Helping Companies Optimize Their HR/Benefits/Payroll Service Partnerships

White Paper - November 2012

The Impact of Human Resource Business Process Outsourcing (HR BPO) on Midsize Companies

SOURCING ANALYTICS

Contents
Executive Overview About the Study Key Findings & Analysis Conclusions & Recommendations 3 6 8 15

SOURCING ANALYTICS

Executive Overview
Founded to assist providers and their clients in supporting the HR services relationship, Sourcing Analytics analyzes, quantifies, recommends, and monitors solutions that enable companies to optimize their HR/benefits/payroll services partnerships.
Midsize companies generally have lean HR departments with multi-disciplined professionals that span across HR, payroll, benefits, time and labor management (TLM), talent management, recruiting, etc. This creates significant challenges for the midsize company struggling to access scalable technology and professionals as-needed. The need for both bandwidth and domain expertise to meet various compliance and human capital needs has driven demand for SaaS (Software as a Service) technology as well as subject matter expertise through business process outsourcing (BPO). In early 2012, Sourcing Analytics released the findings of a study commissioned by ADP, Inc. (ADP) titled The Hidden Benefits of HR BPO. That study focused on HR costs experienced by employers with over 1,000 employees. Sourcing Analytics has been commissioned by ADP to assess if HR BPO lowers administrative costs at midsize companies. This white paper explores the costs associated with all aspects of HR, payroll, and benefits delivery for the midsize market, and the impact of outsourcing these functions in the BPO model employed by ADP. Workforce Now (WFN) Comprehensive Services is ADPs branded HR BPO model for midsize businesses considered in this study. Unlike traditional outsourcing, this model combines expertise in technology, processes, and people into a comprehensive SaaS Human Capital Management solution. It features HR best practices and online self-service tools. Clients have access to a team of product and service experts through a dedicated ADP Relationship Manager. Additionally, clients and their employees access information through a common Web portal. Sourcing Analytics analyzed the calculated costs at four ADP midsize clients before and after their implementation of ADPs WFN BPO services. For the purposes of this study, we define midsize companies as those with 50 3,000 employees and included companies with a head count of 200 700 employees.

For more information contact: Donald Glade Sourcing Analytics, Inc. www.sourcinganalytics.com info@sourcinganalytics.com

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Executive Overview
Key Findings
Outsourcing to ADPs Workforce Now (WFN) Comprehensive Services BPO model lowers the combined costs of HR, payroll, and benefits administration.
The study demonstrates that outsourcing to ADPs WFN BPO model lowers the combined costs of HR, payroll, and benefits administration. It also drives change throughout the organization resulting in a reportedly stronger and more nimble organization. The broad-based impact of HR BPO will be explored more deeply in this paper. The key findings of this study are as follows: Outsourcing to ADPs WFN BPO model provides a 25% lower average Total Cost of Ownership (TCO) of HR, payroll, and benefits administration than other delivery models included in this study. Specifically, companies surveyed experienced a: o 34% lower TCO than in-house processing with an enterprise resource planning (ERP) technology platform ($2,089 Per Employee Per Year (PEPY) with ADP vs. $3,167 inhouse PEPY) o 23% lower average TCO than in-house processing with a combination of outsourced payroll and limited or no human resource information system (HRIS) ($1,784 PEPY with ADP vs. $2,332 combination PEPY) o 9% lower* TCO than the PEO delivery model ($1,101 PEPY with ADP vs. $1,211 PEO PEPY) ADP HR BPO clients enjoy more flexibility with regard to services that are provided by their HR department; organizations with broad and limited HR scope alike experience more cost savings vs. other delivery models. As organizations expand in size, they do not need to increase the size of internal staff to accommodate expansion; ADP clients are able to focus on strategic HR activities without requiring more head count as the overall organization grows. Organizations with limited or no technological support for HR, through effective HRIS, can access such technology in a very cost-effective manner through ADPs HR BPO, and also can reduce overall costs. ADP HR BPO clients report that their organizations are stronger and more nimble as a result of outsourcing to ADP.

ADPs WFN BPO model provides a 25% lower average TCO of HR, payroll, and benefits administration than other delivery models.

