Using Activity Based Costing at CIBC
It’s an IT contract negotiator’s dream — to enter talks with detailed cost data about each activity involved in a comprehensive business process outsourcing (BPO) deal. Armed with this cost data, negotiation starts with how the service provider can beat internal costs for performing the process activities, ensuring that the business case proves positive, or at the very least, break even.
That’s exactly the position that Robert Hakeem, Vice President of Human Resources (HR) for the Canadian Imperial Bank of Commerce (CIBC), staked out for himself when he began talking with outsourcing providers. The result was a comprehensive $227 million ($156 million US) agreement with EDS Canada to provide CIBC’s core HR services, including call center, systems support as well as payroll, benefits and pension administration.
When they began investigating outsourcing options back in September 2000, CIBC’s executives were faced with spending precious investment capital to keep their HR services current and the difficult prospect of choosing internal projects versus spending on the core business. In recent years, CIBC had reorganized, upping the number of strategic business units from 3 to 7. HR systems had to accommodate greater complexity and maintain consistent efficiency levels. On top of these challenges, HR executives needed to provide new services, which required new HR platforms. To support their widely dispersed workforce, for example, they wanted to provide all employees with Internet and 1-800 telephone access to their accounts. Formulating a strategy to meet these needs required that they have a much deeper understanding of their internal processes and associated costs. From there, they could evaluate technology platforms, labor-saving strategies and sourcing options.
CIBC engaged Insight Analytics Group, a Pennsylvania-based management consulting firm that provides activity-based operational metrics. According to Darshain Jain, Vice President, their charter from CIBC had 4 components:
- identify and document the cost drivers and activities (current service processes) that comprise key HR functions such as payroll, benefits, pension administration, training and recruiting,
- measure, through detailed data capture, the amount of time spent on each of these activities (current service levels),
- calculate the unit costs for cost drivers using labor and technology expenses as key inputs, and
- build a baseline of annual operating costs for the organization.
Three Insight Analytics consultants worked for 7 Ω weeks, often involving 12-16 hour days, to compile the data on CIBC’s operations. Using available process flow documentation and interviews with department supervisors, they developed a list of the HR activities by function (payroll, benefits, etc.). Then, using proprietary software, they created barcodes tied to each activity and trained HR employees on using barcode scanners (known as TimeWands). During the course of normal operation, employees swiped barcodes when they started and completed each type of HR activity. When matched with hourly rates obtained from work with CIBC’s financial group, the consultants calculated each “activity cost per unit time.”
Annual measures proved especially challenging. HR activity peaks at certain times during the year and to provide a 12-month view, Insight Analytics consultants had to model this seasonality. Benefits enrollment, for example, crests later in the year but operates in essentially a steady state otherwise. Using annual volume estimates from department supervisors and staff interviews about the seasonal impacts, they put together annual estimates for each activity’s expense.
Jain and his team also derived an overall capacity factor for CIBC’s HR group. This factor, essentially a resource utilization percentage, allowed CIBC to benchmark its internal performance against similar measures reported by other financial institutions.
According to Hakeem, part of the rationale for pursuing the activity-based costing approach was “to identify the margins for improvement. Specifically, were there areas where we could improve our efficiency in terms of dollars, resources, etc.?” The data showed that, compared to HR organizations, CIBC’s resources were well utilized and that process improvement, by itself, was not going to produce a dramatic return.
Insight Analytics detailed their findings in a final report that captured each activity along with its unit time, unit cost and cost driver unit cost. Some of the key HR activity metrics included cost per pay stub, cost per benefit enrollment, cost per phone call, and cost per hire. The report also provided annual operating costs and capacity utilizations. Armed with the report, CIBC engaged service providers to determine if outsourcing was a viable direction to meet their internal technology needs.
According to Hakeem, they had yet to decide that outsourcing was the solution. Instead of holding the report back and evaluating vendor proposals against CIBC internal performance, he forwarded the report to the 4 potential service providers and asked them to bid on a cost/output basis. The report detail provided bidders with a comprehensive set of activities and metrics on which to base their proposals. It also ensured that the resulting bids would offer the same level of service as internal personnel and would all be submitted from a level playing field — all vendors had access to the same level of detailed data.
In just 8 weeks, the RFP process was complete and the deal reached. Based on the metrics and proposals, CIBC decided to outsource the entire business process. As part of the agreement, which was the first of its type in Canada, 200 CIBC HR personnel will transition into EDS. Hakeem credits the activity-based cost metrics produced by Insight Analytics with grounding their decision making in fact. When asked if he’d spend the resources to do that level of analysis again, he didn’t hesitate. “No question. No question we’d do it again.”