Last week I promised to write about measuring risk related to group benefit plans and techniques on evidence based cost avoidance (when I put it that way, it sounds so boring!) I’m sorry, but some other news broke last week that I felt compelled to comment on. I’ll get back to measuring risk next week.
Last week, Hewitt Associates announced that it has appointed Russell P. Fradin as the company’s new chairman and chief executive officer, beginning September 5, 2006. The announcement came the week before a rather disastrous 3rd quarter earnings report in which the company posted a net loss of $202 million or $1.88 per share.
The announcement was seemingly timed to help mute the bad news that was coming. Indeed, the stock has taken a 10% hit since earnings were announced which offset the stock rise after the Fradin announcement.
But what can Russ Fradin do for Hewitt? According to the press release, he’s the right man for the job:
“Previously, Fradin spent more than seven years in various executive positions with Automatic Data Processing (ADP), including president of its global employer services group, where he doubled revenues to $4.5 billion, improved profit margins resulting in operating income of over $1.3 billion and pioneered the company’s entry into total human resources outsourcing for small businesses.”
First, I’d like to point out the very interesting parsing of words in the press release. Hewitt has a very sticky problem here. They have just announced the appointment of the top job in their company, but it is going to someone who used to run the competitor. Interesting thing is that Hewitt does not like to lend credibility to ADP as a competitor. Hewitt’s paradigm has always been that they are without peer.
So read the press release carefully. Hewitt has hired someone who knows the BPO business and HRO in particular. He knows how to grow profitability and revenue. And the kicker? He cut his teeth in the small business market.
This isn’t quite accurate. I first met Russ when ADP was in full acquisition mode. He was working on acquiring Mercer’s administrative capabilities in benefits. They were also going after J&H/KVI’s outsourced business. This came after the Health Benefits America and Williams, Thatcher Rand acquisitions.
It was the continuation of a very clear strategy of expanding market share, product offerings and revenue. Much of this expansion set the stage for, and was the beginning of, the move into HRO in the National Account (over 1,000 life) space. It would actually be interesting to calculate how much revenue growth during Fradin’s ADP tenure was organic and how much was acquisitive growth.
So despite the claim of Hewitt in the press release, it would seem that Fradin actually set the stage for ADP’s explosion into the large employer market through diversified acquisition. It didn’t come without cost, however, as ADP gave up its 40 year string of double digit earnings growth during Fradin’s reign. They also saw stagnant and/or declining share price. In the end, Fradin didn’t like the ADP succession plan that was developed, and moved on to Bisys.
Bisys was reeling from accounting issues, and during his time at Bisys, Fradin saw the stock price plummet over 35%. It is hard to pin that on Fradin, who was brought in to right a ship that had previous accounting irregularities.
What the recent history may tell us, however, is how Fradin might approach the daunting task which is Hewitt. On the most recent earnings conference call, the outgoing CEO acknowledged serious difficulty in delivery especially in recruiting and payroll. He and the CFO indicated that they had taken on too much too quickly. Perhaps Hewitt’s board thinks Fradin is a payroll guy who can get things moving.
They reality is, though, that Fradin is a strategy guy in the McKinsey mold. He won’t be able to right the operational ship. What he can do is come up with ways to either consolidate operations / service offerings or acquire market share while enhancing revenue and delivery capacity simultaneously.
My personal prediction is that Fradin will oversee the “prettying up” of the balance sheet and work to divest Hewitt of the outsourcing business itself. Consulting will remain behind, a shell of its former self. I give it 18 months. If it happens this way, it will be truly unfortunate. As a privately held company, Hewitt was the undisputed leader in its field. As a public entity it has lost its mission and what made it so good. Back in the day, you would never have heard that Hewitt took on too much too fast.
I hope I’m wrong. I hope that Hewitt can once more be at the top. As for Fradin, the rumored succession plan at ADP would have had him as the COO when Gary Butler takes the reigns, and CEO when Butler retires. I wonder if he’d rather be the COO at the currently growing and profitable ADP, or CEO at a listing ship.
About the author – Donald Glade is President and Founder of Sourcing Analytics, Inc., an independent consulting firm specializing in helping companies optimize their HR / benefits / payroll service partnerships through relationship management, financial analysis, and process improvement.
