Finance & Accounting and
Human Resources Outsourcing:
Back Office on the Front Burner
No Better Time for the Right Outsourcing Series
About the Presenters
No Better Time
Alison Turnbull is part of the Finance & Accounting
Outsourcing team in Pillsbury's Global Sourcing group. Ms. Turnbull focuses on developing client-specific BPO
strategies, assessing market opportunities, evaluating service provider capabilities and designing and evaluating proposed market solutions. Leveraging her deep experience as a solution lead at one of the world’s largest outsourcing service providers, Ms. Turnbull advises clients in all aspects of complex global BPO challenges.
Alison Turnbull| Consulting Principal
Pillsbury Winthrop Shaw Pittman LLP
Tel: 202.663.9414
2300 N Street, N.W. | Washington, DC 20037-1122 Email: alison.turnbull@pillsburylaw.com
John Haworth | Consulting Principal
Pillsbury Winthrop Shaw Pittman LLP
Tel: 617543.8500
2300 N Street, N.W. | Washington, DC 20037-1122 Email: john.haworthri@pillsburylaw.com
John Haworth has been the head of the HRO consulting practice at Pillsbury since 2005. A true pioneer in the HR outsourcing field, Mr. Haworth’s career milestones include establishing one of the first truly global internet-based human resource delivery systems for the Raytheon Company, the co-founding of Fidelity’s HRO business in 1995 and establishing the first global BPO licensing program for PeopleSoft .John was recently named 2009 “HRO Superstar Advisor” by HRO Today magazine.
Lori Kenemuth is an associate in Pillsbury's Global Sourcing group, where she currently focuses on complex technology transactions, including information technology and business process outsourcing contracts. Ms. Kenemuth has drafted and negotiated all aspects of sourcing agreements and has worked with clients to develop useful post-execution tools to manage service performance. Prior to joining Pillsbury, Ms. Kenemuth was a consultant for Accenture.
Lori M. Kenemuth | Associate
Pillsbury Winthrop Shaw Pittman LLP
Tel: 202.663.8307
2300 N Street, NW | Washington, DC 20037-1122 Email: lori.kenemuth@pillsburylaw.com
About Pillsbury Global Sourcing
More than US$450 billion in completed transactions
Over 20 years’ experience in structuring and implementing complex delivery arrangements Over 500 transactions across a premier customer base
The most experienced firm in the business – architecting the largest service delivery projects and strategic alliances
No Better Time
The only sourcing advisory firm offering integrated professional services (legal, sourcing, domain, financial & change management)
Guiding clients through the full sourcing lifecycle
Using straight-through processing for speed-to-value
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No Better Time – For Outsourcing the Back Office
The current economic climate may
actually be an opportune time to
consider further sourcing initiatives
Today’s webinar will discuss
à
The current state of FAO
à
Current opportunities in HRO
à
Why there may be No Better Time
for outsourcing in these domains
We are believers in, but not boosters of, the outsourcing industry. If our clients’ needs cannot be met by the outsourcing model, we will tell them so. However, we are of the opinion
that the current economic environment could represent an unusual opportunity for buyers and providers of outsourced services.
Finance & Accounting
Companies are leading with outsourcing of routine / high volume transactional activities such as Accounts Payable
More strategic financial sub-processes (order to cash / accounts receivable) also being included – often with customer-based roles & responsibilities split to mitigate risk
Service providers also more flexible to financial engineering of transition fees to improve cashflow
Service providers building significant productivity improvements into contracts
Improvements on other performance metrics can have significant impact on financial metrics, i.e. DSO
Outcome-based pricing being seen more for higher value-add services
Savings in the 30-50% range are being realized
{ }
The current economy is driving a renewed level of activity investigating Finance and Accounting OutsourcingFinance & Accounting
Companies are Accelerating their FAO Plans
2009 has seen a renewed level of client activity investigating Finance
and Accounting outsourcing
Case Study 3: Large U.S. Retailer
Outsourcing manual accounting and reconciliation activities
Only considering incumbent service providers
Phase 2 may include Analytics activities
"Our current economic conditions coupled with the need for operational innovation globally are driving companies to explore and
implement the outsourcing of Finance and Accounting related functions."
Lisa Ross, Genpact, Vice President -F&A
Case Study 1: Global Manufacturer of Residential and Commercial Building Materials
2008 – considering small number of F&A FTE’s as a pilot for FAO
2009 – considering outsourcing all of F&A shared services operations
Case Study 2: Telecommunications Company
Currently outsourcing AP, Cash Collections, Lockbox and Procurement
Phases 2 & 3 during 2009 to include Revenue Audits, Telco Audits and other General Accounting support activities
Expecting significant $ savings over the life of the contract
Finance & Accounting
Service Providers are Responding to the Economic Challenges
ACS
à
Taking an aggressive approach to the current economic environment
Delivering significant cost savings to clients with process improvement serving as the foundation for every partnership.à
Engaging in assertive and impactful financial initiatives
Can affect the client immediately, not in future years which is most common in typical outsourcing agreements.
