Sourcing Analytics

2009-03-04T11:29:00.000-05:00

Relationship Management - Part I

2006-05-09T09:58:00.000-04:00

Back in January, Double Dubs posted an article titled Vendor or Client - Who’s Fault Is It?

The question is not an academic one, as companies spend a combined fortune greater than the GDP of many countries in search of the seemingly elusive quality service they and their employees so richly deserve. What is really going on here?

The outsourcing industry seems to ride successive waves for any given service area:

Wave I – Move from in-house to outsourced administration primarily for cost reasons (head count reduction, lower total cost, fixed and determinable costs, cost avoidance from technology implementation or upgrade)
Wave II – Change service providers primarily for reasons of service. If cost can be reduced, great, but a cost neutral migration for better service is acceptable. (Wave II can experience multiple iterations)
Wave III – Determine that administration can be accomplished more cost effectively and with better quality in an in-house environment, and bring administration back in house.
Wave IV – Repeat I – III.

Now of course, companies will probably never bring certain functions back in-house: defined contribution recordkeeping is an obvious example. But it is surprising to me to see many companies in-source payroll, health & welfare administration, HRIS, and other HR functions after having outsourced them for years. Even more prevalent, however, is the segment of the market mired in Wave II. These are companies changing from one provider to another multiple times for quality issues.

When a company changes providers, only one thing is certain: the cost to both the client and the provider will be significant. It may or may not result in a lower annual cost that can justify the change costs. It may or may not be accomplished without service disruption or disruption to the business. Most importantly, changing providers will not guarantee enhanced service.

If a company is currently with a Tier II provider, and can move to a Tier I provider, chances are better for enhanced service. Changing from one Tier II provider to another doesn’t portend well, however. But let’s face it, Tier I national providers in this space service scores of happy clients at any given point in time. The quoted retention rates sound, at times, unbelievable. At the same time, however, most don’t rate their providers as meeting or exceeding expectations on a consistent basis.

Most reputable providers have extremely active client satisfaction programs that help to identify a consistent percentage of clients as “at risk”. The clients identified as such change from quarter to quarter and from year to year, but are a constant background of “white noise” to the provider. These are the clients that warrant significant amount of attention, often at the expense of the “safe” clients: thus the constant movement from safe to at risk and back again.

And thus, validation of the old adage “The squeaky wheel gets the grease”.

But at what cost does that grease come for the provider? And what damage to the wheel does all that squeaking cause for the employer / client?

Notice that this article has not begun to answer the original question: “Vendor or Client - Who’s Fault Is It?” This is for good reason. The answer isn’t always apparent, and definitely never a 100% one or the other answer. The fact is, responsibility is always shared, and always for unique reasons.

Over the next few weeks we will explore some of the root causes of problem service that experience has taught us. We will welcome hearing the experience of you the reader through this exploration.

We will also discuss very real techniques and actions both providers and employers can employ in and effort to enhance quality of service, cost containment and ultimately risk management as part of an overall relationship management program. We will look at specific no-name case studies to help us understand the real world dynamics of relationship management.

Let the exploration begin!

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.

Relationship Management II - Managing Expectations

2006-05-16T09:55:00.000-04:00

Last week I wrote, in part, about outsourced service providers’ client satisfaction programs which monitor how satisfied clients are with performance. At any given point in time, there are a number of clients who don’t believe their service providers are meeting, let alone exceeding, expectations.

What causes dissatisfaction? Of course, it’s easy to say that poor service will create dissatisfaction, but is that all it takes? By definition, dissatisfaction comes from unmet expectations. So a critical piece is what are those expectations, and how are they managed?

Essentially, outsource providers are responsible for managing client expectations. And after over 20 years in the business, I can truthfully say that many outsource providers fail miserably at effectively managing client expectations. Too often, expectations are set during the sales process, and are never addressed again. That’s right: the sales process when salespeople say what is needed to close the sale and buyers hear what they want in order to make it happen.

Too often the sales process itself dooms a relationship to failure, or at least significant problems. Promises are made to provide services that aren’t even offered by the provider. Unrealistic timelines are agreed to. Bad data from the current environment isn’t recognized or discussed. Ultimately it is all handed over to an implementation team that is caught between a rock and a hard place. They can’t push back because contracts were already signed and agreed to.

At times, externally engaged search consultants can help a company to avoid this pitfall, but not all companies engage this assistance. At times, even with this assistance, outsource providers insist on their ability to deliver in order to close the sale. The fact is, many companies want to believe that once a function is in the hands of an outsourcer their job is finished.

After implementation, the ongoing processing team picks up the ball and runs with it. Scrambling to correct the errors that resulted from an ineffective and late implementation, the processing team struggles to catch up while continuing day to day operations. Resetting client expectations falls far down the list.

This doesn’t sound too pretty, does it? What can be done about this expectation gap? I am happy to say that it isn’t a lost cause. There are tools and methodologies that can cast a bright light on the expectation gaps. A good place to start is in complete identification of responsibility for specific processes. Following is a case study example:

CASE STUDY

A fortune 500 company outsourced group benefits administration to a well known third party outsourcing provider. Both the plan sponsor and the outsourcing provider were asked to independently complete responsibility matrices identifying the responsible organization/department for specific process steps. What resulted was startling. There was disagreement on responsibility for over 35% of the process steps. Gaps, redundancies and ambiguities in process were clearly seen. Some of the combinations of disagreement were as follows:

Company “A” and Outsourcer “Z” each thought the other was performing a particular function. In essence, this resulted in the function not being performed. This greatly increased risk, but also resulted in “Z” consistently falling short of expectations. After all, how could they ever meet expectations for a function they weren’t providing?
Company “A” and Outsourcer “Z” each thought they were responsible for performing a particular function. This resulted in information being corrupted from overwriting, inefficiencies as multiple parties were doing the same thing, and reduced quality of service as employees were confused about how to complete certain transactions.
Company “A” didn’t know who was responsible. Somehow, many of these functions were completed, but company A never fully appreciated the scope of the work performed by the outsource provider. It became easy for “A” to become dissatisfied and look for reduced fees.

As a result of this exercise, the two parties conducted a series of half day meetings to resolve and reconcile the gaps. Responsibilities were clearly identified, and ownership was affixed.

Other work was performed as part of the review as well, and as a result of all the activity, today client satisfaction is nearly 200% greater than it was before the process began. And importantly, the client has a much better and realistic expectation of services.

Don’t underestimate the power of effectively managing client expectations!

Next week, we will explore the culture of accommodation.

Relationship Management III – The Culture of Accommodation

2006-05-23T09:54:00.000-04:00

Last week we saw what happens when service providers fail to actively manage client expectations. Client satisfaction suffers, and ultimately the relationship can become at risk.We explored the notion that client expectations are frequently mishandled during the sales cycle, but this week I’d like to talk about how the ongoing relationship is often set up for failure due to what I call the culture of accommodation.

In any administrative environment there is always plenty to be done. Almost daily, individuals can think of better ways to do things, can find problems that need fixing, can see technology they want deployed. It is a constant source of projects which can provide a handsome revenue stream for the service provider.

Clients barrage their service providers with constant requests for change. So many times without regard for the reasonableness, appropriateness or utility of the request, vendors will agree to provide the changes; often agreeing to things they have no capability or capacity to provide. To make matters worse, the vendors themselves provide the timeline in which the changes will be completed, and miss the deadlines. (We will talk about project management next week).

In the world of administrative services, it often seems the guiding principle is the retail-oriented “the customer is always right.” Any professional consultant will tell you that the customer is most assuredly not always right. In reality, the reason they hired you is because they frequently don’t know, and don’t have a hope of getting it right on their own. A consultant will tell you that their first job is to protect the client, and make them look great!

How has this gone so terribly wrong in the administrative services area? How have vendors moved to the model in which the “customer is always right?” Why do they have the “yes” mentality, the desire to please, and the “culture of accommodation?”

I would submit that it is a result of the commoditization of administrative services. Vendor or client – whose fault is it? Both are at fault for this. Clients say they look to the service provider to provide knowledge, advice, best practices, risk management etc., and yet balk when service providers push back against a service request.

Service providers boast about providing specialized expertise, yet become order takers to the requests, outlandish as they might be without asking the simple question – “Why?”

As in why do you want to make this change? What are your goals? Is there a better way to accomplish this?

Service providers believe that the more they give to the clients, the more complicated the administrative environment becomes and the harder it will become for the clients to make a change. They believe that the clients become, in essence, “captive.” The reality differs, of course. The very act of agreeing to everything heightens the risk of failure and undermines effective risk management. It provides reason for the churning of service providers from one to the next in search of quality service (all the while, pounding on fees.)

