PURPOSE

Council has requested staff to evaluate the fiscal and practical impacts of outsourcing the City�s HR, Payroll, Benefits, and Time Management processes as compared with various in-house solutions.  This study will help determine the most effective strategy to pursue in order to migrate these operations off of the City�s legacy system and provide a more effective process that can be expanded to meet the ever changing needs of the City and its employees.

BACKGROUND

The City�s Information Technology Department has developed, operated, and maintained a series of custom mainframe applications that have supported City processes for over 20 years.  These services include Human Resource and Benefits operations for the Management Services Department, Payroll operations for the Financial Services and Treasury Departments, and Time Management capabilities for the entire City.

In general, each of these systems maintains data, tracks changes, and provides reporting capabilities for their respective operations: Human Resources - employee personnel data (salary, title, position, promotions, etc.); Benefits - employee insurance data (dental, vision, life, disability, etc.); Payroll - check issuance (earnings, union dues, W2s, etc.); and Time Management - employee time (overtime, sick, vacation, etc.).

The need has arisen to replace these older systems with a more modern solution that takes advantage of state-of-the-art technology designed to streamline business processes and help control and contain costs.  This technology upgrade, either in-house or outsourced, will provide a more efficient operational environment than the legacy systems which have become obsolete as they have reached the end of their usefulness, are inflexible, and can not be easily expanded.

On May 22, 2004, at the direction of Council, staff investigated the implications of outsourcing these legacy systems.  This was in response to Oracle Corporation�s costly proposal to upgrade these systems with an in-house Oracle solution.  This report summarizes the comparative analysis of outsourcing versus various in-house solutions.

ANALYSIS

The focus of this analysis is to determine the best method to pursue in upgrading the City�s HR, Payroll, Benefits, and Time Management systems. The technology change will provide services that are unreachable with the existing operation and will benefit City operations in virtually every department.  Process improvements such as self service and integration with other systems will certainly reduce labor costs by requiring less staff involvement - doing more with less.  A flexible and expandable system will also provide an adaptive environment more responsive to customer needs. 

Available options for the resolution of this issue:

1)     Leave the current system in place and do nothing but maintain it.

This option is not viable. As stated previously, the current system cannot meet the changing needs of the City.  Furthermore, it is not flexible, not expandable, and resides in an isolated environment where it can not share resources resulting in duplication of data and labor.  In short, it is inefficient and insufficient.

2)     Outsource the operation to a third party.

Outsourcing would require the City of Burbank to contract with a vendor to run HR, Payroll, Benefits, and Time Management system software on the vendor�s computer hardware.  The vendor will assume all responsibilities for system upgrades, maintenance, security, data redundancies, and support.  The City would maintain administrative processing of data input and changes.  The vendor would be responsible for providing all output-related items to the City (checks, W2s, etc.).

City staffing resources would be reduced with the introduction of self service.  This new feature, which is common in modern systems, would allow employees to access their own employee file and update their information without relying on HR, Benefits, and Time Keeping staff to perform the queries and updates for them.

3)     Implement an in-house solution.

An in-house solution would require the City to procure all hardware and software products while contracting and managing consultants for the implementation.  Once implemented, the City would be responsible for all system upgrades, maintenance, security, data redundancies, and support.  The City would also maintain all administrative processing of data input and changes as well as all output.  City staffing resources would also be reduced using a self service feature.
 

The evaluation process - outsource versus in-house:

During the evaluation process City staff (including members from the Information Technology, Management Services, and Financial Services Departments) performed many activities to evaluate these options.  A City survey was performed to obtain cost information on existing operations.  Staff worked with the leading provider of HR outsourcing, ADP, Inc., to identify the City�s requirements, current challenges, and opportunities.  An ADP customer survey was also obtained to evaluate ADP customer satisfaction.  Finally, staff also attended system demonstrations for two in-house systems (Oracle and CGI AMS) and visited various sites to see these systems in person and to ask questions of the operation.

