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Taking costs out of your business: quickly
- 1. Taking costs out of your business: quickly 27 February 2009 Nigel Bateman Hugh Shanks Katharine Turner Reproduction in whole or part of this material is strictly prohibited. They should not be relied on as a substitute for specific advice. Therefore, no responsibility for loss occasioned to any person as a result of acting or refraining from acting on the contents of or information contained in these notes can be accepted by Towers Perrin. © 2009 Towers Perrin
- 2. Value proposition We have a checklist of over 100 cost saving interventions in the area of compensation, benefits and HR function spend Working with our client base, we are adding to this list – and know how – daily Not all measures are suitable to all companies We will identify, quantify, and prioritise what works best for you If applicable, we are open to partnering with you on a gain sharing basis Proprietary and Confidential © 2009 Towers Perrin 1 Not for use or disclosure outside Towers Perrin and its clients
- 3. These are challenging times and… Proprietary and Confidential © 2009 Towers Perrin 2 Not for use or disclosure outside Towers Perrin and its clients
- 4. … the costs of total remuneration are significant Overall HR Domain* As a % of Total Market Capitalisation for the Top 50 European Companies (using year end 2007 information) 16 14 12 10 8 6 4 2 0 < 20% 20 - 40% 40 - 60% 60 - 80% 80 - 100% 100 - 125% 125 - 150% > 150% * Overall HR domain = future pay/benefit costs (capitalised over five years) + accrued past obligations (e.g., pension, postretirement medical) Proprietary and Confidential © 2009 Towers Perrin 3 Not for use or disclosure outside Towers Perrin and its clients
- 5. The agenda for today The need for speed A framework for analysis and action Cutting costs from : rewards benefits the HR function Moving forward Proprietary and Confidential © 2009 Towers Perrin 4 Not for use or disclosure outside Towers Perrin and its clients
- 6. The need for speed Large SIZE OF SAVINGS Small Savings in Increased Immediate Savings in future years ROI cash current financial year SPEED OF SAVINGS Proprietary and Confidential © 2009 Towers Perrin 5 Not for use or disclosure outside Towers Perrin and its clients
- 7. Our overall approach for taking actions Preparation Identification Validation Realisation Context/ Identify Examine Execute desired required sources of changes outcome: internal data savings in detail Size of Obtain internal savings data Prioritise Speed Benchmark Develop action Risk appetite plan Qualify Approach: potential ‘Top down’ savings Broad involvement Proprietary and Confidential © 2009 Towers Perrin 6 Not for use or disclosure outside Towers Perrin and its clients
- 8. Identification: Assessing cost saving opportunities Estimated Current savings Source of savings Ease Risks Timescale Country A Spend potential (description) (£m/yr) (£m/yr) COMPENSATION cut base pay 450 50 IMMEDIATE performance mgt. Base salaries working time changes Annual bonus Sales incentives Additions eg overtime, shift, stand by etc Long-term incentives Other compensation BENEFITS Pension/retirement Risk benefits Other benefits + cross border opportunities Proprietary and Confidential © 2009 Towers Perrin 7 Not for use or disclosure outside Towers Perrin and its clients
- 9. Identification: Assessing cost saving opportunities (continued) Estimated Source of Current Spend savings Ease Risks Timescale Country A savings (£m/yr) potential (description) (£m/yr) OTHER EMPLOYMENT COSTS Social security/payroll taxes Employee absence Employee liability/litigation Employee health & safety/wellbeing Other HR FUNCTION COSTS Employment costs Non-employment costs + cross border opportunities Proprietary and Confidential © 2009 Towers Perrin 8 Not for use or disclosure outside Towers Perrin and its clients
- 10. Identification: Cutting costs from rewards rather than headcount There are three main sources of savings Reduce future costs Cut current costs Target “spend” Pay Re-design Performance Bespoke incentives Working time Improve return on investment Re-calibrate performance standards Research Re-mix Comms/processes Proprietary and Confidential © 2009 Towers Perrin 9 Not for use or disclosure outside Towers Perrin and its clients