Recognize this cycle, and you can become a more effective partner. You can break the commodity mentality and the culture of accommodation. Service levels will improve, satisfaction will increase, and everyone will benefit.

Believe it or not, it can happen!

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.

Relationship Management IV – Project Management

2006-05-30T09:53:00.000-04:00

So you’ve outsourced HRIS, or payroll, or H&W benefits administration, or applicant tracking, or any one of numerous HR functions and now your job is finished, right? Well most of you know the answer to that is no.

You still have plenty to do as work through data scrubbing, conversion, or ongoing vendor relationship management. The one function you probably have not given much thought to, unfortunately, is project management. Reasonably, you figure that is in the hands of the experts now. Your outsource provider that promised best practices certainly has project management down to a science as they have performed this function hundreds if not thousands of times before.

Well, you are in for a surprise. Based on my experience, the dirty little secret in the world of outsourcing is that effective project management is in short supply. Providers don’t seem to have standard project management approaches to implementation, ongoing administration or special projects. Despite what you have assumed based on the SAS70 you so carefully studied, you are, to put it simply, lucky or unlucky based upon who has been assigned to your account.

Just last week a client asked me: “who is responsible for managing all these special projects we have waiting to be completed? Because it seems we just don’t make the progress I think we should!”

There isn’t an easy answer to this. If I asked you who in a marriage is responsible for paying the bills, you might say traditionally the man. And yet in many households the woman pays the bills (after all, anyone who has worked with 401(k) plans will tell you women are much more responsible savers).

Traditionally, the outsource provider is expected to provide the project management in an administrative relationship. You would think the client is paying for it. But I will tell you that the client has the most to lose if administration goes bad. If projects don’t get completed, the employees suffer. To my thinking, the answer to the question of who is: “whoever is best suited.”

Every relationship, whether personal or buyer/supplier, comes to an equilibrium based on the specifics of the situation. Clearly, clients cannot abrogate responsibility simply because they have outsourced a function. At a minimum, closely monitored project management is called for. Joint management is reasonable, and if necessary, take over the project management yourself.

You’d be surprised how fast a provider finds the right people to manage your account once you have determined that you need to take project management into your own hands.

Regardless of where there equilibrium ends up in your relationship, make sure you budget for project managment as you build your business case for outsourcing. No one likes big cost surprises after the decision has been made.

Oh, and by the way, if you are lucky enough to have a gem of a project manager on your vendor team, please tell your outsource provider loudly and often. They need to know!

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.

Relationship Management V – Implementation

2006-06-06T09:51:00.000-04:00

I was talking with a client this week about the implementation of an outsourced solution to payroll, HRIS and benefits administration that he would soon be going through.

He has every intention of engaging third party assistance with the implementation. He’s seen things go very wrong for companies who attempted to go it alone with their outsource providers. How or why implementations go wrong and fail can be debated. We can talk about bad project management, unrealistic time frames, faulty technology and the like, but that really isn’t the topic of this week’s posting.

No, I’d like to talk about the successful implementation.
Successful implementations happen every day across the HR spectrum. Client and vendor teams put in the hard work to make it happen. Sometimes third parties are involved to help with data cleanup, project management or other tasks, and sometimes they aren’t. Regardless at the end of implementation, oftentimes one person can be identified who just would not allow the project to fail. He or she could be on the client or vendor side (or with the third party) and can be recognized for the Herculean effort that ensured success.

At the end of the implementation you can also usually point to a person (maybe the person mentioned above), or a group of people, who, to put it bluntly, no one wants to continue working with.

Let’s face it, implementations can be hell. Nerves get frazzled, tensions run high, people put in long hours without recognition or compensation, and once great working relationships can be forever damaged.

Thinking about it, maybe it is a great idea that most service providers have implementation teams separate from ongoing processing. You will also commonly see account managers turn over within a year of completed implementations to allow for a “fresh approach.”

The human toll of a successful implementation is high. And it can often lead to a strained relationship from the start. We already discussed how expectations can already be out of whack post-implementation. This just makes it even harder.

Why am I telling you all this? Well, this series is about relationship management. Give relationship management a chance to work. Don’t start your relationship off in a hole.

What can you do to avoid this? Hire third party assistance to help with the implementation. If nothing else, let them be the bad guys! Let them be the ones who have to constantly badger people to hit deadlines. Let them be the ones to hold the mirror up to the team. Let them be the ones the client and vendor talk about behind their backs. Let them become the ones you love to hate.

And when all is said and done, and the implementation is completed and successful, let them be the ones you thank for keeping the client and vendor from each other’s throats. You’ll be glad you did.

Just think of it as pre-marriage counseling.

It’s Offshoring, Not Outsourcing!!!!

2006-06-13T09:48:00.000-04:00

I am taking a break this week from my discussion of vendor management in order to use this particular platform to rant a bit about a pet peeve of mine. As the title suggests, it’s to rant about the misuse of the word “outsourcing” when people are really referring to “offshoring”.

Today, I read this article from the Washington Times:

Special correspondent John Zarocostas in Geneva interviewed John J. Sweeney, president of the AFL-CIO, last week on the sidelines of the International Labor Organization’s (ILO) ministerial conference about the challenges of globalization and outsourcing and the prospects for employment. The conference began May 31 and runs through Friday.

The millions of people who read this blog and these words will undoubtedly cringe when outsourcing is mentioned with such derision. OK, well yeah, I know millions aren’t reading this blog, but millions are employees in THIS country in the outsourcing industry in some capacity. We on this blog work in HR and many of us owe our livings to outsourcing.

I know many who frequent this site work with brand name outsourcing providers right here in the Good ‘Ole US of A!

On a nightly basis we hear from Lou Dobbs about how America is going down the tubes because of the “Outsourcing of America.”

PLEASE, PLEASE PLEASE, we must do something about this! We who make our livings in outsourcing, whether it be HR, payroll, benefits, finance, accounting, transportation, logistics, information technology or whatever (for goodness sakes, I even outsource my lawn maintenance!!) must do what we can to change the vernacular in this country. Write to Lou Dobbs and educate him. Let him know the proper word is OFFSHORING! He should be talking nightly about the “Offshoring of America.”

Let me get you started:

Dear Mr.Dobbs,

My name is _______ and I am proud to say I am a gainfully employed taxpayer working for an outsource provider in the _____ industry right here in the USA.
I watch your program on a regular basis and marvel at how you have been able to single-handedly foster a national dialogue on the dangers of outsourcing and the “Outsourcing of America”.

The only problem, sir, is that you are misinformed. Early on in your crusade someone misled you. You see, outsourcing is good. Millions upon millions of people in this country work in the outsourcing industry. Every company in America outsources one thing or another to an American outsourcing company.

I believe the word you are really looking for is “Offshoring”. You see, that’s when jobs are shipped over seas. Please consider changing the name of your nightly segment.

Respectfully,
Donald Glade (insert your name)

When the vernacular is changed, maybe then we in the outsourcing industry will get our just due! We will be looked at as creators of jobs within our borders. We will be revered for the tax base we provide. We will be thanked for our consumerism! Never again will we be embarrassed to say what we do for a living. Never again will our children be the victims of scorn and ridicule from the kids whose parents lost jobs because of OFFSHORING!

Join me on this mission if you will. Take up the banner of outsourcing! Proclaim proudly from the mountaintops: Outsourcing is good!

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.

Shake up at Hewitt

2006-06-27T09:45:00.000-04:00

The rumors have been around in the market for some time now, but this past week it showed up in print:

What does surprise Pramuk and other experts, however, is that Hewitt doesn’t have a successor in place for Salvino. “That certainly could be hinting at a sale of its HRO business,” he says.

Marc Pramuk, v.p. of research at Everest Group, was referring to the announced departure of Michael Salvino, co-leader of Hewitt Associates’ HR outsourcing sales and accounts group. The quote appears in an article on workforce.com by Jessica Marquez. The announcement comes on the heels of the announced resignations of Hewitt’s CEO Dale Gifford and Bryan Doyle, president of the HR outsourcing business.

By any standards, the three departures signal a major shakeup at the recognized leader in total benefits administration and major player in the HRO market only two years after the merger of Hewitt and Exult was announced. At the time of the announcement, the merger was regarded as nothing short of a defining moment in the history of HRO. HRO Today magazine had this to say at the time:

“For prospective HRO buyers, Hewitt’s acquisition of Exult makes convincing management to endorse HRO a much easier task with a combined Hewitt/Exult HRO business, than it was to select either separately. And as a combined entity, the new company represents a much more formidable competitor than they previously did.”