Benefits of outsourcing:

The implementation period for an outsourced solution is far less compared to an in-house product (4-6 months vs. 12-18 months).  The outsource vendor is already set up to incorporate the requirements for a new client and can use existing and proven processes to expedite the implementation.  The benefit for this is that the City would be up and running on the new technology faster.

The support for an outsourced solution (including hardware, software, and technical) would be the sole responsibility of the vendor.  The benefits to the City would include better utilization of existing IT resources and core competencies so staff can make other advances in technology for the City.  In addition, liability issues regarding security and confidentiality would not reside with the City.  The vendor would also be wholly responsible for system backup and Disaster Recovery operations.

Challenges of outsourcing:

Outsourcing proves less desirable from a data control and data integration perspective.  The confidentiality and security of sensitive information can be better managed in-house within the constraints of an existing secured City environment.

Unanticipated MOU changes would increase costs and add delays compared with those implemented internally.  An in-house solution would include a test environment that would allow staff to begin changes before they are finalized without affecting production.

The very nature of outsourcing means that the system can not exchange data in real time with other City systems, such as Oracle Financials.  This exchange would have the potential of eliminating data redundancy, minimizing data entry errors, and integrating with other technologies, such as GIS (Geographic Information System).  These gains could not be realized with outsourcing.

Outsourcing HR, Payroll, Benefits, and Time Management processes would not significantly reduce staff costs.  Outsourcing is limited to printing paychecks and offering benefits information for employees to access on-line.  Hr/Payroll staff currently provides many more services than those addressed by outsourcing and would still be needed to deal with HR/Benefits issues, input/process/calculate payroll information to be provided to the vendor, make payroll corrections, recruit and orient new employees, and maintain personnel files, to name a few.  In addition, HR/Payroll functions performed by other City staff (IT, City Treasurer, timekeepers, etc.) represent a small fraction of their responsibilities.  Furthermore, while the outsourcing vendor would be responsible for system upgrades, there would be much effort required by City HR/Payroll staff to assist in the upgrade process including defining and communicating the specifics of the changes and rigorous testing.

FISCAL IMPACT

In an effort to quantitatively understand costs involved with each option, several factors were considered:

The current system�s labor costs were calculated (including timekeepers, IT, Payroll, and HR staff) for each department based on rate of pay and task duration.  Those totals were combined with other costs (checks, forms, banking fees, hardware maintenance, licensing fees, etc.) to provide a total system cost.

A cost for the outsource option was calculated using numbers obtained from an ADP proposal (the most prominent outsourcing vendor) included software purchase, software maintenance, and consulting fees.  City IT labor costs, and business labor costs were also factored in as well as costs associated with major MOU changes due to business process changes required in an outsourced environment.

Costs for three in-house solutions using proposals from Oracle Corporation and CGI AMS Corporation were calculated much the same as those of outsourcing with two exceptions.  Hardware costs for procurement and maintenance were added due to the nature of the solution.  And, since an in-house solution can better match current business functions, no costs for MOU changes were applied.

The following chart is a summary of estimated project costs by duration.  Please see attachment for the details behind this summary.

In summary, the cost of each of the three in-house alternatives that were analyzed is less expensive over a ten year period.  The cost of two of those alternatives is less expensive over a 5 year period.  Furthermore, the cost savings for in-house solutions is even greater over a longer period of time (over 10 years).  In-house costs are largest during the initial implementation period and adjust downward during ongoing production.  Outsource costs, on the other hand, tend to remain constant or increase over time.

RECOMMENDATION

Compared with in-house solutions, outsourcing is more expensive (especially over time), provides less data control, less security, and would not integrate with other City systems.  Moreover, outsourcing the HR and payroll systems would not significantly reduce staff costs (as is normally seen in private industry where entire organizations are eliminated with the outsourcing of entire business processes) because outsourcing only replaces a fraction of the services currently provided by City staff.

Staff recommends not to outsource the City�s HR, Payroll, Benefits, and Time Management systems.

Attachments: Spreadsheet comparing costs of various HR/Payroll Systems

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