Tuesday, August 22, 2006
Tuesday, August 15, 2006
TCO in the Context of Risk
Many regular readers of SystematicHR know that I conducted a Total Cost of Ownership study to determine the cost of benefits administration. The results were released last December.
Double Dubs commented on it here, and it is how I originally came to find his great blog.
Generally, TCO is a means at getting at hidden costs. It is a way to determine the full and total cost of manufacturing, maintaining, administering, etc. a widget or function. Unfortunately, there is something TCO can’t do: measure and calculate risk or factor in quality.
The TCO studies I have conducted demonstrate that within the study groups, there is considerable variance in the bottom line cost for administration. In the case of the benefits administration and payroll studies I conducted, cost variance is consistently greater among the in-house administration group.
I would contend that the reason for this is that quality and service level is much more likely to differ widely among companies administering in-house. When a function is outsourced, the outsource provider will generally offer the same level of service and quality to all clients. Cost variance among the outsourced group comes as a result of the combination of the costs associated with the retained organization and the deal that a client cut with the outsourcer during contracting.
What does this mean, then, for a company that benchmarks costs against a peer group of companies who insource, and finds they are an outlier in that its costs are TOO LOW? Anecdotally, when I have seen this exact situation, I find that there comes a point in which cost containment and reduction clearly increases the risks associated with administration. We will more likely see fines or penalties related to non-compliance or, in the case of benefits administration, see errors in claims payments due to eligibility problems.
I wonder if the line managers that try to understate cost ever thought about how costs that are too low might be interpreted.
As companies evaluate their sourcing options for payroll, HR and benefits, this should be carefully considered. A financial business case that does not consider risk mitigation is not a complete business case. Some would counter that risk mitigation is a non-financial benefit of outsourcing. I believe it is integral to the financial case.
To begin, one can add up the total cost of error experienced over the past 3-5 years. How much in penalties has been paid for tax reporting errors, for example? In an in-house versus outsourced business case, how could assumptions be made that future in-house administration would experience greater quality so as to avoid future penalties?
Ultimately, companies will behave much as individuals do. Some will be willing to take on more risk than others. The risk of speeding is a speeding ticket and financial loss. Certainly, I wouldn’t expect continued speeding to cost me less in the future, but I will consider it when determining how fast I drive. The past experience of getting caught will impact the likelihood of speeding in the future. Get enough speeding tickets, and eventually I will outsource the driving (talk to David Letterman about that).
If I run afoul of the IRS often enough for a big enough price, eventually I will outsource payroll. Small business owners probably know that lesson better than anyone else. They also are probably more risk adverse as life savings are tied up in the business.
Next week I will write more specifically about measuring risk related to group benefit plans and techniques on evidence based cost avoidance.
About the author – Donald Glade is President and Founder of Sourcing Analytics, Inc., an independent consulting firm specializing in helping companies optimize their HR / benefits / payroll service partnerships through relationship management, financial analysis, and process improvement.
Double Dubs commented on it here, and it is how I originally came to find his great blog.
Generally, TCO is a means at getting at hidden costs. It is a way to determine the full and total cost of manufacturing, maintaining, administering, etc. a widget or function. Unfortunately, there is something TCO can’t do: measure and calculate risk or factor in quality.
The TCO studies I have conducted demonstrate that within the study groups, there is considerable variance in the bottom line cost for administration. In the case of the benefits administration and payroll studies I conducted, cost variance is consistently greater among the in-house administration group.
I would contend that the reason for this is that quality and service level is much more likely to differ widely among companies administering in-house. When a function is outsourced, the outsource provider will generally offer the same level of service and quality to all clients. Cost variance among the outsourced group comes as a result of the combination of the costs associated with the retained organization and the deal that a client cut with the outsourcer during contracting.
What does this mean, then, for a company that benchmarks costs against a peer group of companies who insource, and finds they are an outlier in that its costs are TOO LOW? Anecdotally, when I have seen this exact situation, I find that there comes a point in which cost containment and reduction clearly increases the risks associated with administration. We will more likely see fines or penalties related to non-compliance or, in the case of benefits administration, see errors in claims payments due to eligibility problems.