And only one year ago, Brian Doyle had this to say:

“I don’t think HRO really took off until Hewitt and Exult merged. I think before then, we were only seeing some early adopters and a steady but lumpy increase of HR BPO deals, that was certainly the case in 2004. In 2005, we’ve seen a significant uptake in the number of deals.”
And now, while the marriage is still intact, the honeymoon is clearly over. While the union may yet last longer than a typical Hollywood wedding, if the paparazzi could stalk companies, they’d be all over this relationship. I haven’t seen the Las Vegas line, but put the over/under at 18 months and take the under.

When the merger first took place it appeared to be the perfect marriage. Hewitt was regarded as the gold standard in benefits outsourcing; setting the paradigm in how total benefits administration was delivered. Over time, they were offering more and more outsourcing of HR programs such as service award administration and employee discount programs.

Exult on the other hand had the most mature of the practices and model of BPO for HR. Hewitt would be able to expand its brand into broad HR outsourcing and gain significant market share.

The orders started pouring in! It would appear, however that the orders came in too fast as the linked articles on workforce.com suggest. Reportedly (and allegedly) implementation became more and more difficult, and now, perhaps Hewitt isn’t competing effectively for the current
HRO opportunities.

The rumors had been that Hewitt might be looking to jettison the HRO business, and that Accenture would be the taker. This last article brings ADP and Fidelity into the mix. The thinking is that another major market player will have better luck in turning the Exult HRO model to profitability. If Hewitt couldn’t turn a profit with it, however, I don’t think ADP or Fidelity could either.

Hewitt was the best at turning administration into profitability. Fidelity and ADP are the best at turning high volume transaction processing into profit. The real problem, in my opinion, is that HRO, or BPO for HR is neither solely administration nor high volume transaction processing.

When Hewitt offered services outside of its core model, the troubles began. Now, it is hard to tell what the model is. Is it HRO based on Cyborg? Is it a lift and shift of your PeopleSoft or SAP platform? Is it a one to many or a one off model?

Mike Hager, of Hager Strategic, defines HRO as. “Transformational outsourcing where the client’s existing systems and processes are completely replaced by the vendor who migrates all HR processes currently being supported by HR internally, to the vendor’s proprietary technology and service platform.” The market seems to be defining it differently these days, but that was always Hewitt’ strength. It’s what it got away from with the Exult model.

Defining its model for the future is the question that will need to be answered by the new leadership as Hewitt tries to respond to shareholder demands. In the meantime, the market needs to answer the question of how BPO applies in the HR space. Can it be a profitable service offering for the providers thereby providing clients with a stable, efficient, quality, and risk mitigated alternative or will it evolve into something totally different in the years to come?

In the final analysis, we may very well see that the Hewitt-Exult merger did indeed change the way the market views HRO, but not in the way in which people may have thought only one year ago.

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.

How Much Can Outsourcing Really Save?

2006-07-11T09:44:00.000-04:00

I set this article aside some time ago with the intention of commenting on it at some point. Now is as good a time as any.

The story, “Survey: Outsourcing saves less than claimed” is based on a survey conducted by TPI. The gist of the story is summed up in the lead:

“Outsourcing of information technology and business services delivers average cost savings of 15 percent, a survey found on Thursday, disproving market claims that outsourcing can reduce costs by more than 60 percent.”

Now I don’t know about anyone out there reading this blog, but I’ve never really heard claims of 60% savings through outsourcing. So I went to Google and started looking for myself. Then I went to Yahoo and continued looking; and darned if I couldn’t find any study or article or blog entry or anything claiming that companies can save more than 60% through outsourcing.

In all, I tried about 20 search strings. Now granted, some of the searches yielded a lot of results, but the first few pages didn’t show anything so I moved on. If any of the 1.2 million people reading this article can cite a study claiming such huge savings, please let the rest of us know. And when you do, you’ll win the door prize for most effective web search guru. Of course, people do tend to exaggerate at times. For instance, I know that just slightly over 800,000 people are reading this now. That’s nowhere near 1.2 million. So maybe our friends at TPI were just exaggerating.

Maybe they’ve seen claims of massive savings from offshoring (for a refresher on the difference between offshoring and outsourcing, click here). I hesitate to believe that TPI, one of the leaders in the sourcing consulting business, would confuse offshoring with outsourcing. But even if they did, I found this article which claims “that India’s wage rate for computer programmers is 15% that of a programmer in the United States. But in that same article, we hear from an industry expert that ‘Realistically, a company might expect to save about 20% through outsourcing.’”

The TPI study article goes on to say that “savings range between 10 percent and 39 percent, with the average level at 15 percent. These are very interesting numbers to me. Why?

Because I have conducted three Total Cost of Ownership (TCO) studies over the past three years. In all, over 260 companies have participated. Each of the companies had over 1,000 employees. In other words, these weren’t small companies.

The studies looked at the TCOs of delivering payroll services, HRIS, and benefits administration in both the inhouse and outsourced environments. In the weeks to come, I will write more about TCO and the studies specifically. What I want to point out today is that the studies showed that on average, outsourcing saved 17% on benefits administration and 37.5% on payroll administration. The TPI numbers, as I said are very interesting to me. They validate what I have seen with my own research.

For goodness sake, the “Lift and Shift” BPO outsourcing model typically goes for a cost minus 15%- 20%. So where does that 60% claim come from? Maybe it was just an uninformed middle manager at a company that was in the process of outsourcing who made the claim. Maybe it was a bad business case someone once saw.

Wherever it came from, the healine Survey: Outsourcing saves less than claimed does everyone a diservice.

Headlines like this really get to me for many reasons. I’ll talk about these in the weeks to come as well, but the biggest reason is that very frequently, the most effective outsourcing is really cost neutral as savings which are realized can be very effectively “reinvested” in the transformation of the HR function. And especially important in the success of any major outsourcing initiative is the proper management of expectations. How many people out there see this headline and simply think outsourcing really doesn’t help companies achieve their goals?

Shame, really. Maybe someone out there can shed some light on this 60% claim and together - 800,000 strong - we can educate the public on the real benefits that outsourcing can bring when done right!

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.

An Introduction to TCO

2006-07-18T09:42:00.000-04:00

Earlier this week, Elaine commented on my article from last week How Much Can Outsourcing Really Save. Elaine writes:

“Frankly, there are so many articles published stating different outcome of offshoring and outsourcing ventures. More often than not, people are confused on which side to believe in and which is telling the truth or lying.”

Elaine is, of course, correct in the sense that the savings that can be derived from outsourcing will be debated forever. Although, I would maintain that no one is actually lying. It all depends on how you count the beans.

It is for this reason that I believe that the Total Cost of Ownership (TCO) model is the most effective at determining the cost impact of changing any administrative environment. Today, I’d like to introduce the concepts around TCO.

TCO was first introduced as a concept 10 years ago by the Gartner Group. It was used to determine the cost of maintaining a computer workstation. The cost that was determined was surprisingly high. Later, Arthur Andersen was commissioned to do a study to disprove it, and the controversy hasn’t died down since. Elaine’s comment can attest to that.

In 2003, I conducted a study while at PricewaterhouseCoopers, and determined that the average cost for producing a paycheck is $16 for companies that administered payroll inhouse. Again, this was a surprisingly high number and has caused its own controversy in the market.

The reason TCO identifies higher than anticipated costs is because it is specifically designed to capture ALL costs of production or administration.What are these costs? They are the costs associated with the people (labor) doing the administration, the people implementing the systems and the people maintaining the systems. We also include the costs that are associated with the employees but are not part of the salary (non labor) such as tax and benefits load, physical infrastructure (rent, utilities, property tax), general and administrative (telephone, computer, office supplies).

Costs are further identified as either one time costs or as ongoing / recurring costs. This is important because one time costs such as implementation costs or cost for upgrades can cause cost spikes in certain years. The onetime costs, therefore, are depreciated over a certain period of time. Theses costs are amortized over three years in the studies I have conducted.

Individual companies sometimes depreciate capital expenses over 5 or seven years.The costs that are considered will typically cross multiple departments and budgets within an organization. If a TCO model isn’t used to identify costs, typically only certain department costs will be included and the cost is understated. This is why TCO produces dramatically higher cost than expected.