Tata Consultancy Services (TCS)
à
Announced 4Q 2008 it was acquiring Citigroup Global Services Limited for an all cash consideratioin of around $505Mà
CGSL was Citi’s India based captive business processing outsourcing arm
Other service providers amortizing transition fees into years 2+ of the contract
à
Positive impact on client cashflow in year 1à
Accounting treatment varies according to internal / external auditor views
Some service providers also maintaining pricing at 2007/8 levels despite
Finance & Accounting
Outsourced Activities Moving Up The Value Chain
A major insurance company that has
recently completed some Service
Provider site visits had the following
comments:
“
We observed a number of cases where F&A processes were being successfully outsourced at significant savings. The item that struck us most was that labor arbitrage is no longer the primary driver, but rather processimprovements
We were also impressed with how much high level knowledge work was being performed by outsourcers. It was not uncommon to see these suppliers performing high level analytical work that was previously considered "core"
The definition of what constitutes a core process is being rapidly redefined”
Finance & Accounting
Different Value Added Opportunities are Emerging
Current economy creating interesting
M&A activities:
Pfizer-Wyeth merger will create prescription pharmaceutical company of unprecedented scale
Combined entity would have recorded total company sales of more than $70B and
prescription pharmaceutical sales of more than $60B in 2008
Wyeth has multi-tower outsourcing contract with Accenture, which covered more than 65 countries and involved components of HR, F&A, procurement and information services
Merged organization has a few options to consider for the Wyeth outsourcing contracts:
à
Transfer / selectively extend to the merged organizationà
Restructure the contractsFinance & Accounting
No Better Time FAO Opportunities For Consideration
If your company has made any recent strategic announcements (mergers, acquisitions,
restructurings, etc.)
à
Consider where FAO may add additional value
If you have already outsourced parts of Finance & Accounting
à
Consider other F&A activities which are higher up the value chainà
These can easily be added to existing contracts
If you have already outsourced other domains (IT, HR, etc.) and incumbent Service
Provider has FAO capabilities
à
Consider adding F&A to the existing scopeà
Leverage existing contract documents (MSA, etc.) and add new SOW & SLA schedule
If you have not yet ventured into the outsourcing space
à
Consider potential FAO scope and develop a business caseà
Transactional FAO is a low risk starting pointHuman Resources Service Delivery Options
Unbundle Key HR Processes for Speed-to-Value in HRO
For companies that have not yet implemented large-scale HRO, end-to-end HRO has become too cash intensive, with a longer time-to-value than companies can afford at this time
Single large HR processes show quick payback, and mature providers exist in all of the categories
Key targets are processes that have the largest gross spend including:
à
Payrollà
Benefits Administrationà
Workforce AdministrationSelf Service, Shared Services, and SaaS
Implement employee, manager and HR self-service now –very short payback periods, and mature offerings exist
Some companies may want to consider the creation of internal Shared Services model in lieu of outsourcing – captures much the same savings
Consider SaaS applications including the HRMS -scalable, and maturing – especially if wholesale replacement or upgrade of HRMS is due; also consider Learning and Recruitment SaaS solutions – more scalable and makes costs variable
{ }
The cost of HR service delivery is under great scrutiny in this market- selective HR outsourcing can provide a low-risk, high return solutionHuman Resources : Back Office Target
The Situation Today
Relentless pressure on function to reduce costs
HR is often a prime target – a highly visible back office expense
Primary HR spend – and primary target
à
Workforce Administration, Payroll, and Benefits Administration
à
HR COEs, HR Business Partners
Large secondary areas of HR spend – another key target
à
Core HR Systems: PeopleSoft, SAP, Oracle, Lawson, etc.
à
HR point solutions: Learning (LMS), Talent Management (TMS), etc.
