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In the rapidly evolving global marketplace in which outsourcing is ubiquitous, organizations need to be vigilant in their management of risk. Enterprise Risk Management (ERM) is a growing paradigm in which business leaders seek to effectively identify, mitigate, and manage risks across all aspects of the business as a whole. The ERM model classifies business risk into seven distinct, but inter-related categories: 1) strategic market risks, 2) operating risks, 3) finance risks, 4) human capital risks, 5) Information Technology (IT) risks, 6) legal risks, and 7) reputation risks.
(Beasley, Bradford, and Pagach, 2004) A proposed outsourcing of any business process needs to carefully evaluate how the proposed change may create, increase, or reduce risks in each of these business areas. This paper will examine a proposed change from a legacy payroll system to an outsourced solution and evaluate the costs, benefits, and risks of the proposed change. Additionally, it will suggest how to effectively manage such a transition. COSTS AND BENEFITS When considering the costs versus benefits of a business decision, both costs and benefits can be categorized as either direct or indirect.
Direct costs refers to those activities that require a quantifiable and foreseeable outlay of the organization’s assets. Indirect costs, however, refer to potential costs that may arise. Direct benefits refers to those activities that either increase revenue or reduce cost. As with direct costs, direct benefits can be easily quantified. Likewise, indirect benefits are more difficult to foresee and quantify. Following is a cost-benefits analysis matrix representative of the proposed payroll outsourcing project. Direct Indirect
Benefits Revenue Enhancements Cost Reductions Reduction in man-hours Increased efficiency Avoidance of noncompliance fines and penalties Costs Implementation costs Vendor fees Service agreement fees Disruption to payroll activity during transition ENTERPRISE RISK MAMAGEMENT Using the ERM model as a guide, we can identify risks associated with the proposed transition across multiple business areas. Outsourcing the organization payroll functions has the potential to expose it to finance, human capital, and legal risks.
A single vendor mistake, such as miscalculation of tax deductions has the potential for an exponentially negative effect on the organization’s bottom line, the morale, and potential loss of, the employee workforce, and legal compliance with local, state and federal regulations. Tim Stuhldreher stresses that extreme care must be given when choosing a payroll vendor. (Stuhldreher, 2012) Not only should potential vendors be thoroughly researched and vetted, a continuous process evaluation should be put into force to identify, limit, and guard against unintended risk. PROJECT MANAGEMENT
There are many tools which project managers have at their disposal to ensure that a project stays on schedule, within budget, and within scope as well as produces intended outcomes. Common among these management tools are the Gantt chart, the performance evaluation and review technique (or PERT), and the critical path method (or CPM). Each of these scheduling and management techniques has a unique focus as well as certain limitations. A Gantt chart is a horizontal bar chart which identifies the tasks which are to be completed within the project and provides a timeline for their completion.
A Gantt chart for the proposed payroll outsourcing project would have as it individual tasks formation of a vendor selection committee, selection of a payroll vendor, development of a data transfer protocol, system testing, and personnel training, and establishing a go live date. These individual milestones provide the parameters of the project’s scope, and the Gantt chart develops a schedule for completion of these milestones. One significant advantage of a Gantt chart is its simplicity.
By providing a graphical representation of the tasks and timelines, management can easily understand, and gauge, the scheduling and completion rate of the project. A Gantt chart, however, is limited in that its primary focus is the project’s scheduling, and it is inflexible to developing changes that may evolve during the project. Also, while it does identify the tasks that are milestones within the project, it does not illustrate any interdependencies among those tasks. The PERT technique attempts to deal with the uncertainties to which Gantt charts are inflexible, and allowing for uncertainty is the major advantage of PERT.
(Davis, 1966) PERT also identifies dependencies among project tasks, thus provide for a more efficient estimation of project completion time. PERT relies on multiple estimates to factor in scheduling variations due to uncertainty. In doing so, the thing that makes it advantageous over Gantt charts also is the cause for its disadvantage. PERT charts are significantly more complex than Gantt charts so managers may have difficulty interpreting and understanding them in the context of the entire project.
The critical path method (CPM) also illustrates dependencies within project activities, but CPM seeks to identify the significance of the activities and their inter-relatedness. CPM seeks to compress completion time and mitigate risks inherent in the relation of tasks to each other. In addition to the advantage of showing dependencies, CPM more clearly illustrates the impacts of scheduling revisions. As with PERT, though, the added level of detail also presents disadvantages. The larger the project, and the more tasks, the more convoluted CPM becomes with dependency paths.
CPM is also a bit myopic – it has a narrow focus on the dependency paths within the project, and it does not address resource allocation. The aforementioned project management tools all are useful for managing the scheduling and duration of a project. Project managers must also evaluate whether the project is delivering the intended outcome. Such evaluation should not only occur at the terminal end of a project, it should be a continued process throughout the life of the project. (Zofi, 2012) Additionally, employee morale and perception needs to be taken into consideration when implementing a change.
This is especially true when it comes to outsourcing business functions. Elmuti, Grunewald, and Abebe observed that, consequent to outsourcing strategies, employees report lower levels of job satisfaction, lower levels of organizational commitment, and higher intentions to quit. (Elmuti, Grunewald, and Abebe, 2010) It is human, and organizational, nature to resist and be skeptical of change, particularly when a major business function that had previous been done in-house is outsourced. A proactive project management plan will anticipate and address employee resistance.
Organizations considering an outsourcing strategy would be well served to openly and actively communicate with their employees the reasons for, and impact of the potential change while welcoming and encouraging questions and feedback from them. The more the employee base can be involved in affecting, and buy into change, the less their resistance may be. References Beasley, Mark, Bradford, Marianne, and Pagach, Don “Outsourcing? At Your Own Risk” Strategic Finance (July 2004), pp. 23-29 Davis, P. M.
“From Scientific Management to Pert-An Evolution” Nebraska Journal of Economics and Business (1966), pp. 34-45 Elmuti, Dean, Grunewald, Julian, and Abebe, Dereje “Consequences of Outsourcing Strategies on Employee Quality of Work Life, Attitudes, and Performance” Journal of Business Strategies vol. 27, no. 2 (2010), pp. 178-203 Stuhldreher, Tim “Payroll complexity leads to outsourcing” Central Penn Business Journal (June 22, 2012), pp. 17-18 Zofi, Yael “Getting Deliverables Out the Door” Industrial Engineer (July 2012), pp. 35-40