Quantifying the retained organization by LONGUE-VUE

Quantifying the retained organization

Christine Briody, Senior Director of Global Consulting, ADP

Christine Briody’s Biography

Christine Briody,

Senior Director of Global Consulting, ADP Christine is Senior Director of Global Consulting and is responsible for supporting the Sales effort in the global Employer Services marketplace. Christine has a background in operational and service management. She joined ADP in the UK in 1995 and headed up the Managed Payroll Service department for UK and Ireland. From there she moved into a European role working as a Strategic Account Manager for key accounts within ADP. Christine is based in the UK but travels extensively mainly across Europe. She can be reached at: contact@globalhrstudio.com

Quantifying the retained organization Stepping up in HR transformation, and more specifically HR outsourcing, raises fundamental questions and implies to agree on the processes and activities to keep in-house and the ones to reengineer and outsource. More generally, HR transformation is mainly about deciding on the organization to implement to fit the new business needs.

Designing and managing your retained team correctly is a critical factor for the success of your overall HR outsourcing business plan. In particular, the ability to achieve significant staffing efficiencies is typically the key to achieving the financial objectives expected from the outsourcing relationship. This is often the most difficult and poorly planned aspect of the transition to outsourcing HR.

The roles and responsibilities that your organization will need to retain during and after transition of HR services will depend on a number of related factors: • • • • • •

Scope of services that you will be outsourcing Day-to-day processes that will be left behind for your retained team Complexity of Business Unit structure Diversity of your current information systems and/or service suppliers Expected timeline for the transition to your vendor Number of manual tasks that will be automated by outsourcing

Quantifying the retained organization Quantifying and designing the retained organization go hand in hand with the projectâ&#x20AC;&#x2122;s business case and require adopting a structured approach. To assist you in designing the retained organization that will best fit your requirements, we have developed a model that can also enable you to better predict your return on investment. Please note that your ability to achieve the optimum retained organization will largely depend on the success of your governance model.

How to design the retained organization The retained organization roadmap

Define the project scope

Define activities to outsource or retain

Build job descriptions / competencies

The roadmap to design the retained organization begins with the definition of the projectâ&#x20AC;&#x2122;s scope (service model, tasks to outsource, and projectâ&#x20AC;&#x2122;s footprint). Your internal staff and the service supplier then follow up by assigning the tasks that must be performed (based on your negotiated statement of work).

Define positions / headcount

Establish new organization structure

Continuous improvement / process re-design

Next, roles and responsibilities that define retained jobs, positions and headcount are completed by adjusting your organizational structure and putting into place a continuous improvement process.

Understand and define your project’s scope This is the fundamental phase in the design of your future organization. You must understand your service supplier’s business model, determine the extent of your footprint, and decide on the functions to be outsourced. In-depth understanding of your supplier’s service model is the key to that phase of the project.

The service level you will opt for may vary from one country to another or from one region to another. For example, Processing Services may be fine for countries where you are well acquainted with local legislation, while Managed Services may best suit countries where your knowledge of the local environment is less well developed.

Which activities can be outsourced In order to get a clear picture of the future organization, it is usually good to start by focusing on how the work gets done today. A task/time audit (“1 to 31 Approach”) of your current activities will help you understand where outsourcing will generate the greatest benefits. It is essential to map your HR organization with your supplier’s responsibility matrix (also called service definition or statement of work). The responsibility matrix describes what needs to stay in your organization and what comes under the

supplier’s responsibilities. This will also provide you with a sharper focus on tasks that should remain local and the ones that can be grouped and performed at a regional or global level (in shared services centers, for example). In some organizations, collecting information on activities and roles, processes, and job descriptions may take more time than available and even be very difficult to validate. For these companies, their analyses will be based on assumptions that may require adjustments in the business case for the retained organization.

The illustration below provides an example of a detailed portion of the responsibility matrix for payroll Managed Services.

The Payroll Managed Services Responsibility Matrix (extract) The Responsibility Matrix Where?

Who?

Processes System and Application Services and Maintenance Data Management Payroll Time Data Inputs Employee Self Service / Manager Self Service (if applicable) Pre-Payroll Processing

SSC

LOCAL

Client Service Supplier

2 • Create, maintain and distribute Payroll Schedule for each country on a calendar year basis.

Service Supplier

3 • Load pay variation data.

Service Supplier

4 • Verify data loads.

Client Service Supplier

LOCAL

1 • Conﬁrm timely funding of accounts for dispersal of employee payroll through agreed upon bank.

