OUTSOURCING INSIGHTS

Transcription

1 OUTSOURCING INSIGHTS WHITE PAPER Challenges and Payoffs in using Shared Service Centers for HRO (Human Resources Outsourcing) For more information, please contact Ramesh Krish at

2 Executive Summary There has been an increased focus on outsourcing over the last few years. As companies try to show improved bottom lines with little top line growth, cost cutting while optimizing operations by outsourcing functions has become very prevalent. However the complexity around outsourcing decisions is increasing, with the advent of new service providers, financial terms and operating models. In addition, the probability of failure due to insufficient upfront analysis is increasing. The Adya Team helps organizations find answers to questions about outsourcing that match their unique requirements: Is outsourcing appropriate for me? What functions, processes or departments do I outsource and what potential benefits (cost effectiveness, improved quality, increased flexibility, risk mitigation) can I expect? Who are my ideal outsourcing partners? How do I best structure negotiations and broker the most favorable terms? How do I implement the chosen outsourced model and guarantee a smooth transition?

3 Outsourcing Advisory The growth in business process outsourcing in various industries has been significant in recent years. However, there is a high rate of failure, due mainly to poorly analyzed relationships between the concerned parties. Outsourcing can be a major weapon in the battle to improve efficiencies and reduce costs its benefits are real and achievable. However, all organizations must examine outsourcing thoroughly and be aware of the challenges and pitfalls it presents. Problems can arise throughout the outsourcing process. The Adya Team advises buyers and providers of outsourcing services on the planning, design and management of successful outsourcing arrangements. The essential aspects of outsourcing are: t Performance based services the focus is on the output/outcome of the services with minimal prescription regarding the basis of delivery or assets to be employed. Performance measurements based on key performance indicators (KPIs) are a primary tool in assessing suppliers fulfilment of their responsibilities. Such KPIs must be meaningful, measurable, and readily available and within the supplier s control. t Size and duration of contract outsourcing contracts are ongoing; typically covering an initial period of three to five years with options for further extensions. t Transfer of assets and resources the transfer of people, equipment or facilities used to provide services from the customer to the supplier is common and presents many issues regarding valuation, intellectual property and personnel transitioning. t Breadth of responsibilities the supplier accepts responsibilities and risk for the activities associated with the provision of services. However the purchaser is always ultimately accountable for ensure the specifications are appropriate and the outcomes are suitable for the business needs. t Styles of relationship outsourcing agreements typically assume a partnering style of relationship within expectations set by the service level agreement. t New skills under outsourcing, the organization s focus shifts from managing inputs to managing outputs. It becomes a contract manager rather than a resource manager. Skills in the areas of negotiation, contract law and administration, performance measurement, finance and audits all become critical to success. t Flexibility as the organisation s needs change so must the arrangement. Contracts must be adaptable to changing circumstances and requirements refreshed on a continual basis.

4 Some potential advantages and disadvantages are listed in the table below. Potential Advantages Potential Disadvantages Cost savings through economies of scale. Cash flow relief by supplier buying your assets and hiring your staff. Predictable costs-either through fixed or usage based price agreements. Costs are known as an invoice is paid for all costs, avoiding the traps of inappropriate or non-existent internal cost allocation. Rebates or liquidating damages for nonperformance of agreed service levels. Catalyst for organizational change behavior, restructuring, rationalization, etc. Shifting of expenditure from the capital to the operating budget, which is usually less rigid. Remove inflexible work practices mandated by the public sector and unions. Access to leading edge, specialized skills. Shorter lead times to take advantage of new technology and ideas. Economies of scope (the variety of services able to be produced). Access to technology without capital investment. Predetermined service levels parties are forced to define and agree as to what is expected. With pay for performance, suppliers are more responsive to performance complaints if it will affect profitability. Centralized support often there will be one point of call at the supplier. Enables technology catching up or leapfrogging if converted to the supplier s state-ofthe-art infrastructure. Efficiency motivation by converting internal cost center to a supplier profit center, however the supplier tends to receive the cost savings. More frugal use of IT resources when paying real money, users change their behavior. Financial Flexibility Unexpected costs for those that are not explicitly in the scope of the agreement. Higher per unit of service costs if usage projections are above or below those agreed. Cost of outsourcing itself planning, investigating, tendering, implementation and ongoing management. Once off personnel related costs outplacement, remuneration payouts, and union negotiation. Cost of additional skills and resources required managing the relationship. Potential litigation costs for contract breaches. Leakage of confidential information resulting in competitive disadvantage, adverse media, or legal liability. High exit barriers and irreversibility reduced costeffective options if arrangement fails. Loss of control over decision-making, resource management, and daily operations. Supplier inflexibility to economically meet changing requirements on a timely basis. Exposure to suppliers financial strength and profit motive. Supply restrictions locked into a single supply source. Possibility of being tied to obsolete technology for supplier to achieve economies of scale. Possibility of being forced to upgrade for supplier to comply with maintenance provision or to gain operating efficiencies. Efficiency and Effectiveness Exposure to suppliers lack of commitment they may focus their attention on larger or more strategic customers. Suppliers are not motivated to improve customer efficiency, as it will lower their revenue unless they receive a higher margin. Supplier will only meet service levels, not exceed them, without incentives. Loss of in-house expertise if it is allowed to happen. Homogeneous orientated services pay more if a tailored service is desired. Service changes must be negotiated suppliers have responsibilities to other customers and must make a profit.