- 11. Identification: Rewards – sample items of checklist of 25 Estimate Possible Actions – selected examples Ease Risk Timing Make 10% of the workforce £100m CURRENT YEAR redundant OR £20m Cut base pay by 20% IMMEDIATE £15m Freeze base pay CURRENT YEAR £5m Defer salary increase CURRENT YEAR £2m Differentiate on increases CURRENT YEAR £10m Manage out poor performers CURRENT YEAR £43m “Shut down”/sabbaticals IMMEDIATE £16m Part-time working IMMEDIATE £22m Cancel overtime IMMEDIATE £14m Reduce bonus IMMEDIATE £10m Reduce LTI levels CURRENT YEAR Proprietary and Confidential © 2009 Towers Perrin 10 Not for use or disclosure outside Towers Perrin and its clients
- 12. Validation Targeting reward to ‘pivotal’ roles will be crucial Talent Segment and Value Potential Strategic Action Today Tomorrow Strategic Build Critical to driving long-term competitive Job families advantage, with specialized skills or knowledge that affect the strategy Core Protect Support Streamline/ Cannot do without, but whose value could Outsource be delivered through alternative staffing Job families strategies other than full-time headcount affected by the strategy Non-Core Redirect Talent whose skill sets no longer align with the company’s strategic direction Source: The Conference Board, Strategic Workforce Planning, 2006. Proprietary and Confidential © 2009 Towers Perrin 11 Not for use or disclosure outside Towers Perrin and its clients
- 13. Validation Targeting pivotal roles Individual Performance High Low Below Threshold Threshold Target Maximum Above Maximum High Below Average Merit ~1 – 1.5x Average Merit ~2x Average Merit No Incentive Target Incentive ~3x Target incentive Eligible for Equity ~1 – 1.5x Target Equity ~3x Target Equity Normal Training High-performer Training High-performer Training Consideration for Targeted for Development Developmental Assignments Assignments How pivotal is the role No Merit Average Merit ~1.5 No Incentive Target Incentive ~2.5x Target Incentive No Equity Target Equity ~3x Target Equity Normal Training Normal Training Normal Training High Consideration for Development Assignments No Merit Below Average Merit ~1 – 1.5x Average Merit No Incentive Target Incentive ~2x Target Incentive No Equity Below Target Equity ~2x Target Equity No Training Normal Training Normal Training Immediate Performance Eligible for Development Eligible for Development Plan Assignments Assignments Low Proprietary and Confidential © 2009 Towers Perrin 12 Not for use or disclosure outside Towers Perrin and its clients
- 14. Validation Cost savings can result in improvement • 5% increase in Base Salary • 120% of current target STIP • Stock Options (WITHOUT perf. cond.) with the same face value of the last grant • Restricted Stock with face value of 50% of last Stock Options grant • 5% increase in Base Salary 30% • No LTIP / PSP • 120% of current target STIP • Stock Options (WITHOUT perf. cond.) with the same face value of the last grant 20% • No Restricted Stock • No LTIP / PSP • 5% increase in Base Salary • 120% of current target 10% STIP Change in Satisfaction • No Stock Options • No Restricted Stock • No LTIP / PSP 0% ($80,000) ($60,000) ($40,000) ($20,000) $0 $20,000 $40,000 -10% Current state • No change to Base Salary 64% satisfaction • 120% of current target STIP • No Stock Options -20% • No Restricted Stock • No LTIP / PSP -30% • No change to Base Salary • 80% of current target STIP • No Stock Options -40% • No Restricted Stock Satisfaction based on 425 responses • No LTIP / PSP Change in Cost ($000's) Cost extrapolated to full population of 598 Proprietary and Confidential © 2009 Towers Perrin 13 Not for use or disclosure outside Towers Perrin and its clients
- 15. Realisation: Rapid identification may not result in rapid decision making Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Cut current costs A B C Decision made on way forward Reduce future costs Identify and D E F Validate Strategy Governance Take any immediate G H actions Improve return on investment I J K = action/intervention Proprietary and Confidential © 2009 Towers Perrin 14 Not for use or disclosure outside Towers Perrin and its clients