The study also suggests that organizations that are more experienced in outsourcing functionality can more quickly optimize the HR BPO relationship and take better advantage of opportunities afforded through outsourcing. Additionally, we see that the companies have an opportunity to increase the employee-to-HR professional ratio.
*Does not factor in cost differential in buying group health benefits, workers compensation insurance or tax effects from a PEO relative to the open market

SOURCING ANALYTICS

Executive Overview
Conclusions and Recommendations
Mitigating risk and helping to ensure compliance is widely seen as a significant benefit of ADPs HR BPO to clients.
While evaluating the cost impact of HR BPO, TCO methodology can make overall cost-savings opportunities more apparent. The impact of HR BPO goes beyond financial, and midsize companies would be well served to consider ADPs HR BPO for multiple reasons. Particularly: While midsize companies engage ADPs HR BPO for many nonfinancial reasons, this study suggests that cost savings can also be realized. Midsize companies can access technology more effectively and efficiently through ADP HR BPO than otherwise able. Mitigating risk and helping to ensure compliance are widely seen as significant benefits of ADPs HR BPO clients. As with all administrative outsourcing, benefits derived can be optimized through active management of change within the client organization. As experience in the HR BPO environment is gained, benefits increase.

Benefits derived can be optimized through active management of change within the client organization.

Midsize companies would be well served to consider ADPs HR BPO solutions.

This is the first study of its kind to be conducted by Sourcing Analytics. Unlike prior Total Cost of Ownership (TCO) studies, this one assesses the combined TCO across HR, payroll, and benefits. The unique elements of this market segment and the fact that HR professionals in midsize companies wear many hats makes it difficult to identify how much effort falls into any particular category. Additionally, outsourcing service providers do not always supply pricing based on the service component, and the same is true of system providers.

SOURCING ANALYTICS

About the Study

Sourcing Analytics independently collected, calculated, and analyzed data from four WFN HR BPO clients of ADP with 200 700 employees.

Purpose
Many TCO studies examine the costs of HR, payroll, and benefits administration at large companies. Most recently, Sourcing Analytics released the findings of a study titled The Hidden Benefits of HR BPO, the first study that looked at the impact of the HR BPO model on large employers. The purpose of this white paper is to explore the impact of HR BPO on midsize companies. Specifically to: Determine what cost savings (if any) ADP midsize clients are experiencing from using the WFN HR BPO model. Ascertain if clients that convert from varying HR delivery models (PEO Professional Employer Organization; in-house HR delivery; co-sourced HR delivery combination of in-house and outsourced service) are experiencing cost savings. Use this case-study approach as a pilot for additional studies.

Process
While ADP sponsored the study, it had no influence on process, analysis, or outcome. Sourcing Analytics independently collected, calculated, and analyzed data from four WFN HR BPO clients of ADP with 200 700 employees. Because a significant component of current cost for the group is ADP fees, Sourcing Analytics collected billing information from ADP to reconcile the clients understanding of fees and confirm data. The companies selected for this study have all engaged ADP for outsourcing of HR, benefits administration, and time and labor management (TLM) for at least 18 months. Each client completed a survey, which collected the data needed to calculate costs associated with all aspects of HR, payroll, and benefits delivery in both the pre-ADP and current ADP environment. These costs included administrative expenses as well as the costs of HR management, such as policy, procedure, strategy, and delivery of services. This is a broader definition of cost than was used in prior Sourcing Analytics studies. Note: Payroll BPO services are also offered within the WFN BPO suite of services as a newer service offering. None of the Payroll BPO client group has engaged for a long enough period of time to be included in this study. BPO payroll will be addressed in future studies. All participants of this study use ADP for traditional payroll services.

SOURCING ANALYTICS

About the Study

Process continued...
The four companies participating in the study vary in size and each used a different delivery model before outsourcing to ADP.
The four companies participating in the study vary in size and each used a different delivery model before outsourcing to ADP:
Company Company A Company B Industry Energy/Utilities Healthcare Prior EE Count 597 210 Curent EE Count 620 210 Prior HR Delivery Model All PR, HR, and benefits delivery done in-house with an ERP system Outsourced PR, no HRIS, in-house benefits administration Outsourced PR, no HRIS, in-house benefits administration Professional Employer Organization (PEO)

Company C

Manufacturing

375

535

Company D

Agriculture

638

644

Sourcing Analytics conducted follow-up calls with participants to verify, clarify, and validate survey responses. Sourcing Analytics experience with hundreds of prior studies and a data normalization process allowed for the maximum level of confidence in data completeness and accuracy.