Client

5 • Monitor work/non work time; monitor annual leave. 6 • Calculate termination payments. 7 • Validate and approve termination payment calculations. Payroll Processing Post-Payroll Processing Leave Management Termination Management Off-Cycle Processes End-of-Month Activities Client Relationship Management End–of-Year Activities Other Payroll Activities

Type of Service Delivered: Managed Services Client

Service Supplier

Once you have established your current tasks, you can get a better grasp on how the work will change once you outsource. It is important to recognize that some activities are destined to remain within your retained organization. These activities typically include core functions

such as HR strategy, process design, executive recruitment, and aspects of compliance and industry-specific functions related to the growth of your business. Core retained functions might also include oversight of certain HR and payroll functions, such as data validation, payroll authorization, and escalated issue management.

Sample activities/responsibilities of the clientâ&#x20AC;&#x2122;s retained team Area

Responsability

Area

. Request funding from tax and garnishment

. Validate garnishment order . Set up Employee garnishment deduction information into HRIS

. ACH return, step payments, and reversals Banking

. Store garnishment order

. Check paid inquiries . Files and Remit Escheated checks

. Balance deductions/payments monthly . Monitor garnishment remittance services

. Collect change request requirements from business units, with the exception of ad hoc reporting

. Answer employee and agency inquiries/interrogations . Create/send answer and notice letters . Interpret legs/regs; Ensure compliance with garnishment legs and regs

. Reconcilement of bank statements . On-line ACH transfers

. Audit deductions are taken according to order Garnishments

Responsability

Change Requests

. Provide functional requirements to application maintenance team . Complete acceptance testing on developed change requests . Coordinate user acceptance testing with business units

. Conduct data validation . Monitor Tax remittance services . Interpret legs/regs; Ensure compliance with tax legs and regs

Tier 3 Support

. Researche inquiry Taxes, including Stock Options

. Document and tracks inquiry . Respond to agencies . Resolve disputes

Training and Communications

. Inform Payroll Operations of issues/changes as needed . Reconcile return . Processe Stock Options

Mergers & Acquisitions

. Coordinate entry of payroll related data into HRMS with processing team

. Provide instructions for resolution to processing team and customer service team . Create training programs and materials . Create content for payroll related communications . Deliver training to payroll services team . Interpret BU policies impacting pay

BU expertise

. Creat M&A checklist . Work with corporate, HRIS, BUs and acquired companies on transition of payroll

. Provide Tier 3 case management support for taxes, garnishments, banking, stock options

. Provide required procedural updates to the customer service payroll specialist . New hire reporting . Worksite reporting

Other

. Special projects . Create year end calendar . Design corporate payroll policies

As part of the statement of work, your service supplier will have to provide you with a detailed list of the activities it expects to perform and those that will continue to be part of your organization.

What skills/competencies are needed in the new organization Outsourcing HR means changing the roles and tasks of your retained HR staff. With most administrative and transactional actions moved to your service supplier, you are able to focus on supporting your company’s core business.

A similar impact can be expected for the HR and benefits partners, with certain administrative/transactional responsibilities eliminated and replaced by the opportunity to deliver higher added-value services to the Business Unit’s customers.

One common example of an impacted job function is that of the payroll administrator. For many organizations, the payroll administrator plays a broad role, performing activities such as answering employees’ questions, tracking checks and deposits, reconciling payrolls, processing changes in pay, and ensuring compliance with tax filing and other regulatory bodies.

This shift in roles raises the issue of whether to retain and re-train existing staff or to hire people with more relevant skills. A critical step in this decision process is to create new job descriptions aligned with the tasks and roles to be assumed by the retained team. Your service supplier’s responsibility matrix and your internal vision for your department should be the basis for these descriptions.

Successful organizations take full advantage of the outsourcing model to shift the majority of these administrative activities to their provider, while refocusing on more strategic management actions such as design of compensation and incentive plans. For many organizations, this often means that the current administration team may not have the required skill sets to transition into the new roles.

Detailed job descriptions should include: • Description of the job and activities to be performed • Required skills and educational background After the required roles have been defined and the new job descriptions created, formal competency assessments and interviews with the existing staff can identify the right talent within the organization.

Example: Contract Manager job description Area Role:

responsible for managing the service level

Responsability Reports to:

Governance Director

agreements, reporting on trending, change control and process impact analysis.

Responsibilities:

Experience & Education:

. Manage all finance and contract-related aspects of the outsourced services

. 8 - 10 years finance and/or accounting

. Track client assets used in delivery of services

. Significant experience with the management or operations of outsourcing and third party contracts

. Establish and maintain mechanisms to quantify and track business-value delivered . Collaborate with Client Finance and Accounting to develop, socialize and implement acceptable allocation mechanisms

. CPA and Advanced degree preferred

. Demonstrated understanding of legal contracts . Procurement of sourcing experience . Administrative and project management experience

. Responsible for the communication, lock down, and monitoring of value realization with business units

Attributes & Characteristics:

. Responsible for the verification, reconciliation, and payment of all SP invoices; monitor SP contract compliance

. A business/commercially-focused, results-oriented manager with strong listening, financial management, and communications skills

