www.mercer.com

January 15, 2009

Michelle Lewis-Blossman, Houston

Jim Sowers, Houston

Keys to Success in Public Sector HR Restructuring

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IntroductionsMercer presentation team

Michelle Lewis-Blossman, Principal, Southwest Regio n of Mercer Human Resources Consulting

Michelle is a Principal and Market Representative for Mercer’s HR Effectiveness consulting practice. She has 15 years of professional experience working with public and private sector companies and organizations in various stages of their lifecycle from start-ups, healthy, mature companies to those that require restructuring and turnaround. Prior to joining Mercer, Michelle was a Director for Alvarez & Marshal’s Public Sector Restructuring practice, where she served in interim human resource roles for clients facing severe financial and operational distress. Her primary focus was on cost containment and cost reduction within the HR function.

Jim Sowers, Global Human Resource Effectiveness Seg ment Leader of Mercer Human Resource Consulting

Jim is the Global leader of Mercer’s HR Effectiveness consulting practice. He has more than 25 years of professional experience that includes a mix of practice leadership, project management, client service, and academic activities. Prior to joining Mercer, he was the national managing director of Buck Consultants’ HR Management practice, a regional service leader of Deloitte Consulting’s Organizational and Change practice, as well as the firm’s competency leader for organization strategies. Jim was also managing principal for Towers Perrin’s Houston office, and regional leader for the firm’s Strategy and Organization practice. He was also a principal with Holland and Davis, a Houston-based management consulting firm, and the general manager for International HR Development Corp.’s energy sector consulting group. He began his business career in finance with Citicorp and ADP, Inc., and in consulting with Arthur Anderson.

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Desired outcomesBy the end of our session, you will have:

� A framework to review your HR department;

� A list of potential steps to take to examine sources, reduce uses and increase value in your HR Department;

� A sample case study; and

� A list of potential tools and resources to assist you.

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Setting the global context for public sector organi zations

� GAO issued multiple warnings about federal fiscal crisis

– Minimal reform programs underway

� Federal slowdown in domestic spending

� State budget deficits driven by housing crisis and increasing costs in state health care

– 20+ states face fiscal deficits of $34B or more

� Limited availability of capital

� Volatility of the stock market

� Increasing community and tax payer pressure

� Industry culture of late adopters

Global credit crunch

Mortgage crisis

Housing markets decline

Global recession

Job cuts

Stock market volatility

Global credit crunch

Mortgage crisis

Housing markets decline

Global recession

Job cuts

Stock market volatility

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In the absence of strategy, action may be driven by bad news

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2009 will be tougher than 2008; 2010 recovery will be slowSurviving (and thriving) in uncertainty requires change

Financial and trade protectionism may increase

Changes in consumer behavior

More government intervention and

re-regulation

Emerging markets still have appeal, but growth is declining

Unemployment is rapidly deteriorating

Impact of credit crunch is still ahead

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Economic crisis adds new urgency to managing human capital

UnemploymentUnemployment

“The average unemployment rate in the OECD area, estimated at

5.9% this year, is forecast to climb to 6.9% next year and reach

7.2 percent in 2010.”

HealthcareHealthcare

“Total health-care costs under current policy will nearly double across the

developed nations from the current 6.7% of GDP to

12.8% by 2050.”

Employee HealthEmployee Health

“The World Health Organization projects that by 2015, about 2.3 billion adults will be overweight

and more than 700 million will be obese.”

OutsourcingOutsourcing

“The financial crisis and global recession will accelerate adoption

of global outsourcing and offshoring as strategic business

tools as organizations respond to economic adversity with a forceful

push toward cost-reduction.”

Executive payExecutive pay

“Australia, Germany, Sweden, Switzerland, UK and US are

leading a global movement to curb executive pay.”

DownsizingDownsizing

“Only 47% of the large companies engaged in major downsizings actually met their cost reduction goals.. 54% of companies surveyed hired back many of the

people they laid off…in the past recession, shareholders actually punished rather than rewarded

companies involved in the biggest job reductions.”

Employee savingsEmployee savings

“One in five workers have reduced the amount they

save into a pension because of the credit crunch.”

Retirement fundingRetirement funding

“The financial crisis wiped over $4 trillion (€3.2 trillion) from global pension assets

between January and October, according to the

OECD; pension fund returns across the OECD are falling by an average of more than

20%.”

Investment managementInvestment management

“The current economic environment has led to falling returns from commercial real estate, a sector that pension funds are more exposed to than any other

alternative asset class and where global assets managed on their behalf reached over US$512 billion

in 2007.”

