Cos

t-$

35,5

00-$

61,5

00-$

6,80

0-$

6,80

0-$

6,80

0-$

6,80

0-$

6,80

0-$

6,80

0-$

6,80

0-$

6,80

0

Tota

l Cos

t with

Inte

rest

-$35

,638

-$61

,638

$2,5

62$1

4,10

0-$

6,80

0-$

6,80

0-$

6,80

0-$

6,80

0-$

6,80

0-$

6,80

0

Inte

rest

Exp

ense

-$13

8-$

138

-$13

8

Free

Cas

h Fl

ow$3

17,5

78$3

11,5

78$3

62,5

62$4

03,6

00$4

54,0

00$5

04,4

00$5

54,8

00$6

05,2

00$6

55,6

00$7

06,0

00

Tabl

e 4,

in th

ousa

nds

Ben

efit

Year

1Ye

ar 2

Year

3Ye

ar 4

Year

5Ye

ar 6

Year

7Ye

ar 8

Year

9Ye

ar 1

0

Cas

h Su

rplu

s$3

00,0

00$3

53,2

16$3

73,2

16$3

69,5

00$4

10,4

00$4

60,8

00$5

11,2

00$5

61,6

00$6

12,0

00$6

62,4

00

Cas

h fro

m O

pera

tions

$20,

000

$20,

000

$20,

000

$20,

000

$20,

000

$20,

000

$20,

000

$20,

000

$20,

000

$20,

000

Borro

wed

Cap

ital

$33,

216

-$33

,216

FTE

Red

uctio

ns$9

,500

$20,

900

$30,

400

$30,

400

$30,

400

$30,

400

$30,

400

$30,

400

Tota

l$3

53,2

16$3

73,2

16$3

69,5

00$4

10,4

00$4

60,8

00$5

11,2

00$5

61,6

00$6

12,0

00$6

62,4

00$7

12,8

00

Cos

t

Har

dwar

e-$

10,0

00

Har

dwar

e M

aint

enan

ce-$

300

-$30

0-$

300

-$30

0-$

300

-$30

0-$

300

-$30

0

Softw

are

Lice

nse

-$10

,000

-$3,

000

-$3,

000

-$3,

000

-$3,

000

-$3,

000

-$3,

000

-$3,

000

-$3,

000

Softw

are

Dev

elop

men

t-$

15,0

00-$

55,0

00

Softw

are

Dev

elop

men

t Mai

nt.

-$3,

500

-$3,

500

-$3,

500

-$3,

500

-$3,

500

-$3,

500

-$3,

500

-$3,

500

Trav

el C

osts

for D

evel

oper

s-$

500

-$1,

500

Trai

ning

Cos

ts-$

5,00

0

Tota

l Cos

t-$

35,5

00-$

61,5

00-$

6,80

0-$

6,80

0-$

6,80

0-$

6,80

0-$

6,80

0-$

6,80

0-$

6,80

0-$

6,80

0

Tota

l Cos

t with

Inte

rest

-$35

,638

-$61

,638

$2,5

62$1

4,10

0-$

6,80

0-$

6,80

0-$

6,80

0-$

6,80

0-$

6,80

0-$

6,80

0

Inte

rest

Exp

ense

-$13

8-$

138

-$13

8

Free

Cas

h Fl

ow$3

17,5

78$3

11,5

78$3

62,5

62$4

03,6

00$4

54,0

00$5

04,4

00$5

54,8

00$6

05,2

00$6

55,6

00$7

06,0

00

Sources

"3 Common ERP Mistakes and How to Avoid Them - Avalara." Avalara. Avalara, 2 Oct. 2015. Web. 24 Oct. 2015.

"America's Oral Health." Web. 17 Nov. 2015.

"Best's Market Segment Outlook." AM Best RSS News. AM Best, n.d. Web. 19 Nov. 2015.

