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OUTSOURCING

INSIGHTS

W H I T E PA P E R

Challenges and Payoffs in using Shared Service

Centers for HRO (Human Resources Outsourcing)

For more information, please contact Ramesh Krish at 917-971-9701

ramesh_krishus@yahoo.com

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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?

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Outsourcing Advisory Services

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

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Some potential advantages and disadvantages are listed in the table below.

Potential Advantages Potential Disadvantages

FinancialCost 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 non-performance of agreed service levels.

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.

FlexibilityCatalyst 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.

High exit barriers and irreversibility reduced cost-effective 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.

Eff iciency and Effectiveness

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 leap-frogging – if converted to the supplier s state-of-the-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.

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.

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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:

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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.

Payroll

Proces s M onthly Salary and S pecial P ayroll

Batch and input adjustments to mo nthly salary

Process involuntary garnishments

Receive and distribute checks and remittance

advices Re view and file payro ll

au dit repo rt A pprove payroll run for

execution Generate exception

reports and clear exceptions V erify adjustm ents to

mo nthly salary

V erify adjustm ents to weekly hourly pay

Rec eive and distribute prep rinted tim e repo rts

V erify activity for processing and input

m a nua l t im e transactions Receive completed

timesheets

Process and distribute ma nual checks

Batch and input adjustm ents to weekly

sala ry

P rocess W eek ly S alary P ayroll

Process involuntary g arn is hm en ts

Re ce ive and distrib ute checks and remittance

advices Review and file payroll

audit report Approve payroll run for

execution Generate exception

reports and clear exceptions V erify adju stm en ts to

wee kly salary

Process and distribute m anual checks

Proces s Ho urly Payroll

Batch and input hours

Process involuntary ga rn ish m en ts

Rec eive and distribute checks and remittance

advices

R eview and file pa yroll au dit repo rt A pprove payroll run for

execution G en era te e xc ep tio n

reports and clear ex ceptions

Prepare payroll exception reporting form s for dep artm en ts

Process and distribute manual checks P lanning and

S upervision

Develop and implem ent policies and

procedures Hold training sessions

for staff Review daily changeregister

Submit AC H controls to bank

Review daily change register

S u bm it A CH c on tro ls to bank

P rovide control tota ls to Ge neral Accounting for recon ciliation of

data into FMS

P rovide con trol totals to G en era l A c co un tin g for re conc iliation of

data into FM S

Review daily change reg ister

Submit AC H controls to bank

P ro vide cont ro l totals to General Accounting for reconciliation of

data into FMS

Non-Transferable

Transferable

ID Service Description Vendor Requirement Key Performance Indicator

Ability to input, verify, and batch adjustments to monthly

salary 100% accuracy compared to info. in client system Ability to process involuntary garnishments, one-time

deductions, refunds, misc. tax adjustments 100% accuracy compared to info. in client system 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'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

100% accuracy compared to info. in client system Availability and capacity to field customer service questions

Ability to input, verify, and batch adjustments to weekly

salary 100% accuracy compared to info. in client system Ability to process involuntary garnishments, one-time

deductions, refunds, misc. tax adjustments 100% accuracy compared to info. in client system 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

and 350 weekly salary advices

100% accuracy compared to info. in client system Availability and capacity to field customer service questions

Process Weekly Salary Payroll SL.2

Process Monthly Salary & Special Payrolls SL.1

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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

P roc es s IR S W -7 applica tions for ITINS

Oth er P ayro ll Processing Payroll Re co nc ile a nd re m it wage attachment payme nts to appropriate agencies Field questions and

coordinate issue re so lution w ith

appropr iate departme nt

Process check voids, stop payme nts, and re-issue stopped check s Custom er S ervice P roc es s C ity W a ge Tax refund Prepare payroll withholding account recon ciliatio ns

Prepare daily positive pay activity transmi ssion rec onciliation Set up em ployees for

direct deposit Complete wage and salary verifications for

outside agencies

Prepare corrected tax docum ents when

necessary

Review Non-Resident A lie n T a x T re at y ex emption activity Maintain compliance with payroll tax laws

M aintain Non-Resident Alien tax compliance

program

Payroll P rocessing (Data Center)

Ex ecute payroll batch

P rint a dv ices from Ma inframe

Fold and seal check envelopes Print checks via BottomLine system Fold and seal advice

envelopes

Se nd sealed checks and advices to payroll

for distrib ution

T ax Re porting

File 1042s and remit withheld tax es for Non-Resident Aliens

Process special W-2 adjustm ent payrolls

Coordinate printing of W-2 and 1042S form s w ith D at a C en te r Review withholding and deposit re co nc iliations from C eridian D istribute W- 2 and 1042S forms Review compliance

with W -2 repor ting requirem ents T rans mit tax withh oldin g data to

C eridian Reconcile, review, and

analyze tax w ithh olding data

Non-Transferable

Transfera ble

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 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 Ability to coordinate issue resolution with Data Management

department Coordinate with Data Mgmt. within x days Ability to complete wage and salary verifications for outside

agencies (I.e., unemployment, subpoenas, etc )

Ability to set up employees for direct deposit Set up direct deposit within x days Capacity to process approximately 150 manual checks per

month to replace lost, stolen, or expired previously issued checks

Process manual checks within an average of x days

Ability to fulfill stop payment requests Fulfill requests within x days Ability to provide a report to the Payroll director that

reconciles the payroll withholding accounts Provided on a monthly basis Ability to provide a report to the Payroll director that

reconciles positive pay activity transmission Provided on a daily basis Ability to reconcile and remit wage attachment payments to

appropriate agencies Other Payroll Processing

SL.5

SL.6

SL.4 Tax Reporting/Payments

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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.