Data
For purposes of this study, specific TCO cost components include: Initial system installation cost (amortized over three years) Implementation of outsourced solution cost (amortized over three years) Cost of last significant upgrade (amortized over three years) Labor costs for administration (salaries and loads) Labor costs for HR management, HR strategy, other HR functions (salaries and loads) Non-labor costs for administration (corporate overhead, facilities, General & Administrative) Non-labor costs for management, strategy, vendor management, other HR functions Labor costs for maintaining systems (salaries and loads for IT professionals) Non-labor costs for maintaining systems (overhead, facilities, maintenance contracts, etc.) Fees for any outsourcing contracts

SOURCING ANALYTICS

About the Study

Data continued...
The calculated costs are hard-dollar costs based upon actual dollars spent.
The calculated costs are hard-dollar costs based upon actual dollars spent. TCO does not capture soft costs or costs related to risk or productivity loss. Cost avoidance is also not considered part of TCO. Embedded in this methodology is the commitment to collect all costs, regardless of their administrative delivery model or task, scope, and definition of HR for each organization. The same costing methodology can be used for in-house and outsourced delivery models. Service providers in the midsize market generally dont provide a breakdown of fees by component. Because of this, the study calculates one cost across all components (e.g., a separate cost for benefits administration or HR transactional processing is not calculated). Annualized costs were calculated and are expressed as a cost per employee.

Key Findings & Analysis

The study provides five key findings.
The data calculations and analysis lead to five key findings: Lower per-employee cost Outsourcing to ADP in the WFN BPO model provides a 25.27% lower average TCO of HR, payroll, and benefits administration than other delivery models. ($1,690 avg. PEPY with ADP vs. $2,261 prior avg. PEPY) Greater flexibility The companies studied enjoy more flexibility since mission-critical HR functions vary from company to company. Moreover, the ADP model has the flexibility to meet certain customized needs. Effective scalability As organizations expand in size, they do not need to increase the size of internal staff to accommodate expansion. Fixed costs are converted to variable, allowing clients to focus on strategic HR activities. Access to technology Organizations with limited or no technological support for HR through effective HRIS can access such technology in a very cost-effective manner while reducing overall costs. Organizational strength ADP HR BPO clients report that their organizations are stronger and more nimble as a result of outsourcing to ADP.

SOURCING ANALYTICS

Key Findings & Analysis

Lower per-employee cost
All four companies in the study had lower combined HR, payroll, and benefits administration Total Costs of Ownership (TCO) per employee per year (PEPY) after implementing the WFN solution.
All four companies in the study had lower combined HR, payroll, and benefits administration Total Costs of Ownership (TCO) per employee per year (PEPY) after implementing the WFN solution. As seen in the chart below, savings ranged from $110 $1,079 PEPY.

$3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0

Source: The Impact of Human Resource Business Process Outsourcing (HR BPO) on Midsize Companies, 2012. The companies in the study were of varying sizes and came from different legacy environments. The largest savings was experienced by the company that came from a 100% in-house environment with ERP as its technological platform. This comes as no surprise. Numerous studies indicate that outsourcing is significantly more cost-effective than in-house processing. The 34% savings seen at Company A is consistent with the 30% 40% savings seen as the norm in numerous studies. Company B and Company C both come from legacy environments that included outsourcing of payroll to a non-ADP firm, no HRIS, and in-house benefits administration. The average combined annual savings for these two companies is 23.49%. This suggests multi-platform approaches that migrate to a single platform and eliminate seams can create more cost-efficiencies.

SOURCING ANALYTICS

Key Findings & Analysis

On a percentage basis, average annual PEPY savings range from 9% 34%:

Source: The Impact of Human Resource Business Process Outsourcing (HR BPO) on Midsize Companies, 2012. Company D was previously with a PEO. PEOs can be a very cost-effective strategy for delivering HR. However, for this 600-employee company, a 9% savings was seen as a result of transitioning to the WFN BPO environment. ADP also offers its own PEO solution, which was not considered in this study. Our results are based on comparing ADPs WFN BPO to a non-ADP, third-party PEO. No specific conclusions may be drawn regarding the effectiveness of ADPs PEO vs. the WFN solution. An examination of the study group suggests that organizations with prior experience in outsourcing are more successful in shifting costs to the outsourcing provider. Generally, this helps to optimize the outsourcing experience. As we look at ADP fees as a percent of TCO, we find that the study participant with the highest percentage (52%) is the one that came from a prior PEO environment. The one with the lowest percentage (31%) came from the ERP environment. It appears that the study participant from the ERP environment has an opportunity to lower internal costs further including TCO. In fact, the respondent for Company A specifically pointed this out, stating: We can still get more savings and value from this relationship. Due to internal barriers to change, the product offerings are still greater than the benefits gained to date, but we will keep plugging away.