Other HR spend – often overlooked, but good sourcing opportunities
à
Learning and Development
Human Resources: Targeted Savings
Areas of Potential Benefit in HRO
End-to-end HRO not in demand in the current market Outsourcing some
major processes of HRO is viable and active
Richest cost savings opportunities lie with activities with highest gross outlay,
or most inherent operating inefficiencies
Risk reduction opportunities center on practices that can assist downsizing,
and the more vigorous compliance enforcement in some industries
3
Optimize Service3
Reduce Risk3
3
3
3
3
3
Cost Savings Systems Refresh/ Employee and Mgr Self-Service Learning & Development Compensation Performance Management Recruitment Workforce Administration Benefits Administration PayrollHuman Resources
Savings though Payroll Outsourcing
What
Necessary function in all companies – core to data management of the HR function
Complexity of organization drives payroll costs – in a non-linear fashion
Failure to file taxes in a timely fashion can lead to fines and penalties – increasing the expense of the function
Not a core competency for most companies
May involve multiple internal (GL, time and attendance) and external (governments, benefits providers) systems and interfaces – expensive to maintain and error-prone
Typically underfunded, may lack innovation
How
Savings via scale economies - Fixed costs that can be spread among many customers:
à
Large-scale dedicated payroll system or hosted HR management systemsà
Investments in interfaces to taxing authoritiesà
Costs of maintaining current tax tablesà
Ongoing training on tax requirements Outsourcer has strong incentive to invest in its people, technology and processes
à
YIELD: Better, Cheaper, Faster resultsà
Less risk of error for customer Outsourcer can be contractually bound to make clients whole for errors, penalties, fines, and failure to perform to standard
{ }
Savings for Payroll outsourcing compared to in house operations for mid-range companies range between 15% and 30% depending on the complexity of operations and the baselineHuman Resources
Savings though Benefits Administration Outsourcing
What
Benefits Administration is a costly function in the U.S. operations of most companies
Not a core competency of most companies
An area of increasing complexity and compliance risk for in-house operations
Benefits Administration closely related from a data model perspective, with Workforce
Administration and Payroll – hence can be included with those functions as unified scope for provider bids
How
Savings via scale economies - Fixed costs that can be spread among many customers:
à
Large-scale dedicated benefits administration systems or hosted HR management systemsà
Investments in interfaces to carriersà
Ongoing training on complex benefits plans Outsourcer has strong incentive to invest in its people, technology and processes
à
YIELD: Better, Cheaper, Faster resultsà
Often with improved service to employeesà
Less risk of error for customer Outsourcer can be contractually bound to make clients whole for errors, losses, and failure to perform to standard
*Source: Nelson-Hall, 2009
{ }
Savings for Benefits Administration outsourcing compared to in-house operations for mid-range companies range between 15% and 30%, with a recent reported averageHuman Resources
Savings though Workforce Administration Outsourcing
What
Handling employee-based transactions, e.g., life events, data management, core workforce reporting
Not a strategic element for most companies
Not usually an investment area, hence in-house operations often lag in technology, process improvement, and talent – a good target for self–service automation, SaaS, shared services, or complete outsourcing
Upstream to Payroll and Benefits Admin, often bundled with these two to create scope for providers
How
Maximizes the savings that can be achieved under Payroll and Benefits Admin outsourcing
Savings results from same reasons as with Payroll and Benefits Admin outsourcing:
à
Savings via scale economiesà
Outsourcer has strong incentive to invest in its people, technology and processesà
Outsourcer can be contractually bound to make clients whole for errors, penalties, fines, and failure to perform to standard{ }
Savings for Workforce Administration outsourcing compared to in house operations ranges between 15% and 30% depending on the complexity of operations, baseline expenses,{ }
Human Resources
Savings though Recruitment Process Outsourcing
What
All or a portion of an organization’s recruiting function - from talent acquisition, to sourcing and screening, to interviewing, and the hire itself
Can be end-to-end, replacing an organization’s entire recruiting function
à
But often focuses on certain employee types, geos, etc. Often includes rebadging and on-site presence
Unlike traditional contingency recruiting, RPO provider becomes more integrated extension of customer organization – with consequences for failures to make hires
How
Savings via scale economies - Fixed costs that can be spread among many customers:
à
Talent management tools and technologyà
Investments (via technology and otherwise) in the development of candidate pools (e.g., schools, websites, etc) Savings on top of reduced operational costs resulting from improved time-to-hire, improved quality of hire, and reduced employee turnover
à
More expansive geographic reachà
Improved process techniques and technologyà
Candidate quality guarantees Reduces (if not eliminates) use of third- party contingency firms with higher price points
Savings for RPO compared to in house operations can range between 20 and 30%, with related improvements in volume of applicants, quality of hire, time to fill and other
Human Resources
Savings though Learning Services Outsourcing
What
All or a portion of an organization’s Learning and Development function - including content development, learning administration,
classroom instruction, web-based training, and the provision and maintenance of a Learning Management System
Can be end-to-end, replacing an organization’s entire Learning Services function
Often includes rebadging and on-site presence
Internal Learning spend is often disaggregated and can be very sizable
How
Savings via scale economies - Fixed costs that can be spread among many customers:
à
Learning management systemsà
Costs of developing and delivering content Savings on top of reduced operational costs resulting from