I wonder if the line managers that try to understate cost ever thought about how costs that are too low might be interpreted.
As companies evaluate their sourcing options for payroll, HR and benefits, this should be carefully considered. A financial business case that does not consider risk mitigation is not a complete business case. Some would counter that risk mitigation is a non-financial benefit of outsourcing. I believe it is integral to the financial case.
To begin, one can add up the total cost of error experienced over the past 3-5 years. How much in penalties has been paid for tax reporting errors, for example? In an in-house versus outsourced business case, how could assumptions be made that future in-house administration would experience greater quality so as to avoid future penalties?
Ultimately, companies will behave much as individuals do. Some will be willing to take on more risk than others. The risk of speeding is a speeding ticket and financial loss. Certainly, I wouldn’t expect continued speeding to cost me less in the future, but I will consider it when determining how fast I drive. The past experience of getting caught will impact the likelihood of speeding in the future. Get enough speeding tickets, and eventually I will outsource the driving (talk to David Letterman about that).
If I run afoul of the IRS often enough for a big enough price, eventually I will outsource payroll. Small business owners probably know that lesson better than anyone else. They also are probably more risk adverse as life savings are tied up in the business.
Next week I will write more specifically about measuring risk related to group benefit plans and techniques on evidence based cost avoidance.
About the author – Donald Glade is President and Founder of Sourcing Analytics, Inc., an independent consulting firm specializing in helping companies optimize their HR / benefits / payroll service partnerships through relationship management, financial analysis, and process improvement.
Tuesday, August 8, 2006
Relationship Management - Measuring Satisfaction
How do you know when an outsourcing initiative has been successful? At what point can you sit back, look at all that has been done and actually congratulate yourselves on a successful implementation, transition and effective and stable ongoing processing environment.
I think back to the system person I dealt with on a 401(k) conversion one time. This particular provider had gone through a major conversion to a new recordkeeping system and this system person was very proud. He claimed a perfect conversion. “Not a penny was lost. All financial data reconciled to the penny!”
Of course, I had been engaged to determine what went wrong. For while the financial data was in tact, the issues log was longer than the toilet paper lines in the former Soviet Union. Loans weren’t getting processed in a timely fashion, allocation percentage changes were getting lost, and deduction changes were taking much too long to post.
What was missing in this particular conversion was adequate training on the new systems. The people who had to actually process information didn’t have the tools and training to ensure continuity. The clients of this record keeper certainly wouldn’t agree with the system guy’s evaluation, and neither would the participants.
To me, this is where the rubber meets the road: satisfaction. All sorts of metrics can be tracked: speed to answer, case resolution time, system availability, and scores of others. For me, all of those metrics will take care of themselves and should actually take a back seat to satisfaction of the participant/employee and the employer.
Unfortunately, this can be a problematic measure when a new outsourcing relationship is begun. How fast can a new environment be expected to attain superior levels of satisfaction? One month? Three months? Six months?
Certainly, to expect a service provider to score great on satisfaction surveys on day one is unreasonable. It takes time for participants to get used to a new environment, and satisfaction surveys can reflect experiences they may have had in the old environment.
It is for these and other reasons that I am a firm believer in establishing a baseline for satisfaction at the employee level BEFORE the new environment is entered into. By establishing a baseline, improvement in satisfaction can be tracked over time. Success, at least in terms of the all important satisfaction, can be measured and evaluated.
A satisfaction score of 57% may sound dismal, but it takes on new meaning in the context of improvement from a 34% in the month before.
In terms of overall relationship management, this provides a meaningful basis for partnering with your outsourced provider. For service providers reading this, consider recommending this baseline, and conducting the survey as part of the implementation plan. Establishing a satisfaction baseline can protect all parties involved.
But this isn’t just about protecting yourselves. Ultimately, the participant employees benefit from this satisfaction-centric approach.
So if you are entering into a new environment, be it insourced, outsourced or other, please consider establishing a baseline for satisfaction in the old environment. You’ll be glad you did!
