Finance & Accounting and Human Resources Outsourcing: Back ... · 2 | No Better Time for the Right...

Pillsbury Winthrop Shaw Pittman LLP

Finance & Accounting and Human Resources Outsourcing: Back Office on the Front Burner

No Better Time for the Right Outsourcing Series

April 14, 2009

1 | No Better Time for the Right Outsourcing

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: 202.663.94142300 N Street, N.W. | Washington, DC 20037-1122Email: [email protected]

John Haworth | Consulting PrincipalPillsbury Winthrop Shaw Pittman LLP

Tel: 617543.85002300 N Street, N.W. | Washington, DC 20037-1122Email: [email protected]

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 | AssociatePillsbury Winthrop Shaw Pittman LLP

Tel: 202.663.8307 2300 N Street, NW | Washington, DC 20037-1122Email: [email protected]


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

Deploying a unique visual sourcing technique using our patented ValueChain method


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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 discussThe current state of FAO Current opportunities in HRO 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’ needscannot 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 opportunityfor buyers and providers of outsourced services.


Finance & Accounting

Companies are leading with outsourcing of routine / high volume transactional activities such as Accounts PayableMore strategic financial sub-processes (order to cash / accounts receivable) also being included – often with customer-based roles & responsibilities split to mitigate riskService 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. DSOOutcome-based pricing being seen more for higher value-add servicesSavings in the 30-50% range are being realized

{ }The current economy is driving a renewed level of activity investigatingFinance and Accounting Outsourcing


Finance & AccountingCompanies are Accelerating their FAO Plans

2009 has seen a renewed level of client activity investigating Financeand Accounting outsourcing

Case Study 3: Large U.S. RetailerOutsourcing 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 Residentialand 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 CompanyCurrently 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 & AccountingService Providers are Responding to the Economic Challenges

ACSTaking an aggressive approach to the current economic environment

Delivering significant cost savings to clients with process improvement serving as the foundation for every partnership.

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) Announced 4Q 2008 it was acquiring Citigroup Global Services Limited for an all cash consideratioin of around $505MCGSL was Citi’s India based captive business processing outsourcing arm

Other service providers amortizing transition fees into years 2+ of the contractPositive impact on client cashflow in year 1Accounting treatment varies according to internal / external auditor views

Some service providers also maintaining pricing at 2007/8 levels despite current inflation rates in India


Finance & AccountingOutsourced Activities Moving Up The Value Chain

A major insurance company that hasrecently completed some ServiceProvider site visits had the followingcomments:

“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 process improvements

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 & AccountingDifferent Value Added Opportunities are Emerging

Current economy creating interestingM&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 2008Wyeth has multi-tower outsourcing contract with Accenture, which covered more than 65 countries and involved components of HR, F&A, procurement and information servicesMerged organization has a few options to consider for the Wyeth outsourcing contracts:

Transfer / selectively extend to the merged organizationRestructure the contracts Termination


Finance & AccountingNo Better Time FAO Opportunities For Consideration

If your company has made any recent strategic announcements (mergers, acquisitions, restructurings, etc.)

Consider where FAO may add additional value

If you have already outsourced parts of Finance & AccountingConsider other F&A activities which are higher up the value chain 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

Consider adding F&A to the existing scopeLeverage existing contract documents (MSA, etc.) and add new SOW & SLA schedule

If you have not yet ventured into the outsourcing spaceConsider potential FAO scope and develop a business caseTransactional FAO is a low risk starting point

{ }Pillsbury would be pleased to assist with the evaluation and execution of any of these opportunities


Human 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 timeSingle large HR processes show quick payback, and mature providers exist in all of the categoriesKey targets are processes that have the largest gross spend including:

Payroll Benefits AdministrationWorkforce Administration

Self 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 savingsConsider 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 solution


Human Resources : Back Office Target

The Situation TodayRelentless pressure on function to reduce costs

HR is often a prime target – a highly visible back office expense

Primary HR spend – and primary targetWorkforce Administration, Payroll, and Benefits AdministrationHR COEs, HR Business Partners

Large secondary areas of HR spend – another key targetCore HR Systems: PeopleSoft, SAP, Oracle, Lawson, etc. HR point solutions: Learning (LMS), Talent Management (TMS), etc.