The calculated costs can be represented in any number of ways. It can be on a per widget manner such as $16 per paycheck. It can be presented as a total cost over the expected useful lifetime of a product such as $40,000 for a car after principal, interest, maintenance, etc over 10 years (less for an American car), it can be expressed as an annual run rate ($3 million per year), or even on a per employee basis. You name it; it can probably be expressed in a different way.

And the funny thing about numbers, depending on the expression, the numbers can seem either really big or really small. $16 per paycheck may not seem like much unless you start thinking about a company that produces 1 million paychecks per year.The interesting thing about TCO in any case, is that it provides the ability to baseline costs in a holistic manner. Any change to the environment can then be evaluated more accurately as the impacts of all departments and processes can be evaluated. This is how TCO relates to ROI. It is also where the controversy takes on a life of its own as reasonable people can disagree on what impact change can have on a system. For instance, will automating a particular process result in a head count reduction of 1 or 2 people? Is the redeployment of personnel real cost savings? How do TCO and ROI relate to build an actual business case for change?

And of course, how do figures lie and liars figure? Over the next few weeks I will be going more in depth on these questions and on TCO. I welcome input from the readers to help me focus the discussion on what will be most helpful to you.

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.

TCO: A Case Study

2006-07-28T09:39:00.000-04:00

Some time ago, a fortune 500 company acquired another fortune 500 company. At the time, the acquiring company was a PeopleSoft shop for payroll and HRIS. The acquired company had been outsourcing payroll and accessed a hosted HRIS system for their HR needs. Both companies were roughly the same size and a decision needed to be made: how should the combined company process payroll and what should be the combined company’s HRIS?

Situations such as this arise fairly frequently. You would think the answer is easy. Everything else being equal, jus do what’s cheaper, right? Of course first off, everything isn’t always equal. Quality and risk concerns and all kinds of other non-financial factors need to be considered.

And what of the question of what is the more cost effective solution? Well in this particular case, the manager in the legacy PeopleSoft shop was asked to determine the comparative costs of bringing the entire company onto PeopleSoft or on the outsourced platform. The manager did an “economic evaluation” and concluded that outsourcing the combined company’s payroll and HRIS would cost the company an additional $2.2 million per year!

How accurate and credible was this evaluation? Was there an inherent conflict of interest with having the PeopleSoft IT manager conduct the study? Last week I stated: “The interesting thing about TCO, is that it provides the ability to baseline costs in a holistic manner. Any change to the environment can then be evaluated more accurately as the impacts of all departments and processes can be evaluated.”

TCO to the rescue!

In this case, the TCO model could be credibly used to:

Evaluate the assumptions made in the economic evaluation by comparing component costs to companies that had previously participated in a broad based TCO study
Could project future state staffing and delivery models in a consistent manner using TCO methodologies
Could identify previously overlooked costs in the initial evaluation

The results of the application of the TCO model to this case revealed that the more likely outcome was that converting the outsourced portion of the company to PeopleSoft wouldn’t save $2.2 million per year, but rather only $200,000. Adjusting for better benchmarked assumptions allowed for better estimates of future upgrade costs, revealed termination penalties in the current outsourcing contract, better estimated future state staffing models, and recognized more accurate outsourced pricing given a doubling of the company size.

Interestingly, the ROI analysis that the CFO applied changed the economics back towards inhouse processing because he dismissed the contract termination fees and the higher data conversion fees as capitalized merger expenses, seemingly not “real” cost. An interesting approach I thought, but not one I thought the shareholders would agree with, this is a clear example of how TCO and ROI don’t always match up. In the end, however, the economic situation was viewed as a basic wash.

The non-financial case became even more important, and critical to the non financial case was the concept of risk. It is important to note that in the time between when the initial economic evaluation was conducted and when my own analysis was presented to the CFO, the acquiring company had lost their payroll manager, the PeopleSoft It manager and 3 other key individuals to turnover. Positions had gone unfilled for months and were backfilled with more expensive contract labor. Additional costs were incurred for recruiting, and IT initiatives were put on hold. Risks became clear, and the impact on cost became more transparent. The impact did not go unnoticed by the SOX compliance auditors either.

The lessons from this story are many. Some that I would like to highlight are the following:

Utilizing TCO methodologies allows for a more accurate “all in” analysis of cost
Using credible benchmarking of costs can illuminate bad assumptions or outright obfuscations
Even with agreed upon costs, reasonable people can still disagree on the financial treatment of costs and the impact on ROI.
Although non-financial business case elements are typically full of “soft” costs, many times these soft costs become hard dollars.
Risk analysis and mitigation should always be a primary component of any evaluation of this sort.

For those who are curious as to how this case was resolved, The CFO left the company (I’m not sure why, maybe the share holders were also “reasonable” people who disagreed on the treatment of capital expenses), a new CFO took a look at the business case and ROI analysis, and the new combined company no longer uses PeopleSoft for payroll and HRIS.

Although no company names were used in the presentation of this case study, the names were changed to protect the innocent. Of course, if ever pressed, this was a fictional case study. How is it stated in all those novels we read? Ahem:

This case is a work of fiction. Names, characters, places, and incidents are either products of the author’s imagination or are used fictitiously. Any resemblance to actual events or locales or persons, living or dead, is entirely coincidental.

Ok, I feel better now.

TCO and the Line Manager

2006-08-01T09:37:00.000-04:00

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.

Relationship Management - Measuring Satisfaction

2006-08-08T09:36:00.000-04:00

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.

TCO in the Context of Risk

2006-08-15T09:31:00.000-04:00

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.

Russ Fradin: The New CEO at Hewitt Associates

2006-08-22T09:29:00.000-04:00

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.

TCO: Measuring Risk

2006-09-19T09:26:00.000-04:00

In a prior post I wrote about the Total Cost of Ownership (“TCO”) in the context of risk. Today I would like to write about techniques to measure the cost of risk, particularly in the case of administering benefit plans.

The shortfall of TCO modeling for administrative functions is that typically, quantifying the costs of poor administration is difficult to accomplish. Just as with investment returns “past performance is not an indicator of future returns,” if poor administration in the past resulted in additional costs, we don’t know that it will in the future.

We can, however, quantify those past costs from penalties, fines, lawsuit settlements etc., and include them in a TCO calculation. Unfortunately, when it comes to benefits administration, the potentially biggest cost of poor administration is typically never known. That’s the cost of overpayment of medical, dental or pharmacy claims.

Companies attempt to ascertain these “claims leakage” costs through a traditional claims audit conducted by a benefits consulting firm such as Mercer, Hewitt or Watson Wyatt. (Now, now, if you work for Towers, PwC, Deloitte or some other firm and do claims audit, don’t get upset. I just used those firms as examples. Fact is there are brokerages and other “independents” that do this work as well. More on them later and next week.)

A “traditional” claims audit will follow a common methodology:

Randomly select a number of claims that have been paid (say 200)
Manually review the claims for reasonableness including eligibility, reasonable and customary amounts paid, covered procedures, formulary – you get the idea
Note any exceptions within the selected group and calculate the amount of the overpayment
Note the availability of recovery of overpayment from the claims payer or recipient
Total the amount of overpayments in the select group and extrapolate a total overpayment amount cross all claims

So at the end of the project, you have been provided two or a series of numbers by your consultant which tells you how much was paid in error for the select group, and how much we can assume has been erroneously paid out across the entire claims pool.

To this, I respond with an unequivocal and resounding “SO WHAT?”

You may have just paid $100,000 to get this information. What can you do with it - pay another amount to check the next 100 claims? Try to recover the amount that was identified in the first select group? There really won’t be enough there to go after the claims administrator.

As a Senior VP of HR recently said to me while recounting the story of a traditional audit he engaged on of the large consulting firms for:

“It was ridiculous; I mean here I was on a conference call with these auditors getting all excited about finding a $5,000 over payment. They were asking if I was going to try to recover it. All I could think was that it was costing more to talk about it. I have over $100 million in annual benefits spend and they’re getting excited over $5,000? Bring me some real money!”

This is a valid comment. In a world where 1% - 2% of claims are paid to ineligible employees or dependents, the Senior VP above is probably experiencing up to $1 - $2 million in claims leakage from eligibility problems alone. Add stop loss errors, subrogation, coordination of benefits, etc., and this Senior VP might be leaking up to $5 million in claims overpayments.

For a company the size of his, self insured plans are the rule. In this case, then, up to $5 million per year is coming directly off the bottom line of the company. Assuming a 20% margin, the company would have to increase sales by $25 million to make up for this.