Bundala, Ntogwa. “Does Capital Structure Influences Working Capital Intensity and Growth

Opportunity of a Firm” N.p., Apr. 2014. Web. 20 Oct. 2015.

Collett, Stacy. "Forecast 2015: IT Spending on an Upswing." Computerworld. 3 Nov. 2014.

Web.17 Nov. 2015.

"Credit Rating Definition." Investopedia. N.p., n.d. Web. 18 Sept. 2015.

"Debt Financing." Inc.com. Inc, 29 Nov. 2015. Web. 19 Nov. 2015.

"Delta Dental 2014 Annual Report." Delta Dental Annual Report 2014. Delta Dental, n.d. Web.

19 Sept. 2015.

Dolatwoski, Tom. Dental in Depth. N.p.: n.p., n.d. Apr. 2009. Web.

Drew, Jeff. "7 Ways CFOs Can Keep up with Rapid Changes in Technology." N.p., 1 May 2015.

Web.

"Economic Outlook 2015 | US Economic Forecast 2015, Good If You're Rich." Stock Market

Advice Investment Newsletters Profit Confidential. Profit Confidential, 23 Oct. 2015. Web.

19 Nov. 2015.

Hayes, Adam. "Top 10 Insurance Companies By The Metrics." Investopedia. N.p., 13 Nov.

2014. Web. 27 Sept. 2015.

Kramarz, Theresa. "The Five Most Common ERP Implementation Mistakes & How to Avoid

Them." The Five Most Common ERP Implementation Mistakes & How to Avoid Them.

N.p., n.d. Web. 12 Oct. 2015.

"Lending Interest Rates." World Bank Org. World Bank Org, 12 Aug. 2015. Web. 11 Oct. 2015.

"Making a World of Difference for 25 Years...Northeast Delta Dental." 11 Mar. 2015. Web. 17

Nov. 2015.

Neale-May, Donovan. "Facts & Statistics." Facts & Statistics. Web. 17 Nov. 2015

�31

Schiff, Jennifer Lonoff. "13 Common ERP Mistakes and How to Avoid Making Them." CIO. N.p.,

27 Mar. 2012. Web. 22 Oct. 2015.

Stillman, Jessica. "Debt Financing." Inc.com. Inc, 29 Nov. 2015. Web. 19 Nov. 2015.

Wailgum, Thomas. "10 Famous ERP Disasters, Dustups and Disappointments." CIO. N.p., 24

Mar. 2009. Web. 18 Oct. 2015.

"Why Should Marketers Care About Mobile Marketing?" Forbes. Forbes Magazine, 25 Apr.

2013. Web. 17 Nov. 2015

Woolhandler, Steffie. "Administrative Costs Consume 31 Percent of US Health Spending, Most

of It Unnecessary." Administrative Costs Consume 31 Percent of US Health Spending,

Most of It Unnecessary. N.p., n.d. Web. 18 Nov. 2015.