Other HR spend – often overlooked, but good sourcing opportunities Learning and DevelopmentRecruitment


Human Resources: Targeted Savings

Areas of Potential Benefit in HROEnd-to-end HRO not in demand in the current market Outsourcing some major processes of HRO is viable and activeRichest cost savings opportunities lie with activities with highest gross outlay, or most inherent operating inefficienciesRisk reduction opportunities center on practices that can assist downsizing, and the more vigorous compliance enforcement in some industries

OptimizeService

ReduceRisk

Cost Savings

Systems Refresh/

Employee and Mgr Self-Service

Learning & DevelopmentCompensationPerformance

ManagementRecruitmentWorkforce

Administration BenefitsAdministration

Payroll


Human ResourcesSavings though Payroll Outsourcing

WhatNecessary function in all companies – core to data management of the HR functionComplexity of organization drives payroll costs – in a non-linear fashionFailure to file taxes in a timely fashion can lead to fines and penalties – increasing the expense of the functionNot a core competency for most companiesMay involve multiple internal (GL, time and attendance) and external (governments, benefits providers) systems and interfaces –expensive to maintain and error-proneTypically underfunded, may lack innovation

HowSavings via scale economies - Fixed costs that can be spread among many customers:

Large-scale dedicated payroll system or hosted HR management systemsInvestments in interfaces to taxing authoritiesCosts of maintaining current tax tablesOngoing training on tax requirements

Outsourcer has strong incentive to invest in its people, technology and processes

YIELD: Better, Cheaper, Faster resultsLess 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 companiesrange between 15% and 30% depending on the complexity of operations and the baseline

expenses related to fines, tax errors, and penalties.


Human ResourcesSavings though Benefits Administration Outsourcing

WhatBenefits 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:

Large-scale dedicated benefits administration systems or hosted HR management systemsInvestments in interfaces to carriersOngoing training on complex benefits plans

Outsourcer has strong incentive to invest in its people, technology and processes

YIELD: Better, Cheaper, Faster resultsOften with improved service to employeesLess 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 averageof 26%* among mid-market benefits administration clients.


Human ResourcesSavings though Workforce Administration Outsourcing

WhatHandling 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

HowMaximizes the savings that can be achieved under Payroll and Benefits Admin outsourcing

Savings results from same reasons as with Payroll and Benefits Admin outsourcing:

Savings via scale economiesOutsourcer has strong incentive to invest in its people, technology and processesOutsourcer 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 rangesbetween 15% and 30% depending on the complexity of operations, baseline expenses,

and the degree of automation already in place.


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Human ResourcesSavings though Recruitment Process Outsourcing

WhatAll 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

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


Talent management tools and technologyInvestments (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

More expansive geographic reachImproved process techniques and technologyCandidate 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

process cycle times, as well as employee turnover.


Human ResourcesSavings though Learning Services Outsourcing

WhatAll 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


Learning management systemsCosts of developing and delivering content

Savings on top of reduced operational costs resulting from

Improved employee performance and engagementDemand 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 between20 and 30%, with related improvements in volume of learners served, quality of instruction and

content, as well as enhanced employee engagement.


Human ResourcesSavings though Self-Service, Shared Services and SaaS

WhatOutsourcing 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

HowUse 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:reduce costs as compared to licensing and maintaining softwareallow customers to focus on delivery results (and not IT)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)providers vary between 10-40 %.


{ }

No Better Time for Outsourcing the Back Office


The three main drivers of opportunity are:

Stronger business cases Favorable market dynamics Lowered execution risk




In the current economic environment the business case for outsourcingis 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

1. Leveraging Stronger Business Cases


In the current economic environment market engagement is morelikely 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

2. Leveraging Favorable Market Engagement Dynamics


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

3. Leveraging Lowered Execution Risk


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No Better Time for Outsourcing the Back Office


The three main drivers of opportunity are:

Stronger business cases Favorable market dynamics Lowered execution risk




Upcoming Sessions

April 28 Changing the Paradigm: Accelerated Savings throughInnovative 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

July 14 M&A – Business Continuity and Cost Effective Operations through Outsourcing

Pillsbury Winthrop Shaw Pittman LLP

Finance & Accounting and Human Resources Outsourcing: Back Office on the Front Burner

No Better Time for the Right Outsourcing Series

April 14, 2009

Finance & Accounting and Human Resources Outsourcing: Back ... · 2 | No Better Time for the Right...

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