Of course, we started by talking about quantifying risk. Better administration might prevent some of this leakage. Problems in point-in-time eligibility can occur any where in the work stream from field HR through to claims payer. A root cause analysis is difficult to perform until all the data points are available, however. How can the points be identified when traditionally, only 200 claims out of many thousands are looked at? The answer, in a word, is technology. Appropriate given the name of this Blog known the world over. (SystematicHR, for those of you who have actually read this far and may have forgotten where you were).

Technology is truly a wonderful thing and today I am happy to tell you that technology has been brought to bear on this very problem (not by SOURCING ANALYTICS, but what a great idea). Start with a time variant data warehouse of claims, eligibility and enrollment, census and COBRA enrollment information, add a dash of creative data mining and compare programs and out comes the ability to perform 100% claims audit of any set of claims you’d like: medical, dental, pharmacy – whatever. From there, you can accurately and completely identify real claims leakage with a real hope of recovery from the claims payer.

But this is just the beginning. If you think outside of the box, you’ll quickly realize that the data collected allows you to identify much more information that can assist in cost containment and avoidance programs such as root cause identification and process improvement, disease management, wellness programs, or plan design changes to name a few.

Next week, space permitting, I’ll write about one company leading the way in this approach. But first, I’ll comment and highlight a Wall Street Journal article published today which take a close look at the traditional claims audit in the context of carrier selection and independence within the broker and consulting ranks. It’s a fascinating read, and directly on point with the topic of this post.

Independent Consulting: Perception or Reality?

2006-09-26T09:21:00.000-04:00

Last week, Barbara Martinez wrote a very in-depth article which appeared on the front page of the Wall Street Journal (September 18, 2006; Page A1). A subscription to WSJOnline is necessary to view the article, but I encourage you to read it if at all possible. In the article MS. Martinez writes about independence in the health care industry with regards to product placement and claims audit. More on that in a moment, in the meantime, allow me to digress.

Enron. The word means different things to different people. For people working in the audit and professional services industry, it has a very personal meaning. The Enron scandal affected hundred of thousands of lives: perhaps millions. Tens of thousands of Enron and Arthur Andersen employees lost their jobs directly as a result of the scandal, and the ripples continue to be felt today.

The limitations placed upon the provision of professional services firms provide to they also audit has left the consulting practices of the Big Four audit firms in tatters. For example, at PricewaterhouseCoopers, the firm had to choose between providing audit services or actuarial services. The choice was easy. PwC resigned as actuaries for up to 60% of their actuarial book of business.

The Enron case was the classic juxtaposition of perception versus reality. Just because a firm derives millions in revenue from consulting services, does it necessarily follow that the corporate audit will be completed with a wink and a nudge? Sarbanes-Oxley thinks so, evidently. Of course, David Duncan didn’t help the perception any when he shredded all those work papers, did he?

So how does this relate to the article written by MS. Martinez? The parallels are striking. By my read, there are two main points made in the article:

Consultants who are engaged to select heath insurance providers often have an inherent conflict of interest because of the compensation they receive from the providers
Consulting firms that receive significant fees from claims payers also have claims audit as a core service offering thereby creating a significant conflict of interest.

Now, just because there is a conflict of interest, does it follow that services provided are of any less quality? In a Kissingerian sense, it doesn’t matter. If Enron taught us anything, it’s that perception supersedes reality. MS. Martinez gives example after example of serious conflict which leads us to the conclusion that there is something seriously wrong in the industry. When search consultants receive 15 times their consulting fees in provider compensation from the health carrier, the perception will always be that the recommendations were at a minimum clouded by payments. At worst, the recommendations were directly bought and paid for by the carrier.

In her first example, MS. Martinez tells of the $517,000 a consultant received from UnitedHealth Group after they were selected as the health insurer for the Columbus Ohio School District. The consulting fees paid by the District? $35,000. For their $35,000, the School District expected (and contractually agreed to) fully independent consulting in the best interests of the District. The consultant did not disclose the “commission” arrangements, and his insurance license was ultimately suspended for three years by the Ohio Department of Insurance.

This type of situation is not new in the industry. We frequently saw it with 401(k) plan placement also. Brokers get paid through commission. It’s when there is less than full disclosure that the perception turns.

The perception turns big time when we see that the firms that are engaged to perform traditional claims audits are also receiving significant revenue from the firms they are auditing. MS. Martinez gives a striking example in which Mercer is engaged by Suffolk County, NY to audit claims paid by Express Scripts. After initially estimating that Express Scripts had over billed by $1.1 million, Mercer later adjusted that number to just $14,000. Mercer, by the way, also had consulting arrangements with Express Scripts which were evidently not disclosed. The kicker? Suffolk County fired Mercer after they found only $14k in over billings and brought in a different auditor that found and recovered $865,000 in over billings.
The perception in this case is that Mercer did not find the over billings because there was a financial disincentive to find any. Mercer would certainly put its relationship with ExpressScripts at risk if it had found the $865,000 themselves.

In this case the reality may be, however, that traditional claims audits (as discussed last week) are just unable to find the real problems lurking in claims data. Without 100% audit, are auditors really looking for a needle in a stack of hundreds of thousands of claims forms?
Perhaps it doesn’t matter. Whether it’s an inability to find the problems or unwillingness due to conflict of interest, this story does not bode well for Mercer or the other traditional firms who derive revenue from the companies they audit. Full disclosure should be the norm here. If you are a purchaser of these services, let the buyer beware! Ask for the disclosures, do the research and make informed decisions about who to trust.

And just one side note to Barbara Martinez: We enjoy your work as a “comic-book superhero, defending the downtrodden from the greedy.” We look forward to seeing more of your in depth reporting.

A Technological Approach to Claims Audit

2006-10-03T09:19:00.000-04:00

The last two weeks I wrote about the ineffectiveness of traditional claims audit and the inherent conflict of interest some companies face when they perform such audits. This week I’d like to introduce a company that brings a different approach to the industry: HR Best Practices.

HR Best Practices was founded by Howard Gerver five or six years ago. I first met Howie 3 years ago at the 2003 HRO World Conference. From the beginning, I could tell he was one of those people who just plain “get it”. Since then I’ve found out more about his company and approach to health care claims audit. I believe it’s unique. If anyone reading this knows of other companies taking a similar approach, I’d love to know about them.
Essentially, HR Best Practices employs proprietary financial management and reconciliation tools to perform 100% audit of claims for three primary purposes:

Cost Recovery
Cost Containment
Cost Avoidance

For Howie, claims audit is ROI driven. In fact, depending on the situation, I’ve seen HR Best Practices offer something I haven’t seen anywhere else in the industry: an ROI guarantee. The flexibility of the approach makes it applicable to all types of claims data. The audits can be geared towards areas such as point-in-time eligibility, dependent audit, coordination of benefits, subrogation, disease management, cost benchmarking, etc.

There are a couple of White Papers available on thier Website here and here which give some really good information and further insight on the approach and application of the technology.
As I look at it, I definitely believe it is the approach of the future, making the traditional claims audit obsolete. I assume there are other companies taking this approach, but haven’t run across them yet. As I said earlier, if there are others offering this comprehensive approach, let us know.

For now, it seems a no-brainer that this is the way to go to get a guaranteed return on investment and demonstrable cost recovery, containment and avoidance as a result.

100% Claims Audits Revisited

2006-10-10T09:17:00.000-04:00

Nearly one year ago, Double Dubs graciously asked me to be a regular contributor on this most amazing blog of his. I think all of us can agree that what he has built here is impressive. He has created a reference tool for HR professionals (both in and out of the technology space) to come research and learn. He provides links and footnotes for us to delve as deeply as we care to delve into his posting of the day.

When he asked me to contribute, he wanted me to comment on items such as vendor management and total cost of ownership (TCO). He wanted his readers to be able to learn about getting the most out of their vendor relationships. He wanted to explore the financial aspects of HR service delivery as well.

For me, the perfect opportunity to do this is provided in the area of health claims administration. I believe we are seeing an almost “perfect storm” scenario: out of control costs, questionable independence in placements, ineffective vendor management of claims processing, lack of accountability/auditability, risk management challenges, Sarbannes/Oxley, HIPAA etc.

The fact is, from a TCO and vendor management perspective, most companies don’t know what inaccurate claims are costing them, and ineffective vendor management is the rule rather than the exception. I assume you can tell by my last three postings that I am generally dissatisfied with business-as-usual claims audit from an effectiveness, independence, and general utility perspective. I have been impressed with the recognition by individuals in the market place of a driving need for claims audit services which provide real value to companies by helping to quantify and contain costs and provide the tools to better manage vendor relationships.