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.

Center of Expertise Services Business Partner Services Corporate Steward Services Center of Scale Services

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.

Establishes a partner relationship between

organizational units to achieve common goals.

Provides a structure to support central mission critical objectives.

Procurement

Accounts Payable

Payroll

Travel & Expenses

ERP COEsTax/TreasuryBenefitsLegalInternal Consulting ServicesStrategyReengineeringGovernment RelationsComplianceFiduciary

Major Types Description Sample Processes

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. Scorecard Category Plan & Manage Employee Resources Manage Employee Recruitment

& New Hire Integration Develop and Train Workforce Perform Employee Data & Salary Admin Perform Employee Benefit Event Maint. / Open Enrollment Administer Employee Benefits Manage Employee Union Activities (& Employee Relations) Manage Employee Separation Process Financial Performance E:R Customer Service Employee Commitment/ Satisfaction Operational Efficiency HR Headcount Ratio Organizational Effectiveness Employee Productivity Income Factor (Gross Margin/ Employee) $41,863 (S) External Cost per Hire $5,556 (S) Development & Training Cost per Employee $162 (H) Employee Data Mgmt Costs/ Employee $26 (H) H&W Admin. Cost per Employee $285 (H) Benefit Comp. Factor (Bene. Costs/ Comp. Costs) 29.3% (S) Total Employee Communication Costs Termination & Retirement Costs per Employee $24 HR Process Offer Accept. Rate New Hire Sat.

w/ On-Boarding Process Average # of Training Weeks Completed 1.7 Wks (H) Transaction Accuracy Rate 99% Average Time to Enroll % of Employees citing benefits as driver of satisfaction # of Grievances % Leaving on Favorable Terms as Indicated by Exit Survey Utilization Rate 100% Staffing Time to Fill (External) 40 days (S) Average time to develop, deliver, deploy new program # of Admin Transactions/ Employee 2.3 (H) % of Enrollments via Self-Service 95% # of Claims per Employee/ Retiree 14 Claims (H) Average Time to Resolve Grievances Days to Process 10 Days % of Employees Receiving Top Ratings Days to Become Fully Productive 75 Days Key Skills Documented, Tracked, and Attained % of Transactions Centralized Average administrative cost reduction per year Overall Comp & Benefits Package versus Industry Diversity Profile Voluntary Separation Rate 10.4% (S) BU Manager Satisfaction w/ HR 95% H-From H Co. S-From S Co. -Sample

Additional Metrics Creating such metrics will require time, analysis, and a measureCreating such metrics will require time, analysis, and a measurement infrastructurement infrastructure

Scorecard Category Plan & Manage Employee Resources Manage Employee Recruitment

& New Hire Integration Develop and Train Workforce Perform Employee Data & Salary Admin Perform Employee Benefit Event Maint. / Open Enrollment Administer Employee Benefits Manage Employee Union Activities (& Employee Relations) Manage Employee Separation Process Financial Performance E:R Customer Service Employee Commitment/ Satisfaction Operational Efficiency HR Headcount Ratio Organizational Effectiveness Employee Productivity Income Factor (Gross Margin/ Employee) $41,863 (S) External Cost per Hire $5,556 (S) Development & Training Cost per Employee $162 (H) Employee Data Mgmt Costs/ Employee $26 (H) H&W Admin. Cost per Employee $285 (H) Benefit Comp. Factor (Bene. Costs/ Comp. Costs) 29.3% (S) Total Employee Communication Costs Termination & Retirement Costs per Employee $24 HR Process Offer Accept. Rate New Hire Sat.

w/ On-Boarding Process Average # of Training Weeks Completed 1.7 Wks (H) Transaction Accuracy Rate 99% Average Time to Enroll % of Employees citing benefits as driver of satisfaction # of Grievances % Leaving on Favorable Terms as Indicated by Exit Survey Utilization Rate 100% Staffing Time to Fill (External) 40 days (S) Average time to develop, deliver, deploy new program # of Admin Transactions/ Employee 2.3 (H) % of Enrollments via Self-Service 95% # of Claims per Employee/ Retiree 14 Claims (H) Average Time to Resolve Grievances Days to Process 10 Days % of Employees Receiving Top Ratings Days to Become Fully Productive 75 Days Key Skills Documented, Tracked, and Attained % of Transactions Centralized Average administrative cost reduction per year Overall Comp & Benefits Package versus Industry Diversity Profile Voluntary Separation Rate 10.4% (S) BU Manager Satisfaction w/ HR 95% H-From H Co. S-From S Co. -Sample

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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 Services 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 Services 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.

References

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