- 16. Identification: Cutting costs from benefits There are three main sources of savings Simplification Benefit design Lower running costs New & existing employees Platform for change Market trends Agile decision-making Using member choice Accounting cost and cash Deficit and funding control Underlying cost vs timing De-risking? Proprietary and Confidential © 2009 Towers Perrin 15 Not for use or disclosure outside Towers Perrin and its clients
- 17. Identification: Benefits - sample items of checklist of 40 Estimate Possible Actions – selected examples Ease Risk Timing Make 10% of the workforce £100m CURRENT YEAR redundant OR £2m Close DB plan to new entrants IMMEDIATE £30m Reduce DB accruals CURRENT YEAR £50m Close DB accruals CURRENT YEAR £6m Reduce DC contributions CURRENT YEAR £14m Increase employee contributions CURRENT YEAR Convert employee contributions to £2m CURRENT YEAR salary sacrifice £14m Move pension accruals overseas CURRENT YEAR £1m Consolidate pension plans CURRENT YEAR £1m Reduce employee medical IMMEDIATE £2m Multinational pooling CURRENT YEAR Proprietary and Confidential © 2009 Towers Perrin 16 Not for use or disclosure outside Towers Perrin and its clients
- 18. Identification: Understanding costs can reveal opportunity Illustrative example Benefits costs analysis Asia Europe €m UK Americas Germany 0 50 100 150 200 250 300 350 State mandated Benefits Retirement Benefits Other Benefits* IME Benefits Germany Americas UK Europe Asia State mandated Benefits 194 65 71 105 26 Retirement Benefits 108 60 105 28 12 Other Benefits* 9 57 33 21 27 IME Benefits 1 10 30 5 52 TOTAL 312 191 239 159 117 * Health & Well-being and other Benefits (non state mandated) and Long Service Awards Proprietary and Confidential © 2009 Towers Perrin 17 Not for use or disclosure outside Towers Perrin and its clients
- 19. Validation: Assessing opportunities Country Opportunity Estimated Cost Saving Estimated Cost Impact on of Action Employee Value ($’000) Proposition 2007 Annual Long ($’000) Term ($’000) ⎯ Belgium Introduce 200 25 Neutral bonus sacrifice for savings plan ⎯ France Harmonise 200 70 Small negative health/risk benefits Germany Move to cash 50 350 150 Mix of negative balance and positive ⎯ Netherlands Introduce 550 120 Negative employee contributions Switzerland Move to defined 150 250 70 Negative contribution UK Salary sacrifice 600 1,500 150 Small positive for employee contributions + review multinational pooling/captives Proprietary and Confidential © 2009 Towers Perrin 18 Not for use or disclosure outside Towers Perrin and its clients
- 20. Validation: how will the picture evolve? Risk Exposure Cost 5% 400 A n n u a l C o s t a s a % o f P a y ro ll 4% 300 $ in M illio n s 200 3% 100 2% 0 1% 2010 2012 2014 2016 2018 2020 2022 2009 2011 2013 2015 2017 2019 2021 2023 Current Pension Plan Recommended Pension Plan Current Pension Plan Recommended Pension Plan Proprietary and Confidential © 2009 Towers Perrin 19 Not for use or disclosure outside Towers Perrin and its clients
- 21. Realisation: A plan typically has four inter-linked strands Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 if new plan Simplification established B H K Decision made on way forward Accounting Cost & Cash Identify and C G J Validate Strategy Governance Take any immediate F D actions A if consultation Benefit Design I E L = intervention Proprietary and Confidential © 2009 Towers Perrin 20 Not for use or disclosure outside Towers Perrin and its clients
- 22. HR function cost reduction There are three main sources of savings Reduce volume of work Prioritise vs criteria (e.g. strategic Reduce HR FTE value, cost, time) and identify Apply ratios, spans of control work to stop Redesign structure – refine Reduce demand Redesign structure - radical Streamline processes Move work to managers/ employees Reduce cost of providing services Reduce use of suppliers Renegotiate supplier terms Increase use of outsourcing Increase use of offshoring Increase use of service centres Proprietary and Confidential © 2009 Towers Perrin 21 Not for use or disclosure outside Towers Perrin and its clients