About the author – Donald Glade is President and Founder of Sourcing Analytics, Inc., an independent consulting firm specializing in helping companies optimize their HR / benefits / payroll service partnerships through relationship management, financial analysis, and process improvement.
I think back to the system person I dealt with on a 401(k) conversion one time. This particular provider had gone through a major conversion to a new recordkeeping system and this system person was very proud. He claimed a perfect conversion. “Not a penny was lost. All financial data reconciled to the penny!”
Of course, I had been engaged to determine what went wrong. For while the financial data was in tact, the issues log was longer than the toilet paper lines in the former Soviet Union. Loans weren’t getting processed in a timely fashion, allocation percentage changes were getting lost, and deduction changes were taking much too long to post.
What was missing in this particular conversion was adequate training on the new systems. The people who had to actually process information didn’t have the tools and training to ensure continuity. The clients of this record keeper certainly wouldn’t agree with the system guy’s evaluation, and neither would the participants.
To me, this is where the rubber meets the road: satisfaction. All sorts of metrics can be tracked: speed to answer, case resolution time, system availability, and scores of others. For me, all of those metrics will take care of themselves and should actually take a back seat to satisfaction of the participant/employee and the employer.
Unfortunately, this can be a problematic measure when a new outsourcing relationship is begun. How fast can a new environment be expected to attain superior levels of satisfaction? One month? Three months? Six months?
Certainly, to expect a service provider to score great on satisfaction surveys on day one is unreasonable. It takes time for participants to get used to a new environment, and satisfaction surveys can reflect experiences they may have had in the old environment.
It is for these and other reasons that I am a firm believer in establishing a baseline for satisfaction at the employee level BEFORE the new environment is entered into. By establishing a baseline, improvement in satisfaction can be tracked over time. Success, at least in terms of the all important satisfaction, can be measured and evaluated.
A satisfaction score of 57% may sound dismal, but it takes on new meaning in the context of improvement from a 34% in the month before.
In terms of overall relationship management, this provides a meaningful basis for partnering with your outsourced provider. For service providers reading this, consider recommending this baseline, and conducting the survey as part of the implementation plan. Establishing a satisfaction baseline can protect all parties involved.
But this isn’t just about protecting yourselves. Ultimately, the participant employees benefit from this satisfaction-centric approach.
So if you are entering into a new environment, be it insourced, outsourced or other, please consider establishing a baseline for satisfaction in the old environment. You’ll be glad you did!
About the author – Donald Glade is President and Founder of Sourcing Analytics, Inc., an independent consulting firm specializing in helping companies optimize their HR / benefits / payroll service partnerships through relationship management, financial analysis, and process improvement.
Tuesday, August 1, 2006
TCO and the Line Manager
In the jobs I had before I started my own business, I always felt an important part of my responsibility was to develop the people who reported to me. In fact, I always went a step beyond and looked to develop one person to the point at which they could do my job.
Of course, this wasn’t complete altruism. In fact, it was rather selfish of me. You see, when I could find someone to do my job for me, that enabled me to go beyond my own job description and find newer, more interesting and ultimately more valuable and value added things to do. That was what enabled me to be more valuable to the organization, get promoted and make more money.
What does this have to do with TCO and the line manager? Over the past three years, I have helped a number of companies determine and benchmark their TCOs of payroll, HRIS and benefits. Many of those times I encountered line managers who worked hard to minimize or hide the cost their functions experienced. The thought was that if the costs were too high, outsourcing would look too attractive, and the function they oversaw would be outsourced. Interestingly enough, even after outsourcing, these managers would still have jobs.
It seems that too many times people believe the value of their jobs is directly related to how many direct reports they have. They spend their days building “fifedoms” instead of determining ways to add value to the organization and making themselves more marketable and valuable.
I look at outsourcing as the ultimate way to find someone to do my job, thereby allowing me to move on to bigger and better things. Which is better: supervising 20 people, or being responsible for a $1 million per year outsourcing contract? Which provides you with a better means of providing security for your family and marketability for yourself? How can you best continue to grow and learn?
Eventually, the fiefdoms crumble one way or another. Do yourself a favor and build years of experience instead of one year of experience repeated x times. It does no one any good to be the best buggy whip manufacturer in the world these days.
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