Last week’s post highlighted a company doing just that. This blog, I believe, should be a place people can come to learn about trends in the market, services being provided, technologies being developed, and yes, vendors providing the services. This is why last week’s post highlighted a specific company which is demonstrating “the intersection between HR Strategy and HR Technology.”

HR Best Practices is demonstrating that intersection, and my purpose in highlighting them last week was not, in the words of Romain, for “marketing/commercial intentions.” As they say, I’ve got no dog in that hunt. As for responses to posts by vendors, I would hate to think that this would become a place of edited or censored comments. I believe the source should be considered any time a comment is made. I also believe those in the vendor community can provide great value by commenting here themselves. It enables us to learn straight from the horse’s mouth, so to speak. Of course, we wouldn’t want the space to be filled with rumor and innuendo posted by anonymous screen names. That would result in a devolvement in all we hope to accomplish here.

All that being said, I did get a private e-mail response to last week’s post alerting me to another company providing seemingly similar, if not identical services to those highlighted last week. A representative of Independent Healthcare Initiatives contacted me, and after rescuing the e-mail from a seemingly overaggressive spam filter, I learned quite a bit that the readers here can probably benefit from.

I visited their website, and viewed the testimonial video. The IHI messaging is very similar to HR Best Practices. IHI also provides an ROI guarantee: actually waiving fees if they can’t demonstrate cost savings. I am looking forward to receiving a presentation over the web.
For me, this is what it’s all about: identifying a need in the marketplace and filing it! Here now are two companies who have done just that. They also stand by their services with ROI guarantees. For a company wanting to contain costs and better manage their vendors it certainly wouldn’t hurt to consider the 100% audit approach.

I’d love to develop a roster of companies providing these services. Again, as I requested last week, please drop me an e-mail or respond directly to this post to let us all know about what is going on in this space!

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.

Hewitt’s Lessons Learned

2006-10-27T09:12:00.000-04:00

From time to time companies exhibit moments of organizational maturity not often enough seen in the market. This week’s moment comes to us courtesy of Hewitt Associates’ Mike Wright, global HRO sales co-leader, during his presentation last month at the Conference Board’s 2006 Human Resource Outsourcing Conference in Chicago.

Thank you (again) to Jessica Marquez at Workforce.com for bringing this to our attention with her fine and timely reporting in a piece entitled Hewitt Shifts Course After Recent Missteps. I write about it today not merely as a follow up to my previous articles here and here, but rather because Mike Wright’s comments are shocking in their clarity and instructive anyone looking at the HRO business today.

The article and Wright’s comments actually provide material for me to do a multi-part series over the next two months, but come to think of it, much of what is said I’ve already written about. In any case, it’s refreshing to see a service provider to recognize these lessons that Hewitt has seemingly learned (that’s learnt for those of you across The Pond):

Clients need to be intimately involved in the conversion process
Aligning goals and expectations (managing expectations) is also crucial to success
Clients need to take a close at the staffing and delivery model in the Retained Organization to maximize economic benefit
The “lift and shift” model doesn’t work!
Full customization is a rat hole; think “one to many” or “flexibility in a box”
HRO should be more about a two-way dialogue and less about “Yes, we can do that”
Service providers could do well with a dose of humility every now and again

I’d like, now, to take a closer look at each of these lessons.

Client involvement

Wright acknowledges that in the past, Hewitt has had a tendency to try to plow through problems encountered in an insular way. After all, as the leader in outsourcing they could figure out the solutions, right? Now, Wright stresses the importance of involving the client in the process more, including having customers visit its service centers and offer ideas on how to address problems.

For many of us, this is not a revolutionary idea. In fact, as a standard, I recommend that clients retain legacy staff long enough into the “post-implementation shake out” to have staff at the vendor service center for at least a month after go-live just to walk the floor. They should be listening in on phone calls, recommending improvements to process, reviewing help text, performing culture training, etc. This is true client involvement that can help ensure a successful relationship from the beginning.

Aligning Goals and Expectations
As I’ve written before, managing expectations is critical to success. After all, at its root success is defined as a function of the attainment of expectations, isn’t it? It’s about more than just hitting the SLAs that have been agreed to. It’s about determining the SLAs in a collaborative way. It’s about determining roles and responsibilities. It’s about defining the future state and being nimble enough to make adjustments to it.

Unfortunately, I don’t think it’s about putting language in the contract mandating staff reductions at the client in the post implementation world as Mike Wright suggests. This draconian measure will do nothing to foster collaboration, review, trust and understanding. Perhaps more helpful would be to agree to independent post implementation review to assure that an end to end structure that is “set up for success” has been created.

No client wants or should be expected to agree to staff reductions before the new environment has been entered in to. In fact, many times it is the second or third year when the environment is stabilized and staff reductions are fully realized.

Post Implementation Staffing

To elaborate further on the prior point, one of the primary ways in which clients fail to attain the financial goals set out in outsourcing is to make the necessary changes to the internal environment after outsourcing has been implemented. Too many times staff and functions are retained which create redundancies in process, add cost and increase risk.This basic concept has been noted and highlighted in the cost findings of TCO studies I have conducted. Collaboration and clear definition of roles and responsibilities are the way to address this, not mandated staff reductions.

The “lift and shift” model doesn’t work!

From the Marquez article: “Probably the biggest lesson learned for Hewitt is that the “lift and shift” model, whereby it would just take over a buyer’s HR processes and attempt to do them cheaper, doesn’t work, Wright said.”

Ummmmmmm……I’m shocked! Really? Can this be so? You mean you can’t do it better / faster / cheaper on day one for 20% less than it costs me now? Say it ain’t so!! You mean you won’t bring me additional cost savings / scale / leverage / best practices in year two?

OK, I am showing my bias here. This has been my belief for years. Ever since I saw PwC try to implement lift and shift years ago for an unnamed Atlanta based client (some of my readers are cringing as they remember the fiasco, I’m sure). The approach is rife with inherent weaknesses and problems. Also, as we are seeing throughout the market, it also dooms the service providers to deep financial losses. So what is the answer:

One to Many Processing

For providers to make money, and clients to get the best service and best practice that is promised, it is my belief that the “one-to-many” model is an absolute must. Flexible, scalable, and leverage-able systems and process that isn’t reinvented with every client can allow for true improvement in process and does not make every system enhancement or upgrade a one-off fire drill for every client. How can a service provider claim economies of scale if every implementation is a one off, unique environment?

As I said a few weeks ago, for Hewitt to turn the corner (if they aren’t on the auction block), I believe the answer is flexibility in the Cyborg box. It is a risky venture, but one I believe can be the best answer to ADPs as yet un-challenged Enterprise-based outsourcing model.

HRO is not about “Yes, we can do that”

Of course, when we begin talking about a one-to-many model, over-customization is just not possible. Trade offs will be made, and the vendor will have to say no. The Culture of Accommodation can begin to be broken!

Service providers could do well with a dose of humility every now and again

Again, from the Marquez article: “I come to you pretty humbly this morning,” Wright told attendees, noting the troubles the company has had.

Anyone who knows Hewitt realizes that this could not have been easy for Mike. In fact, it would not have been easy for representatives of most service organizations. I can only imagine that the commitment to speak at the conference was made before the very public “challenges” Hewitt has recently faced.

Humbled is one way to think of it. In her subtitle, Marquez says “older and wiser.” I actually like that. But whatever you call it, if Mike’s comments and position are shared by others in the organization, we will see Hewitt attain the next level of what I like to call organizational maturity. If so, let the competition beware!

Social Security Reform Revisited

2006-10-31T09:08:00.000-05:00

This past week, President Bush resurrected the issue of Social Security Reform. As part of this political season, it seems he wants to flex some presidential muscle by attempting to re-establish his core initiatives which have stalled in congress over the past 6 years. Clearly, the war on terror has made a robust domestic agenda difficult.

On the topic of Social Security Reform, much has been written - particularly on privatization. I wrote something in a comment on SystematicHR back in April before becoming a regular contributor. The general SystematicHR readership has grown since then. For some, posting it here again will be a repeat, but many of the readers of this blog get only the daily subscription and do not visit the site to read the comments, so for them this will be new.

So in recognition of the resurrection of Social Security Reform I give you:

Social Security - Private Ownership, Government Control

In 2004, the California Public Employees’ Retirement System (“CalPERS”) sought to oust the Chairman of Safeway foods, who happened to battle against the large union group represented by the CalPERS president. Columnist Dan Walters stated “What’s happening with CalPERS….is part of a larger, nationwide effort by labor unions to gain leverage with corporations by wielding investment power of public pension fund.”