5 In order to get started, a good first step could be to identify the goals, how outsourcing will fit with this business strategy, what impact it will have on the employees, how much do current activities cost, and what benefits can be expected from an outsourcing arrangement. A thorough approach facilitates the due diligence process to identify the outsourcing objectives and expectations, and to find the right partner for success. Strategy Development We take you through the process to determine the outsourcing strategy that best meets your organizational objectives - Internal, Multi-Sourcing or Selective, Partial, or Full outsourcing. We review industry trends and comparisons. Management Structure Define the management and/or governance of the outsourcing agreement. Identify the internal and external controls that are expected. Identify the organizational changes to support what is the best structure for interaction with providers and internal customers. Business Case Review strategic vision, business objectives and performance expectations. Develop future state vision of the organization and how the value of the outsourced functions will be increased. Evaluation of Risk Understanding the risk involved with outsourcing improves the success rate. Identifying risks related to service level expectations will reduce risk exposure over the life of the contract. Evaluation of Vendors We develop the best method to select an outsourcing provider. Vendors can be internal or external to the organization. Vendors should have the ability to define relationship management, how they measure success. Outsourcing in Human Resources The wage structure for many organizations is not in synch with the best in class. Large organizations have the opportunity to reorganize their corporate support services to provide better support to end customers (employees) while significantly reducing the cost of providing these services. Many best of class organizations have chosen to use a shared services framework to restructure the delivery of these services. There are many forms of shared services, however a common theme across all of them is a reduction in inefficient and unnecessary diversity of systems, processes, locations, and organizations delivering the same service. For example, a payroll application can be outsourced to a shared services center by clearly identifying the activities, mapping the roles/ profiles and developing appropriate risk mitigating strategies to deal with process breakdowns. The following example highlights the importance of using detailed mapping and assessment tools to identify the right outsourcing opportunity for shared services. Initial due diligence activities need to focus on what activities can be transferred and what cannot. A detailed risk management analysis needs to be followed by a change management and a financial benefits realization model to determine the potential transition issues as well as the financial benefits that could be realized from such an outsourcing initiative. The schematics that follow illustrate the importance on identifying the transferable and non-transferable activities:

6 Payroll Planning and Supervision Process Monthly Salary and Special Payroll Process Weekly Salary Payroll Process Hourly Payroll Hold training sessions for staff Batch and input adjustments to monthly salary Review daily change register Batch and input adjustments to weekly salary Review daily change register Receive completed timesheets Receive and distribute checks and remittance advices Develop and implement policies and procedures Process involuntary garnishments Submit ACH controls to bank Process involuntary garnishments Submit ACH controls to bank Batch and input hours Receive and distribute preprinted time reports Verify adjustments to monthly salary Provide control totals to General Accounting for reconciliation of data into FMS Verify adjustments to weekly salary Provide control totals to General Accounting for reconciliation of data into FMS Verify activity for processing and input manual time transactions Prepare payroll exception reporting forms for departments Generate exception reports and clear exceptions Generate exception reports and clear exceptions Process involuntary garnishments Process and distribute manual checks Approve payroll run for execution Approve payroll run for execution Verify adjustments to weekly hourly pay Review daily change register Review and file payroll audit report Review and file payroll audit report Generate exception reports and clear exceptions Submit ACH controls to bank Receive and distribute checks and remittance advices Receive and distribute checks and remittance advices Approve payroll run for execution Provide control totals to General Accounting for reconciliation of data into FMS Process and distribute manual checks Process and distribute manual checks Review and file payroll audit report Non-Transferable Transferable Determining the right service levels is key to the successful implementation of an outsourcing initiative. The service levels need to illustrate the performance requirement as well as the KPIs. ID Service Description Vendor Requirement Key Performance Indicator Ability to input, verify, and batch adjustments to monthly salary Ability to process involuntary garnishments, one-time deductions, refunds, misc. tax adjustments Ability to submit daily change register and ACH control totals SL.1 Process Monthly Salary & Special Payrolls to Payroll director Provided with each pay cycle Complete monthly salary payroll in accordance with the Client's payroll calendar 6th business day prior to month-end Prepare payroll audit report for Client Payroll director Provided with each pay cycle Capacity to process and distribute 1600 monthly salary checks and 4100 monthly advices Availability and capacity to field customer service questions SL.2 Process Weekly Salary Payroll Ability to input, verify, and batch adjustments to weekly salary Ability to process involuntary garnishments, one-time deductions, refunds, misc. tax adjustments Ability to submit daily change register and ACH control totals to Payroll director Provided with each pay cycle Complete monthly salary payroll in accordance with the Client Payroll calendar Tuesday of each week Prepare payroll audit report for Client Payroll director Provided with each pay cycle Capacity to process and distribute 650 weekly salary checks Availability and capacity to field customer service and 350 weekly salary advices questions

7 Payroll Payroll Processing (Data Center) Tax Reporting Customer Service Other Payroll Processing Execute payroll batch Reconcile, review, and analyze tax withholding data Prepare corrected tax documents when necessary Field questions and coordinate issue resolution with appropriate department Process check voids, stop payments, and re-issue stopped checks Print advices from Mainframe Transmit tax withholding data to Ceridian Maintain compliance with payroll tax laws Complete wage and salary verifications for outside agencies Process City Wage Tax refund Fold and seal advice envelopes Review withholding and deposit reconciliations from Ceridian Maintain Non-Resident Alien tax compliance program Set up employees for direct deposit Prepare payroll withholding account reconciliations Print checks via BottomLine system File 1042s and remit withheld taxes for Non-Resident Aliens Review Non-Resident Alien Tax Treaty exemption activity Prepare daily positive pay activity transmission reconciliation Fold and seal check envelopes Process special W-2 adjustment payrolls Process IRS W-7 applications for ITINS Send sealed checks and advices to payroll for distribution Review compliance with W-2 reporting requirements Reconcile and remit wage attachment payments to appropriate agencies Coordinate printing of W-2 and 1042S forms with Data Center Distribute W-2 and 1042S forms Non-Transferable Transferable ID Service Description Vendor Requirement Key Performance Indicator Ability to remit withheld taxes 100% of tax payments made on a timely basis Tax penalties resulting from vendor mistakes are vendor's responsibility Ability to accumulate and summarize payroll tax withholdings SL.4 Tax Reporting/Payments with each pay cycle Ability to reconcile and analyze tax withholding data with each pay cycle Prepare wihholding and deposit reconciliations for Payroll director Prepared on a quarterly basis Ability to process and reconcile special W-2 adjustment payrolls Prepared in January Capacity to field several hundred telephone inquiries for each of the three pay cycles Calls answered within x minutes SL.5 Customer Service Ability to coordinate issue resolution with Data Management department Coordinate with Data Mgmt. within x days SL.6 Other Payroll Processing Ability to complete wage and salary verifications for outside agencies (I.e., unemployment, subpoenas, etc ) Ability to set up employees for direct deposit Capacity to process approximately 150 manual checks per month to replace lost, stolen, or expired previously issued checks Ability to fulfill stop payment requests Ability to provide a report to the Payroll director that reconciles the payroll withholding accounts Ability to provide a report to the Payroll director that reconciles positive pay activity transmission Ability to reconcile and remit wage attachment payments to appropriate agencies Set up direct deposit within x days Process manual checks within an average of x days Fulfill requests within x days Provided on a monthly basis Provided on a daily basis Developing a balanced scorecard approach is key to achieving the goals of outsourcing. Managing the performance levels is driven by setting and continuously measuring the key metrics to avoid disappointments in

