Re-Engineering II Analysis Payroll Assessment Project Scope and Objectives

The Payroll Assessment team focused on the Universitys US payroll operation including Time & Labor as a key input component to payroll processing. The review covered all employees, process, and technology components necessary to support the payroll process starting from onboarding, transaction processing, time collection up to the production of paychecks and the payroll bank file. The objective of the assessment is to investigate opportunities for improving accuracy, efficiency and effectiveness for NYUs US payroll operations. This includes: utilizing industry standards and benchmarks analyzing payroll service delivery alternatives assessing current payroll processes and functions interviewing key users of payroll operations Data was gathered using two methods: Transaction and financial data was extracted from the HRIS/Payroll and Personnel Action Submission System (PASS). The resulting metrics were compared to industry standards to measure how NYU compares to other organizations. A total of 18 interviews were conducted covering 48 personnel representing the various schools, units and administrative areas. The interviews were used to identify roles, procedures, issues, opportunities, and challenges to the current payroll process.

Current State/Fact Findings

The total University (Washington Square; excluding School of Medicine) employee population is approximately 18,000+ and is paid in one of four payroll schedules -- monthly, semi-monthly, weekly and bi-weekly. In addition, there are two scheduled off-cycle payrolls each week (on Monday and Thursday), designed to catch late-submissions and special transactions. In total, there are at least 17 payroll cycle runs each month.

1. Time & Labor process is manual

NYUs Time & Labor process is almost 100% manual. Information is entered on paper forms and transmitted to Payroll for keying into the HRIS system.

There is no standard mechanism for tracking vacation and sick time; some departments use shadow systems, others do it manually, or this information is not maintained. The potential for overpayment could be significant.

2. Payroll Operating costs are significantly higher than industry average

Current annual cost of operating payroll is $4.7 million. Almost half of that cost is dedicated to supporting a manual Time and Attendance process -42.9% in field support and 6.6% in T&L labor. An additional 15.5% is in IT Labor. When added together, more than 60% of the cost of Payroll is in IT and the Schools/Units which must dedicate FTE to supporting Time and Labor tracking and Payroll.

3. Late transactions impact Payroll operations

A significant number of transactions (73.8%) from the Schools/Units are submitted late. The University issues 11,000 off-cycle payments annually. Off-cycle payments and retroactive adjustments cause rework for both the Payroll department and the School/Unit Payroll support. Off-cycle payroll functionality was custom-built for the HRIS/Payroll system in an effort to avoid financial hardship to employees and eliminate manual production of checks which are costly and inefficient.

4. HRIS/Payroll system is obsolete

Currently, the Universitys HRIS/Payroll system is called Integral -- a mainframe computer system that is approximately 30 years old. It is no longer supported by the vendor and NYU is dependent on a relatively small third-party support firm. There is substantial business risk of payroll failure as well as the possibility that the University will be unable to implement regulatory changes. In addition, the number of IT professionals with Integral expertise is small and will continue to shrink.

5. NYU lags behind other Higher Education organizations

In comparison with other higher education institutions and industry best practice, NYU lacks: An automated system for Time & Labor tracking A shared service center model for payroll and employee services An Enterprise Resource Planning (ERP) system such as PeopleSoft

6. Benchmarks show NYU has significant opportunities for improvement and savings
The estimated cost per paycheck at NYU is $15.20 compared to the external benchmark of $3.44. The NYU average payroll cost per Payee is $304.04 compared to the external benchmark of $72.93. NYU processes five times more retroactive pay adjustments compared to the external benchmark. The 2

average Payroll operation services approximately three and a half times more employee per Payroll FTE than NYU. 7. Outsourcing Payroll operations will be an expensive proposition Four options were considered as follows: Option 1 Maintain in-sourced payroll, automate and reengineer key processes Option 2 Outsource payroll (data processing), automate T&L, reengineer key processes Option 3 Outsource payroll and T&L (data processing mode), reengineer key processes Option 4 Outsource payroll and T&L (managed service model), reengineer key processes The financial analysis prepared by Accenture presented four options with Option 1 showing the lowest steady state run cost, and the best overall financials and rate of return.

Recommendations/Re-Engineering Opportunities
Based on Option 1, the project recommendations are as follows: 1. Continue to run Payroll as an insourced function. 2. Implement a Time & Labor system immediately. (Accenture estimates the cost of implementing a Time & Labor module at $7 million. Internal assessment by Human Resources estimates the cost at $2.5-3 million). 3. Transition Payroll into a true Service Center model and optimize payroll operations. 4. Reengineer key aspects of HR transaction processing to improve speed and efficiency of transactions affecting payroll.

Cost Savings
Some of the potential impacts of implementing a Time & Labor solution include:

MINIMUM SAVINGS
Up to 50% reduction in Payroll T&A staff ($250 thousand annual savings Up to 75% reduction in School/Unit payroll support staff ($1-2 million annual

MAXIMUM SAVINGS $250,000 $2,000,000

$250,000 $1,000,000

savings)

Estimated 1-3% reduction in total hourly payroll by reducing overpayment errors and inaccurate tracking of sick/vacation time ($1.5-3 million annual savings) Overall, the financial impact of the recommended option includes reduction of steady state run costs by $1,937,340 million, a 45% reduction

$1,500,000

$3,000,000

$1,937,340

$1,937,340

TOTAL

$4,687,340

$7,187,340

Payback of 2.3 years with an NPV of $18 million (based on $7M Time & Labor investment and reduced payroll operating costs of $1,937,340).

Timeline
Based on Option 1, a proposed timeline was presented with the following key milestones. Begin implementation of Time & Labor system - Oct. 2009 (Both Payroll and Human Resources should co-chair and direct the implementation plan). Begin Payroll optimization (creation of Payroll service center) - April 2010 Begin HR re-engineering - Oct. 2010 or before.