I was able to learn this from the website of the California State Senate Republican Caucus. It seems they are concerned about “activism” in the management of monies for a public trust fund. And apparently with good reason; the “responsible investing” money management style which CalPERS follows may actually cause earnings to drag, and cost the people of California more in the long run.

CalPERS has a long history of using its political clout to pressure corporations to abide by CalPERS criteria that have nothing to do with investment returns. Clearly, the threat of divestiture of any particular company’s stock and the resultant decline in the stock value is powerful leverage for CalPERS.

According to the California Republican Caucus, CalPERS uses this power to “promote social and political agendas such as affordable housing, international human rights, affordable healthcare, and environmental activism.” This is, evidently, counter to the California Republican Party platform.

So how, exactly does CalPERS have so much power? Through two primary means CalPERS is able to influence corporate policy. Without getting too complicated, CalPERS can either threaten to divest it’s investment in a company (sell all their stock and drive the price down as a result), or through the voting of the “proxies”, remove board members or the chairman him/herself.

CalPERS is able to do this because as of the end of 2004, The CalPERS trust fund was valued at almost $190 billion dollars. A staggering amount to be sure.

This brings me to the primary point of this article: Social Security. The current proposals to “save” Social Security allow for individual accounts which would be invested in a mix of stock and bond funds. Individuals investing in this manner would not have direct ownership in individual company stock, but rather a “pool” of investments. The money managers of these funds would decide in what companies to invest. The money manager would also be responsible for the voting of the company stock shares or “proxies.” This is pretty much how it currently works if you invest in a mutual fund either individually or through a company 401(k) plan.

Maybe you can see where this is headed.

As applies to the Social Security Trust fund, these funds would be managed not by private mutual fund companies, but by government employees: no doubt political appointees. Well certainly, the Social Security trust fund couldn’t exercise as much clout as CalPERS, could it? I mean, CalPERS has amassed billions over the years.

In a word, yes. The Social Security trust fund could exercise that much clout, and more. To put it into perspective, the additions to the trust fund in 2004 as a result of payroll taxes was $472 billion. That’s 2.5 times the entire CalPERS fund added to Social Security in only one year.

Different current proposals for SS reform provide for different rules. For example, one proposal would allow approximately 2/3 of total employee contributions to be invested in this way. The proposal is silent on the employer portion, but let’s assume that the employer portion will not be invested in stocks. A quick calculation reveals that conservatively, $158 billion a year would be invested in stock and bond funds. That’s nearly the equivalent of a CalPERS being created every year. Talk about the potential for political and social activism!

Oddly, there is precious little detail in the proposals being bandied about. The hook seems to be simply “It’s your money, shouldn’t you be in control of it?” It seems that with this mantra, detail isn’t really needed.

One thing is clear, however, regardless of the details, through the Social Security trust fund, the Federal Government would become the single biggest investor in the stock market on the planet. OK, well, technically I suppose you could say the government would not be the owners, rather the American people: the account holders. So let’s amend the above statement:

The Federal Government would be the single biggest controller of business on the planet.

Private Ownership, Government Control

Regardless of your political leanings, is this what you want; the potential, nay the probability, that the Social Security trust fund would be used for activism at the whim of the controlling party?

“Fascism should more properly be called corporatism, since it is the merger of state and corporate power.” Benito Mussolini is credited with that quote. And he should know.

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.

Human Resources and the Mid-Term Election

2006-11-07T09:01:00.000-05:00

Today is Election Day!!! After today, we will no longer be bombarded with political ads slinging mud right out of our TV sets. After today, most of the nightly news will go back to the typical and sensationalist news of the day. I really won’t miss the political mudslinging, but election season is always an exciting time in my mind. Regardless of political stripe, persuasion, or philosophy, it’s a great time to check the pulse of the nation and determine if we are on the right course or if, as a nation, we need a course correction. And today’s election should prove to be more spell binding and exciting than the typical mid-term election.

All the news is a twitter with election coverage, and every pundit is pontificating and speculating as to the future composition of the House and Senate. At the risk of alienating our significant non-American readership, here today we take a passing glance at the American Election.

SystematicHR (at least Donald Glade) will remain neutral and unbiased (I can’t speak for Double Dubs). I will, however, color the election in terms of Human Resources.

As I said earlier, regardless of your political leaning, we can all recognize differing approaches to HR issues between the Parties. Clearly, these issues will not sway most people’s votes given the reality and gravity of today’s larger issues, but let’s take a look at them here.

Some of the issues at play in the current election that could affect the HR professional’s job include:

Social Security reform – reduced benefits, later retirement, private accounts, increased taxes, SS wage base are all potentially in play.
Medicare prescription drug coverage – the last legislation passed has cost the government much more than anticipated; a Democratic controlled Congress would surely take this on.
Minimum wage legislation – with the Federal minimum wage not changed in nearly 10 years, the parties have been fighting over this issue for a while now. With individual states also having the right to set minimums above the federal level, six states (Arizona, Colorado, Missouri, Montana, Nevada and Ohio) also have state minimum wage increases on the ballot today.
Union regulation – legislation could be introduced making unionization easier to achieve
Ergonomics regulation – Only 60 days after taking office, President Bush signed a repeal of ergonomic regulations which were to become effective October 15, 2001, dooming office workers across the country to wrist and back pain. No, seriously, this was some pretty comprehensive OSHA stuff that the Democrats would love to get back. Check it out: “ergonomic legislation” gets 682 hits on The Google!
FMLA expansion – all sorts of tinkering with the FMLA has been discussed. Keep an eye out!
FLSA regulation – The Democrats were generally unhappy with the final regulations published by the DOL in 2004, and may bring it up if given a chance.
Health care reform – On EVERYONE’s list in some fashion whether it’s through universal health care, health care pooling, or Health Savings Accounts, we will definitely be hearing about it when Congress reconvenes; but can anyone get legislation passed in this contentious arena?

There are plenty of issues to which both parties can attach themselves. There are differing perspectives, proposals and outcomes depending upon which party will control Congress.

I have no illusion that HR issues will sway the electorate, but I encourage all of you to educate yourselves on the options and approaches of both of the parties, and write your representatives to let them know how you, the HR professional, feel about these issues. You’ll feel good about yourself while fulfilling your civic duty.

And remember: Vote Early, Vote Often!

Hewitt’s Financial Results - What Do They Mean?

2006-11-14T08:57:00.000-05:00

Hewitt’s very public financial difficulties continue today, days after announcing quarter-end September 30, 2006 financial results. It is not my intention to single out Hewitt by writing about them again. Rather, as the recognized leader in HRO, Hewitt can be viewed as the industry bellwether and can provide insight into the dynamics of the industry.

Taking a look at the results as reported by workforce.com, we see that Hewitt posted modest (0.9%) revenue gains year over year while net income was down 43%. Surprisingly, net income was only $23 million on $727 million in revenue. A deeper dive reveals that the outsourcing arm of the business (over half of the business) experienced declining revenue, income and profitability.

The workforce.com article goes on to report on Hewitt’s declining market share according to an EquaTerra study. Take a look at the article if you have the time.

As a bellwether, I would also look to see what else is being said about the market in general. Are we in fact seeing declining revenue, profitability and income industry wide? An interesting (un-attributed) article published the end of last month by HRO Today provides some interesting insight.

The article, citing a NelsonHall study, points out that the growth in the industry has definitely slowed and is not meeting analyst expectations. In fact:

“The value of BPO TCV (total contract value) awarded has declined by approximately 50 percent in North America from a peak of $15.4 billion in the 12-month period ending September 2004 to $7.5 billion for the 12- month period ending September 2006”

So while Hewitt’s revenues are down, clearly the industry is still growing: albeit at a slower pace than expected or previously enjoyed. By definition, Hewitt’s market share must be slipping. But what about profitability and the reasons growth is slowing? According to HRO, “Contracts are not awarded in 30 percent of instances where BPO is evaluated.”

There seems to be a disconnect in the general market between supply and demand. The market is demanding something that is seemingly in short supply: a proven ability to deliver high quality services with operational expertise at cost-reduced levels.

These quotes from the article are telling:

“Eighty percent of U.S. sourcing managers state that lack of process operations knowledge within the vendor has led to rejection of BPO.”

“Superior process capability is essential for BPO vendor success and needs to be more widely demonstrated than at present.”