8 the future. Below is an illustration of a post-merger scenario of two companies (H & S), where the best practice from each company is set as a benchmark for the new organization. HR Process Scorecard Category Plan & Manage Resources Manage Recruitment & New Hire Integration Develop and Train Workforce Perform Data & Salary Admin Perform Benefit Event Maint. / Open Enrollment Administer Benefits Manage Union Activities (& Relations) Manage Separation Process Financial Performance E:R Income Factor (Gross Margin/ ) External Cost per Hire Development & Training Cost per Data Mgmt Costs/ H&W Admin. Cost per Benefit Comp. Factor (Bene. Costs/ Comp. Costs) Total Communication Costs Termination & Retirement Costs per Customer Service Commitment/ Satisfaction Operational Efficiency HR Headcount Ratio Organizational Effectiveness Productivity H-From H Co. S-From S Co. -Sample Additional Metrics $41,863 (S) $5,556 (S) $162 (H) $26 (H) $285 (H) 29.3% (S) $24 BU Manager Satisfaction Offer Accept. Rate Average # of Training Transaction Accuracy Average Time to Enroll % of s # of Grievances w/ HR Weeks Rate citing benefits New Hire Sat. Completed as driver of w/ On- Boarding satisfaction 95% Process 1.7 Wks (H) 99% Utilization Rate Staffing Time to Fill (External) Average time to develop, deliver, deploy new program 100% 40 days (S) % of Days to s Become Fully Receiving Productive Top Ratings 75 Days # of Admin Transactions/ 2.3 (H) % of Enrollments via Self- Service 95% # of Claims per / Retiree 14 Claims (H) Key Skills Documented, Tracked, and Attained % of Transactions Centralized Average administrative cost reduction per year % Leaving on Favorable Terms as Indicated by Exit Survey Average Days to Time to Process Resolve Grievances 10 Days Overall Comp & Benefits Package versus Industry Diversity Profile Voluntary Separation Rate 10.4% (S) Creating such metrics will require time, analysis, and a measurement ment infrastructure Analysis must be conducted to determine the most appropriate type of shared services organization for each business area. Below are the most common types of shared services organizations. Major Types Description Sample Processes Center of Scale Center of Expertise Handles routine transaction based processes by leveraging economies of scale and standardization. Concentrates expertise to provide high-value services to internal customers at competitive cost. Procurement Accounts Payable Payroll Travel & Expenses ERP COEs Tax/Treasury Benefits Legal Business Partner Establishes a partner relationship between organizational units to achieve common goals. Internal Consulting Strategy Reengineering Corporate Steward Provides a structure to support central mission critical objectives. Government Relations Compliance Fiduciary Each of these shared services models will have different governance structures. The key elements of governance structures are explained below: t MISSION, VISION and CORE VALUES: Provides purpose and vision for the organization. Defines the ability of the organization to resolve differences in priorities.

9 t CULTURE: Determines how members of the organization behave toward each other, customers, and strategic partners. t ECONOMICS: Defines the approach to resource allocation and priority assessment to map resources against approved initiatives. t STRUCTURE and PROCESSES: Determines how the work of the organization is managed, how the organization is managed, and sets out the key roles that members of the organization will perform. t CUSTOMER INTERFACE: Defines the nature of the relationships between the organization and its customers. t INFRASTRUCTURE: How the organization uses technology, organization design, standard practices and behaviours to support its management processes and structure. These different types of shared services organizations do have some common characteristics. These are described below in a discussion of what shared-services is, and just as importantly what shared services is not. Shared IS: t Commonized support processes and systems to provide better service to business operations. t Separate organization providing services focused on customer satisfaction and continuous improvement. t Re-designed business processes that emphasize value creation and measurement. t An organizational evolution through which some support processes may be identified as good candidates for outsourcing. Shared is NOT: t A move to centralize internal support processes under one roof, operated under a corporate mandate. t Re-engineering existing support processes without considering the context of the larger business processes that they support. t Simple cost reduction measures achieved through process consolidation and FTE elimination. t An internal push to have all non-core business processes performed by outside service providers. Outsourcing provides great opportunity, however, one must analyze the opportunities carefully and implement them with commitment and rigor to mitigate the significant risk inherent in outsourcing.