�32

�33

Appendix

�34

Ben

efit

Year

1Ye

ar 2

Year

3Ye

ar 4

Year

5Ye

ar 6

Year

7Ye

ar 8

Year

9Ye

ar 1

0

Cas

h Su

rplu

s$3

00,0

00$3

20,0

00$3

40,0

00$3

71,8

75$4

18,0

00$4

76,0

00$5

34,0

00$5

92,0

00$6

50,0

00$7

08,0

00

Cas

h fro

m O

pera

tions

$20,

000

$20,

000

$20,

000

$20,

000

$20,

000

$20,

000

$20,

000

$20,

000

$20,

000

$20,

000

Borro

wed

Cap

ital

$0$0

$0$0

$0$0

$0$0

$0$0

FTE

Red

uctio

ns$0

$0$1

1,87

5$2

6,12

5$3

8,00

0$3

8,00

0$3

8,00

0$3

8,00

0$3

8,00

0$3

8,00

0

Tota

l$3

20,0

00$3

40,0

00$3

71,8

75$4

18,0

00$4

76,0

00$5

34,0

00$5

92,0

00$6

50,0

00$7

08,0

00$7

66,0

00

Cos

t

Har

dwar

e-$

10,0

00

Har

dwar

e M

aint

enan

ce-$

300

-$30

0-$

300

-$30

0-$

300

-$30

0-$

300

-$30

0

Softw

are

Lice

nse

-$10

,000

-$3,

000

-$3,

000

-$3,

000

-$3,

000

-$3,

000

-$3,

000

-$3,

000

-$3,

000

Softw

are

Dev

elop

men

t-$

15,0

00-$

55,0

00

Softw

are

Dev

elop

men

t Mai

nt.

-$3,

500

-$3,

500

-$3,

500

-$3,

500

-$3,

500

-$3,

500

-$3,

500

-$3,

500

Trav

el C

osts

for D

evel

oper

s-$

500

-$1,

500

Trai

ning

Cos

ts-$

5,00

0

Tota

l Cos

t-$

35,5

00-$

61,5

00-$

6,80

0-$

6,80

0-$

6,80

0-$

6,80

0-$

6,80

0-$

6,80

0-$

6,80

0-$

6,80

0

Free

Cas

h Fl

ow$2

84,5

00$2

78,5

00$3

65,0

75$4

11,2

00$4

69,2

00$5

27,2

00$5

85,2

00$6

43,2

00$7

01,2

00$7

59,2

00

100%

Cas

h C

alcu

latio

n, in

thou

sand

s

�35

Max

imum

Deb

t, in

thou

sand

s

Ben

efit

Year

1Ye

ar 2

Year

3Ye

ar 4

Year

5Ye

ar 6

Year

7Ye

ar 8

Year

9Ye

ar 1

0

Cas

h Su

rplu

s$3

00,0

00$3

97,8

50$4

17,8

50$3

71,8

75$4

18,0

00$4

76,0

00$5

34,0

00$5

92,0

00$6

50,0

00$7

08,0

00

Cas

h fro

m O

pera

tions

$20,

000

$20,

000

$20,

000

$20,

000

$20,

000

$20,

000

$20,

000

$20,

000

$20,

000

$20,

000

Borro

wed

Cap

ital

$77,

850

-$77

,850

FTE

Red

uctio

ns$1

1,87

5$2

6,12

5$3

8,00

0$3

8,00

0$3

8,00

0$3

8,00

0$3

8,00

0$3

8,00

0

Tota

l$3

97,8

50$4

17,8

50$3

71,8

75$4

18,0

00$4

76,0

00$5

34,0

00$5

92,0

00$6

50,0

00$7

08,0

00$7

66,0

00

Cos

t

Har

dwar

e-$

10,0

00

Har

dwar

e M

aint

enan

ce-$

300

-$30

0-$

300

-$30

0-$

300

-$30

0-$

300

-$30

0

Softw

are

Lice

nse

-$10

,000

-$3,

000

-$3,

000

-$3,

000

-$3,

000

-$3,

000

-$3,

000

-$3,

000

-$3,

000

Softw

are

Dev

elop

men

t-$

15,0

00-$

55,0

00

Softw

are

Dev

elop

men

t Mai

nt.

-$3,

500

-$3,

500

-$3,

500

-$3,

500

-$3,

500

-$3,

500

-$3,

500

-$3,

500

Trav

el C

osts

for D

evel

oper

s-$

500

-$1,

500

Trai

ning

Cos

ts-$

5,00

0

Tota

l Cos

t-$

35,5

00-$

61,5

00-$

6,80

0-$

6,80

0-$

6,80

0-$

6,80

0-$

6,80

0-$

6,80

0-$

6,80

0-$

6,80

0

Free

Cas

h Fl

ow$3

62,3

50$3

56,3

50$3

65,0

75$4

11,2

00$4

69,2

00$5

27,2

00$5

85,2

00$6

43,2

00$7

01,2

00$7

59,2

00