“Vendors frequently fail to justify the levels of cost reduction promised during the bidding focus. Vendors are offering cost savings but two-thirds of sourcing managers have rejected BPO as a sourcing option because of a lack of belief in the vendor’s ability to deliver the cost savings promised”

So it would seem that while companies look for better process and cost reduction, vendors are falling short of the mark. “Lift and shift” can be one reason for this. It’s not unreasonable to ask how a vendor can do it better and cheaper if they use the same people, process and technology. We have consistently seen that the productivity gains are slow to come. The market seems to be noting this more than ever as the HROToday article title states: Many Potential Buyers Stay out of Market over Concerns about Delivery.

So as the market demands change in delivery, and change seems to be the key to provider stability, growth and profitability it comes as no surprise to see Russ Fradin make the following statement last week: “Our attention in the near term will be on accelerating the growth of the benefits outsourcing and consulting businesses, and redefining our approach to the HR BPO business.”

I would caution Mr. Fradin to take care not to put the cart before the horse. Redefining the approach to HR BPO will be critical to the future success of Hewitt and the market in general.

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.

How Did They Get Here – Hewitt Associates

2006-11-28T08:50:00.000-05:00

The other day I was trying to remember what happened to a company in the benefits administration space I used to deal with quite regularly. Of course, as been happening with increasing regularity, it had been acquired some years ago by another provider and has been all but lost except in the memories of those of us in the business who either worked with or for them.

The list of these long gone companies is extensive and made me think for a moment about doing a “where are they now” series. After noodling on it for a while, I realized a more interesting tactic would be to take a look at today’s companies and see how they got to where they are today.

So as part of a recurring series, I bring you “How Did They Get Here,” a look at the mergers and acquisitions that have formed the companies we see today. Along the way, you will hear names such as Kwasha-Lipton, Howard Johnson, Wellspring Resources and Williams Thatcher Rand.

By no means will I provide the definitive history of the organizations I will look at, but it might be kind of fun. There are enough of you out there who have a history with the companies that we will look at that I hope you will contribute to the conversation with recollections of the old companies’ cultures and services or even add to the list companies that I may have missed.

For the first “How Did They Get Here” company, I take a look at Hewitt Associates. I do this not because we have written a lot about them lately, but because as a company who grew mostly organically, I thought they would be the easiest for a first company. Many of the other current service providers will take a bit more time and research to write about.

For the longest time, Hewitt Associates was the company that kept their heads down and did nothing but grow organically. They made a reputation for themselves as being the best at what they do with no excuses. Growth came easy as they became the gold standard in benefits consulting and administration.

Hewitt was founded in 1940 as an actuarial and benefits consulting firm (ABC firm), and expanded from there into broader compensation and HR consulting and administration. I don’t know if it can still be looked at in this way (perhaps others have an opinion), but at one time Hewitt was part of what many termed the Big 4 ABC firms: Hewitt, Wyatt, Mercer, Towers Perrin. Is there still a “Big 4,” or has the move to broader HR services and the proliferation of administration-only firms rendered this an obsolete notion?

In any case, Hewitt was not known for making acquisitions, but rather steady organic growth and a strong non-diluted corporate culture. All this seemingly changed in June of 2002, when Hewitt became a publicly traded company. Before this, Hewitt’s forays into new lines of business was through expansion of service, not acquisition. Remember Sageo? This was a separately run internet health and welfare services business created by Hewitt in 2000 to capitalize on the tech bubble. In September of 2001, it was wrapped back into Hewitt, its clients transitioned to the TBA platform, its employees redeployed or terminated. (Anyone reading this today who worked for Sageo? I’d love to hear recollections.)

After going public in 2002, the acquisitions seemed to come as an annual event. In June, 2002, Hewitt acquired the UK Actuarial firm, Bacon and Woodrow. Also in 2002, Hewitt acquired National City’s Retirement Plan Services recordkeeping staff, systems and clients. The client base was about 500 clients with 130,000 participants. It wasn’t a major acquisition for Hewitt, but it was a portend of a much more significant acquisition one year later: Northern Trust Retirement Services.

Northern Trust was, by most accounts, a significant player in 401(k) recordkeeping and pension services. In fact, Northern was one of the first (if I recall, they used to market that they were THE first) to use voice response systems to collect 401(k) participant transactional requests.

Also in 2003, Hewitt began its foray into broader HR and payroll services through the acquisition of Cyborg. At the time, Hewitt’s press release billed it this way:

"Hewitt becomes the only organization able to offer total HR outsourcing services - HR, benefits and payroll - with complete HR consulting expertise to large (more than 10,000 employees) companies.”“

Of course, we end this story of Hewitt acquisition with the most recent and in retrospect, most notorious of all: the Exult acquisition. Exult has been the most difficult of all to digest and with it, Hewitt has ceased the annual acquisition ritual it began in 2002.

Only time will tell if Hewitt will renew is acquisitive path, or whether they in fact will become the acquired as has been speculated for many years.

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.

How did they get here – ADP

2006-12-05T08:46:00.000-05:00

Next in our “How did they get here” series, I take a look at ADP, perhaps the most acquisitive organization in the payroll / HR / benefits space. As such, I certainly cannot begin to recount all of the activity that got ADP where it is in this space. I will however try to hit the highlights.

First, however, to give an idea of how ADP seems to buy up everything in sight, look at these acquisition figures. These are the totals spent each year on acquisitions:

1998 - $351 million

1999 - $107 million

2000 - $200 million

2001 - $ 75 million

2002 - $232 million

2003 - $270 million

2004 - $270 million

2005 - $422 million

Now granted, some of these acquisitions fall outside of the HR space (they have a line of service called Dealer Services, for example), but you get the idea. In fact, the 2002 Annual Report had this to say:

“You can expect us to increase our acquisition activity even further, as we look to supplement our internal growth with strategic acquisitions that extend our markets and add applications to our product sets.”

And look at this quote from the 2005 report:

“We will increase our emphasis on acquisitions, including a focus on transactions larger than our historical experience and entry into adjacent markets where we bring some important synergies.”

Did I read that right? Even LARGER acquisitions to come? Hmmmmmm.

Anway, here is a chronological listing of some of the acquisition highlights with a brief description of the importance as I see it. Taken together, we can definitely see that this is how ADP got to where it is today. (Note there is a gap between announce dates and close dates, so there can be some discrepancy in the years of each of the activities below)

1992 Acquires PeopleSoft 3.0 source code. This agreement provides ADP with a perpetual license to use internally, to modify and to sublicense to its clients and prospects Release 3.0 of PeopleSoft HRMS and PeopleTools on the Centura SQLBase (OS/2) and Oracle environments. Believe it or not, the purchase price for the rights was only $22 million. This became the base of what is now the Enterprise system, ADP’s platform for all things HRMS.

1994 ADP acquires the Application Group which provides ADP with an implementation arm with a deep understanding of PeopleSoft.

1995 ADP acquires Williams, Thatcher, Rand, a New York based boutique actuarial and benefits consulting and administration firm. This begins ADP’s dive into the benefits administration arena.

1996 ADP Acquires Health Benefits America (HBA), a Salt Lake City based benefits administration firm specializing in large company custom services.

1997 Acquires the payroll business of Royal Bank of Canada and Scotia Bank – an important step in becoming a global provider. Acquired Staff Management Services of Florida and renamed it TotalSource, establishing ADP as a player in the PEO space.

1998 Acquired Mercers administrative business in 401(k) and Benefits administration, expanding on the base created by WTR and HBA.

1999 Acquired Vincam, a Miami based PEO, vaulting ADP to the second largest PEO in the country. Acquired the administrative business of J&K/KVI, securing some very large benefits administration clients in the process.

2000 Acquired NetBoa, an Atlanta based COBRA administration company, expanding its benefits capabilities significantly.

2002 Acquired Avert, a pre-employment background verification firm. ADP is continuing its expansion of end to end services from hire to off boarding.

2003 Acquired ProBusiness which some say removed its only competition in the large employer payroll market. Ceridian would, of course, disagree with that statement. Acquires Scudder’s 401(k) business.

2006 Acquired Virtual Edge, further expanding its pre-employment services. Already, it has replaced the previous recruitment services its salespeople have in their sales bag. Acquired Employease, expanding web based capabilities in the middle market space.

The journey for ADP has been interesting to say the least. What you see here is just a portion of the activity. Feel free to add to the list. One thing is clear: it’s been a very different path from the one we saw last week when looking at Hewitt. It has certainly presented its own set of challenges as ADP has had to integrate substantially different cultures, services and systems platforms over the years. It hasn’t always been pretty, but ADP is in the estimation of many the true leader in the field right now.