à
Improved employee performance and engagementà
Demand management through visibility and ability to more easily charge back costs Reduces (if not eliminates) use of third- party learning firms (with higher price points and scale limitations) by moving many instructor-led courses to the web
{ }
Savings for Learning Services Outsourcing compared to in-house operations ranges between 20 and 30%, with related improvements in volume of learners served, quality of instruction andHuman Resources
Savings though Self-Service, Shared Services and SaaS
What
Outsourcing not always the shortest route to savings – companies have other options with in-house operations
Implementing employee and manager self-service (e.g. data entry, transaction workflow, benefits enrollment, payroll) saves much
Organizations that have not yet centralized major HR functions can realize significant savings through creation of Shared Service operations for Workforce Admin, Payroll, Ben Admin, Recruitment and Learning
Many of these functions can be supported via SaaS applications
How
Use of some or all of these techniques in
concert will often result in lower costs basis for HR service delivery
Leverage an existing HRMS to increase self-service (ee and mgr) capabilities without significant additional technology investments
Centralization of HR service delivery via a shared services model may require less upfront cash outlay than “pure” outsourcing
SaaS solutions often:
à
reduce costs as compared to licensing and maintaining softwareà
allow customers to focus on delivery results (and not IT)à
bring deeper domain expertise{ }
Savings achieved by implementing employee self service, shared service operations, and through the use of scalable, “rentable” applications from Software as a Service (SaaS){ }
No Better Time for Outsourcing the Back Office
The current economic climate may
actually be an opportune time to
consider further sourcing initiatives
The three main drivers of
opportunity are:
à
Stronger business cases
à
Favorable market dynamics
à
Lowered execution risk
We are believers in, but not boosters of, the outsourcing industry. If our clients’ needs cannot be met by the outsourcing model, we will tell them so. However, we are of the opinion
that the current economic environment could represent an unusual opportunity for buyers and providers of outsourced services.
In the current economic environment the business case for outsourcing
is likely to benefit from these trends:
•
More high-level business support and advocacy
•
Get in front of management with your plan for the altered service delivery
•
You have their attention as never before
•
Renewed focus on the business’s core competency
•
Unless your organization is Six Sigma in Shared Services, it is unlikely that
service delivery is a core competency
•
Take a leadership role in examining the alternatives
•
Focus on cost, but with an eye to long term scalability
•
Show that cost can be reduced, but that making the function more scalable (up
and down) will provide even greater savings in the years to come
•
Positioning the company to win when market recovers
•
Show that investing in employee care and streamlined F&A can help position
the company to move ahead of competitors in the recovery
In the current economic environment market engagement is more
likely to result in:
•
More leverage for existing customers, especially if they are willing to offer
providers additional incentives
•
Economic uncertainty focuses providers on broader scope or longer terms
•
Trade these terms for provider concessions (e.g., pricing)
•
More leverage for new customers to attract more provider interest
•
Providers are hungry for new sources of revenue
•
Deals that were previously too small for some providers may now be interesting
•
More flexibility in financial terms, including potential for provider-supplied
financing
•
Important because often “good” deals with strong ROIs are forgone because the
client cannot afford the upfront investment
•
Providers can make these upfront investments more manageable
•
More willingness on part of providers to “think outside the box”
•
This is critical because there are many different impacts on the financials, not just
the usual metrics (minimums, etc.)
•
Clients may have more opportunities to create a good deal for both parties
In this market, some execution risks may be mitigated through:
•
Less questioning of the model; less rear-guard undermining of change
•
These massive projects are often controversial, and political maneuvering/self
interest can often create obstacles
•
There may be more solidarity, less gamesmanship in this environment
•
Greater sense of purpose and commitment on both sides of the deal
•
These deals have greater importance to both parties now and are more critical to the
parties achieving their respective goals
•
Customer and partner focus on meeting the business case
•
Providers know that at the end of the day, if the project doesn’t save the customer
money, it will be viewed as a failure, no excuses
•
They are incented to help you make and preserve a business case. This may require
looking harder to find costs that are buried in others’ budgets. Advisors and
providers can help you
•
More time to focus on long-range planning
•
True if things are slower than normal
•
Although in some organizations that have become too lean, you may have even less
time to devote to new initiatives
{ }
No Better Time for Outsourcing the Back Office
The current economic climate may
actually be an opportune time to
consider further sourcing initiatives
The three main drivers of
opportunity are:
à
Stronger business cases
à
Favorable market dynamics
à
Lowered execution risk
We are believers in, but not boosters of, the outsourcing industry. If our clients’ needs cannot be met by the outsourcing model, we will tell them so. However, we are of the opinion
that the current economic environment could represent an unusual opportunity for buyers and providers of outsourced services.
Upcoming Sessions
April 28 Changing the Paradigm: Accelerated Savings through
Innovative Pricing and Procurement Techniques
May 19 IT Outsourcing: Devising a Fast and Sustainable Diet
June 9 Renegotiations: Positioning for the Fast Path to Savings
June 30 Procurement & Real Estate Outsourcing: Short Term Strategy with Long Term Results
