At its best, outsourcing truly is a strategic tool, for it provides unique solutions to knotty business problems. That's what Greg Lennes, corporate secretary and director of Stock Option Administration for International Truck and Engine Corporation, learned when he used outsourcing to solve the dilemmas that ailed his company's stock option administration process.
A subsidiary of Navistar International Corporation (a leading producer of diesel engines, trucks and school buses), International Truck and Engine employees are entitled to stock options in parent company, Navistar. International Truck had a need to replace the individual who had been performing the stock option administration functions about the same time it was looking for a new transfer agent, so they sought an outsourcer that would be able to perform both functions. It seemed logical. But when they considered the bid responses to their Request for Proposal and began evaluating the potential suppliers, it didn't look doable.
Separating Wheat from Chaff
As in a harvesting procedure of separating the valuable wheat and leaving the dregs behind, International Truck evaluated potential outsourcing partners according to their ability to provide value and meet its specialized needs. Lennes says a major requirement was optimal automation of the process. None of the bidding suppliers was able to implement as much automation as the buyer needed, and Lennes would still end up having to manually input a lot of the information to maintain the database.
"When you do an exercise of a stock option, for instance, you have to calculate taxes," he explains. "We wanted a direct link between our payroll system and the supplier so that when there is an exercise we would automatically know the taxes." It also needed to automate employee FICA payments for the year, as well as data on changed addresses and similar information.
There was another problem in that none of the bidding outsourcers would be able to produce the type of transfer agent reports that Lennes needed for internal purposes, so he would have to modify the information provided by the outsourcers.
"Unfortunately, I didn't find any company that I felt comfortable with," recalls Lennes. "And our stock option program is a little complicated, and the companies that we interviewed didn't want to do it because of those complications."
It seemed they had crossed all bridges and there was nowhere else to go.
But Lennes had noticed something about all of the potential outsourcers - each used Transcentive software (or a modified hybrid of it). International Truck also used Transcentive's products. When Lennes spoke with the company about the difficulties he'd encountered in finding an outsourcer for the stock option administration, the solution was clear.
Transcentive's stock plan management services include three approaches: use its software but maintain the administrative services in-house; outsource both the software and administration; or implement a hybrid solution somewhere in-between. Transcentive's idea was to use the third approach, easing International Truck's administrative burdens yet allowing the company to maintain access and control of its information.
Retooling a Process
Upon signing their outsourcing agreement in November 2000, the parties held a two-day kickoff meeting to discuss the International Truck process and how to automate it as much as possible. The buyer's payroll and Human Resources people were involved in the planning, as well as ADP (the outsourcer who handles International Truck's payroll process). The payroll process had to be changed to implement more automation so that Transcentive would get automatic downloads regarding tax codes and address changes.
The outsourcer not only automated the database process to meet International Truck's needs, but it also Web-enabled the reporting information for Lennes' access in producing internal reports. It further eliminated headaches for Lennes, who in the past often had to work with out-of-date information. "I'd have obsolete addresses, where a stock optionee had moved to a different state and I didn't know that. So I'd charge him Illinois taxes instead of Indiana taxes, for instance."
The automation by Transcentive has eliminated much of Lennes' paperwork and reengineered several multi-step processes into one. It especially made a dramatic difference to the company's "cashless exercise," occurring when an employee just wants money and sells stock at the same time as exercising a stock option.
Before automating and outsourcing this procedure, International Truck's broker would send stock option exercise information to Lennes. He then had to figure out the taxes and call payroll to determine if the employee's FICA taxes had been paid for the year. Sometimes he had to call payroll to find out the state tax rate in different states. Once the taxes were determined, Lennes would send an excercise confirmation form to the broker, stating the amount of taxes the stock optionee owed. The broker would process that information and send a check to Lennes, who then had to manually figure out the taxes to come out of the check, figure the cost of the option and send it to accounts payable.
"It was a very time-consuming process with a lot of back and forth and faxing and a lot of paper," recalls Lennes. Now the outsourced process automatically updates the International Truck database.
The outsourcer's expertise also built a solution to improve the information available for the individual stock optionees. "We now have an intranet program using Transcentive's WealthViewsTM product," says Lennes. "Now, instead of the stock optionees calling me and finding out what options they have, it's all automated. They can look at their individual options on the intranet and figure out how much they will get if they exercise an option. We talked about this feature initially, but I didn't expect it to be so successful. I was just trying to relieve myself of doing all these stock options." Transcentive also customized a video-conference seminar broadcast to International Truck's locations to educate employees on how to use the intranet. WealthViews has resulted in eliminating the need for Lennes to fax or email stock optionee reports to the 350 employees. He adds, "This way, they do it on their own, and I'm a firm believer in doing everything you can do over the Web."
"We had some great expectations with this outsourcing arrangement," comments Lennes. He and his company are very happy at the way the expectations have been met so far. "In outsourcing, it's very important to know exactly what you want to do," advises Lennes. "Spend some time doing your homework on suppliers and their solutions and ask the right questions."
Lessons from the Outsourcing Journal
- Outsourcing a paper-intensive process can streamline it from multiple communication steps to one easy automated step.
- Buyers should state in their Requests for Proposal exactly what results they want the outsourcing to accomplish and continue to search for a supplier that will customize its solution to meet those requirements, rather than accepting a supplier's less-than-ideal standard solution.
- If the outsourced process will "touch" other integrated processes that are currently handled by a third-party contractor or outsourcer, that company should be involved in the planning and mapping of process reengineering and transitioning the work to the new outsourcing supplier.