- 23. Identification Required Benchmarks Comparisons Example Savings Internal Data Metrics That Provide Sources Types of Comparison Moving from median to Insights LQ in total HR cost per Ratio of total head Towers Perrin HRSD & By company size total FTE would save: count to HR FTEs HRO Surveys By industry type % of HR function costs per Towers Perrin Human £ HR By geography head Capital Metrics Costs By sub-function HR function costs as Saratoga In 5,000 0.70 20 person percent of net Everest Research co. operating costs In 10,000 Degree of self-service 2.39 27 person Cost per process co. In 20,000 Ratio of total head 10.7 39 person count to HR generalists co. HR outsource ratio In 50,000 Vendor costs 14.8 34 person co. Proprietary and Confidential © 2009 Towers Perrin 22 Not for use or disclosure outside Towers Perrin and its clients
- 24. HR Function - sample items of checklist of 35 Estimate Possible Actions – selected examples Ease Risk Timing Reduce volume: Simplify data £2m CURRENT YEAR management £3m Reduce volume: Extend self service CURRENT YEAR Reduce HR FTE: Reduce distributed £2m IMMEDIATE specialists Reduce HR FTE: Increase span of £2m CURRENT YEAR control and decrease layers Reduce HR FTE: Increase HRBP £4m IMMEDIATE manager ratio Reduce cost of providing services: £2m IMMEDIATE Recruitment supplier consolidation £1m Recruitment marketing consolidation IMMEDIATE Reduce cost of providing services: £4m FUTURE YEARS Move from classroom to e-learning £2m Centralize training CURRENT YEAR £2m Reduce travel costs IMMEDIATE Proprietary and Confidential © 2009 Towers Perrin 23 Not for use or disclosure outside Towers Perrin and its clients
- 25. Realisation MEDIUM – LONGER TERM SOURCE SHORT-TERM ACTIONS ACTIONS Reduce Engage with key managers Identify priority processes (cost, volume of work value etc) Agree what to stop Redesign Communicate and stop Design and implement ESS and MSS Reduce HR Develop staffing principles Redesign structure FTE Apply top down targets Define new roles Manage redundancy process Develop staffing principles Conduct selection process Manage redundancy process Reduce cost of Renegotiate with suppliers Produce business case for providing changes Confirm potential for greater use of services existing shared services, offshoring Move work to existing SS, offshore Identify potential for selective / broader outsourcing Conduct RFP for outsourcing Proprietary and Confidential © 2009 Towers Perrin 24 Not for use or disclosure outside Towers Perrin and its clients
- 26. Insights Increasing managing and employee self-service can actually be welcomed! Top down reductions, intelligently applied, can be required to break inertia Size thresholds for HR shared service centres are coming down Shared services are rarely fully exploited Multi-country HR shared services are feasible Outsourcing often does not save money (although may help with capital) Proprietary and Confidential © 2009 Towers Perrin 25 Not for use or disclosure outside Towers Perrin and its clients
- 27. Moving forward How does your company progress from today? You How Towers Perrin Can Help How much do you need PREPARE: how to approach to save? IDENTIFY: Where are potential opportunities opportunities? fast VALIDATE: Are the opportunities opportunities and ‘real’? considerations REALISE: achieve change Decided where to cut? effectively Proprietary and Confidential © 2009 Towers Perrin 26 Not for use or disclosure outside Towers Perrin and its clients
- 28. Taking costs out of your business: quickly 27 February 2009 Nigel Bateman Hugh Shanks Katharine Turner Reproduction in whole or part of this material is strictly prohibited. They should not be relied on as a substitute for specific advice. Therefore, no responsibility for loss occasioned to any person as a result of acting or refraining from acting on the contents of or information contained in these notes can be accepted by Towers Perrin. © 2009 Towers Perrin