. Lead in negotiations of or adjustment to SP contract; Manage the Benchmarking process

. Consultative and client-oriented

. Advise on savings calculations, business case development; Review and assess project business cases

How to determine the retained headcount An anticipated reduction in headcount is often central to the business case for moving to an HR outsourcing model. The trick is to determine what the right reduction should be. Many organizations rely on an activity-based analysis to estimate the volume of work that will be handled by the retained team. This activity analysis attempts to estimate volumes or transactions that still need to be handled, including the strategic and management functions necessary to operate the outsourced functions. Your service supplier can typically provide much of the information needed to estimate those activities based on due diligence during the sales process as well as a statement of work that defines the activities that will be retained by your team. This is generally a good guideline, but you may want to back it up by other analyses done by yourself and/or outside consultants. In activity-based analyses, organizations generally estimate how many transactions and/or activities one person actually handles during a specific period

of time, compared with the number of transactions that could be processed over that same period of time. In fact, there are many factors that may make this estimate unique to the client’s situation, including: • Transaction complexity • Data input quality • Degree to which policies are standardized and harmonized • Workforce diversity • Vendor consolidation • Position control in place Direct comparisons of headcount before and after implementation may not be viable due to changes in how new jobs and functions are defined. In some cases, total headcount may not seem to go down, but the organization will see a marked improvement in overall productivity and effectiveness. In other instances, there is a significant reduction in headcount, not just in the functions outsourced, but also in the broader HR organization due to strategic realignment.

Here is one example of what can happen when you combine outsourcing efficiencies with retained organization design. A company with 9,000 employees spread across the U.S. has outsourced payroll administration and HR information technology, including the HRIS, a new applicant management system and time and attendance. They also redesigned their processes to take advantage of efficiencies gained from online employee and manager self-service. They engaged stakeholders early and focused not only on the applications and the processes, but also on role definition.

Excluding those employees who worked in payroll or in the employee service center (operations now outsourced), the HR team has been reduced from 88 to 62 people. «They no longer do tasks such as applicant tracking or labor rules compliance reporting. Their focus is on a different level of work, which includes change management, workforce planning and talent management” the HR Director reports.

What is the typical impact on labor There may be no such thing as a â&#x20AC;&#x153;typicalâ&#x20AC;? impact on labor since the outcome is highly dependent on the organizationâ&#x20AC;&#x2122;s structure, previous degree of centralization, functions (and scope) being outsourced and (very important) the assertiveness in redefining new roles and responsibilities. However, some useful industry estimates can serve as benchmarks for business planning and execution purposes. The Everest Research Institute, a leading supplier of HRO research and analysis, estimates that the average staff reduction for an outsourced HR engagement is 54%. This impact is spread across

the various job types within a department, with greatest impact coming at the admin support level (75% reduction) and the least impact at the senior manager/executive level (20%). According to Everest, organizations in the top quartile of labor savings have achieved a 76% overall reduction in headcount, made possible by a 91% reduction in administrative support roles. Interestingly, these same top-quartile organizations actually experienced an increase in senior manager/ executive roles (+7%). This is likely attributable to a successful shift from an administrative to a strategic, high-value focus for the organization.

Average HR staff reduction by job type (percentage)

75% 52%

50% 37%

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Top quartile staff reduction by job type (percentage)

91% 77%

74% 39%

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-7%

With these points in mind, it is reasonable to expect a 50% reduction in force in the functions that are being outsourced. Why not 100%? It is important to remember that, even though you have outsourced an entire function, it is still necessary to retain internal staff that will be responsible for strategic planning, vendor management, and support as well as other defined retained team responsibilities. This is even truer for international organizations that have to cope with country-related specificities that must be taken into account when the time has come to outsource. Will those specific country-related processes be covered in the HR outsourcing contract? For example, travel expense management is not a part of payroll in Switzerland. International

outsourcing deals can scope out that specific process as part of the current payroll service, forcing the client company to keep it in-house. In China, payslips have to be printed on rice paper and stamped by the administration at the end of each fiscal year. In Belgium, educational leave is included in payroll, but this administrative task may have to continue to be handled in-house even after the HRO contract has been signed. As a consequence, your service supplier should provide you with a list of optional and/or scoped-out tasks country by country in order for you to be able to conduct a detailed check of your entities.

Wrap-up • Quantifying and designing the retained organization go hand in hand with the project’s business case and require adopting a structured approach. • It is essential to map your HR organization with your supplier’s responsibility matrix. • Successful organizations take full advantage of the outsourcing model to refocus on more strategic management actions. • A critical step is to create new job descriptions aligned with the tasks and roles to be assumed by the retained team. • It is reasonable to expect a 50% reduction in force in the functions that are being outsourced. • Even though your have outsourced an entire function, it is still necessary to retain internal staff.