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Key Findings & Analysis

Organizations cannot afford and dont desire to pay for services they dont need and wont use.

$2,500 $2,000 $1,500 $1,000 $500 $0

Source: The Impact of Human Resource Business Process Outsourcing (HR BPO) on Midsize Companies, 2012. While this sample size is limited, participants were not selected based upon evident cost savings. Indeed, the greatest benefits of HR BPO for midsize companies come from non-financial sources. The experiences of these four companies suggest that, regardless of current delivery models, midsize organizations can experience a financial return from HR BPO that is similar to that of large employer organizations.

Flexibility
HR means different things to different organizations. For instance, one organization may consider recruitment an HR function, while another may consider it a line business function. In some organizations succession planning is a core HR service, while other companies may not do any succession planning. In some companies, HR oversees annual performance reviews. In others, performance reviews are not a part of a formal process. This is just the tip of the iceberg. The fact is, in the midsize market, the definition of HR scope varies from company to company, probably more than it does in large employer organizations. The degree of variance in PEPY between the four companies studied indicates varying definitions of HR scope. Flexibility in any service solution is critical. Organizations cannot afford and dont desire to pay for services they dont need and wont use. The ADP delivery model provides this flexibility. For example, WFN BPO gives clients access to a recruiting specialist to assist with optional fee-based services in the areas of Job Postings, Candidate Sourcing and Full Service Recruitment. ADP also provides Background Screening on an as-needed basis for a fee. ADPs solution provides the flexibility that allows each company to utilize services that focus on the aspects of HR that it sees as mission-critical.

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Key Findings & Analysis

Scalability
Converting fixed costs to variable costs can be an important advantage.
Organizations that are growing quickly, or contracting, often find it difficult to efficiently and cost-effectively meet HR needs. Often, employers must commit to more HR staff and fixed costs, even as employee head count contracts. Or, they scramble to add HR staff as their workforce expands. Converting fixed costs to variable costs can be an important advantage for such companies. The data in this study reveal that, as Company C grew by 42% from 375 to 535, PEPY TCO actually fell over 10%. In fact, the company currently employs no more HR department staff than they did when they had 375 employees. After implementing ADP, the company decided to re-deploy staff into other HR tasks or functions, including strategic services. As a result, today Company C has 74 employees per HR full-time equivalent (FTE). Before implementing ADP, they had 45 employees per HR FTE.

90 80
Companies have the opportunity to reduce the ratio of HR FTEs-toemployee ratio.

Prior and Current Employees Per One HR Resource

77 74

70 60 50 40 30 20 10 0
Company A Prior EEs per 1.0 HR FTE Company C Current EEs per 1.0 HR FTE 40 45

Source: The Impact of Human Resource Business Process Outsourcing (HR BPO) on Midsize Companies, 2012. This is very similar to Company As experience, which went from 40 employees per HR FTE to 77. Interestingly, Company A didnt experience the change in company size that Company C did. Because Company A wasnt growing in the same way, they chose to reduce HR head count as functions were taken on by ADP. These different approaches yielded similar results.

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Key Findings & Analysis

Access to technology
Manual processing often creates significant risk of non-compliance.
Midsize companies are challenged when it comes to accessing technology for HR applications. Particularly helpful applications include manager and employee self-service, which can drive a company toward paperless HR administration. Company A took this path and, as we saw in the prior sections, reduced a high TCO significantly after implementing ADPs HR BPO. Company A had limited employee self-service with their ERP, but now has full employee and manager self-service along with ADP employee / manager call center support which is a significant contributor to cost reduction. The deployment of technology combined with access to subject matter expertise through HR BPO has been more robust and cost-effective than in-house deployment. Manual processing often creates significant risk for non-compliance with Department of Labor, Internal Revenue Service, regulatory, and state and local tax requirements. It can increase risk for overpayments to employees for pay and / or benefits claims. Previously, Companies B and C did not have any technology for HR or benefits administration. As a result of implementing HR BPO, Companies B and C have mitigated risk, accessed new technology, and reduced costs all at the same time. In fact, the Company C survey respondent specifically indicated that the company was able to better track and contain paid time off (PTO) and significantly reduce costs.

HR BPO can help reduce regulatory risk.

Organizational strength / Risk mitigation

In addition to collecting data to calculate costs, we asked study respondents to provide qualitative comments. The respondents made it clear that HR BPO has made their organizations stronger and more nimble. They also believe that they have reduced regulatory risk. Here are some of the comments we received regarding better access to reporting: Because of the better reporting we now have, we can look at schedules, PTO, productivity in ways we previously couldnt. Managers now have direct access to reporting and better manage the business. We have much better access to reports and can pull reports on demand that help us manage our business. The reporting capabilities are really great. I love our portal! One place to shop. I can get it all. With really high turnover we can manage our business so much better. On the portal, we now have all the manuals, etc.

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Key Findings & Analysis

Organizational strength / Risk mitigation continued...
HR BPO has provided value well beyond any anticipated or desired cost reduction.
Compliance was also a major theme in the comments: We have improved cost, process control, compliance, and enhanced productivity. Greatest value: Access to assistance for our payroll and benefits questions for our HR and payroll teams. It is peace of mind knowing that ADP helps us ensure our legal compliance.

Organizational effectiveness and change comments include: Another value is to be able to outsource things such as COBRA administration and have the systems to support the day-to-day processes so I can focus on our bigger projects, such as compensation strategy and succession planning. The resisters in our department sing praises for less overtime, fewer weekends, and more back-burner projects completed. We are also able to spend time on projects that we wouldnt be able to tackle if we were entrenched in the day-to-day.

Respondents made it clear that HR BPO has provided value well beyond any anticipated or desired cost reduction even though cost savings were not the primary reason for engaging ADP to begin with. Most respondents said their primary reasons for moving to HR BPO include: refocusing the HR organization on value-added activities, mitigating risk, and improving their compliance profile. They were all curious about cost savings and were anxious to participate in this study. Results make clear that cost can and should be a part of ADPs HR BPO equation.

Application to the broader market

This is the first study that looks at TCO across all aspects of HR, payroll, and benefits administration for midsize companies that outsource using the ADP HR BPO model. While the study suggests savings from using BPO, you can only draw conclusions regarding the ADP BPO model. No other BPO provider clients were included in this study. ADP is a recognized market leader in HR BPO with a one-to-many technology platform that creates a unique cost dynamic to benefit clients. Significantly, ADPs midsize HR BPO business has a retention rate of approximately 90%.

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Conclusions & Recommendations

Midsize companies considering HR delivery options should consider HR BPO.
While midsize companies engage ADPs HR BPO for many non-financial reasons, this study suggests that companies can also expect cost savings. Midsize companies can access technology more effectively and efficiently through ADPs HR BPO than they would otherwise be able to. Mitigating risk and improving a companys compliance profile is a significant benefit of ADPs HR BPO for midsize companies. As with all administrative outsourcing, companies can optimize the benefits of outsourcing by actively managing organizational change. As experience is gained, benefits increase.

Midsize companies considering HR delivery options should consider ADPs HR BPO to: Lower cost Help mitigate risk Gain better access to technology Improve the compliance environment

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. Sourcing Analytics has exercised reasonable professional care and diligence in the collection, processing, and reporting of this information. However, data used from third-party sources has not been independently verified or audited. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, Sourcing Analytics, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of reliance on information contained in this publication.

Midsize companies already using the HR BPO model can drive continuous improvement through constantly evaluating the opportunities for internal change.

COPYRIGHT NOTICE
Any Sourcing Analytics information that is to be used in advertising, press releases, or promotional materials require prior written approval from Donald Glade, President of Sourcing Analytics, Inc. A draft of the proposed document should accompany any such request. Sourcing Analytics reserves the right to deny approval of external usage for any reason. Copyright 2012 Sourcing Analytics ADP and Workforce Now are registered trademarks of ADP, Inc.

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