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Economic Impact on PerformanceEconomic Impact on PerformanceEconomic Impact on PerformanceEconomic Impact on Performance

Bend, but don’t break Hardest hit

� Example Players− Consumer staples− Pharmaceutical

� Workforce Actions Taken− Make performance-based

staff reductions− Implement one-time health

care program savings− Freeze salaries for some

categories of employees − Reduce bonus payouts

(tighten goal and target setting)

− Rescind outstanding offers; delay hire of non-essential talent

� Example Players− Financial services− US auto industry− Airlines

� Workforce Actions Taken− Significant layoffs and limits on

all hiring − Freeze salaries for all

employees− Eliminate bonuses− Focus on retention for select

key leaders

Economic stress impacts business segments different lyActions will vary based on business conditions

So far, so steady

� Example Players− Public sector− Low cost retailers− Select global companies− Select energy companies

� Workforce Actions Taken− Prune low performers− Ensure top performers are aligned

with top opportunities− Opportunistically scout talent− Invest in workforce planning− Limit salary increases− Increase use of variable reward

elements− Reduce training costs− Shift costs/risks to employees

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Organizations are taking steps to address economic concernBalancing cost-cutting with short- and long-term value

are somewhat/very likely to

invest in addressing drivers of

health care cost increases

are somewhat/very likely to invest

in wellness programs to improve

employee engagement and ensure

employee health-related behaviors

are somewhat/very likely to

reduce investments to

improve overall HR services

are somewhat / very likely to

invest more in outsourcing

additional HR functions

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HR plays a critical role in shaping an organization ’s response to the business conditions

� Effective HR functions are designed to adapt to both challenging and growth-oriented business environments. In any case, HR must always be prudent in its investments and in its cost management efforts.

� When times are tough, it is especially critical for HR to help their companies navigate through challenging human capital issues. Being creative and speedy with HR approaches to drive the right behaviors in an uncertain environment is the most important work HR can do.

� The talent pool is the deepest during the toughest times. While focusing on cost management is immediately important, targeted recruiting of key talent, positions the company for the recovery.

Examining SourcesReducing UsesIncreasing Value in HR

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Preparing the HR ResponseSources, uses and HR value

Whether evaluating the

department to identify

immediate cost

reductions or preparing

for more positive

economic times with

systems and process

changes , there is a

productive way to evaluate

and restructure your HR

department.

Whether evaluating the

department to identify

immediate cost

reductions or preparing

for more positive

economic times with

systems and process

changes , there is a

productive way to evaluate

and restructure your HR

department.

PlanPlan

DoDo

ReviewReview

1

2

3

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Understand sources and uses of your fundsMake decisions that impact the bottom line

Deepen your understanding of the budget PlanPlan1

Conduct a function-by-function (budget review)

Conduct a function-by-function (budget review)

Build from bottom up

Organizational knowledge+

HR strategy+

detailed understanding of budget=

Business and HR Strategy aligned with HR Operating Strategy

– Understand primary sources and uses of revenue by function, activity and role within HR department.

– Understand the effectiveness of your uses and the value your “customers” place on them, as well as the potential gaps between them.

– Account for how every dollar comes in and how every dollar goes out.

– Include “new needs” in the budget, not on top of it.

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� In this sample case, HR devotes the largest amount of labor hours and cost to the Staffing function performing activities such as Staffing Customer Service and Candidate Assessment.

� The second largest investment of time is spent on HR Department Management, which involves tasks such as HR Department Administrative Support and HR Department Meetings.

Time (%)

Non-HR1%Payroll

2%

Retirement Benefits2%

Compensation5%

Time & Attendance

1%

Staff ing20%

HRIS/HR Applications6%

OrganizationDevelopment

8%

Employee Relations9%

Non-Retirement Benefits13%

Training16%

HR Department Management

17%

Function Time (Hrs) Time (%) Cost Cost (%) FTE StaffStaffing 13,062 21% $333,562 18% 6.3 15

HR Department Management 10,807 17% $263,386 14% 5.2 31Training 9,855 16% $283,091 15% 4.7 19Non-Retirement Benefits 7,978 13% $267,953 15% 3.8 13Employee Relations 5,728 9% $202,810 11% 2.8 22Organization Development (OD) 4,720 8% $179,186 10% 2.3 23HRIS/HR Applications 3,794 6% $76,367 4% 1.8 13Compensation 3,078 5% $122,440 7% 1.5 11Payroll 1,506 2% $32,621 2% 0.7 6Retirement Benefits 1,111 2% $36,182 2% 0.5 7Non-HR 790 1% $23,524 1% 0.4 8Time & Attendance 354 1% $7,550 0% 0.2 4Grand Total 62,784 100% $1,828,673 100% 30.2

Account for every dollarSample allocations by HR function

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6,094

2,350

2,288

2,033

1,988

1,726

1,643

1,568

1,539

1,522

1,244

1,206

1,169

1,115

1,061

0 1,000 2,000 3,000 4,000 5,000 6,000 7,000

HR Department Administrative Support

Employee Health and Wellness Program Administration

Staffing Customer Service

HR Special Projects

Employee Records Management

Employee Data Maintenance

Candidate Assessment

New Hire Data Administration

Training Program Coordination/Administration

HR Department Meetings

Orientation Program Delivery

Workers’ Compensation Administration

Background/Reference Checking

Employee Relations Customer Service

Job-Specific Training Delivery

Understand where your resources are spentSample allocations by activity

� In this case, when examining the data at the activity level, HR dedicates the largest amount of resources to HR Department Administrative Support. This activity is defined as providing general secretarial or administrative support to HR department staff. Activities may include processing department mail, copying, scheduling meetings, filing, greeting and receiving visitors, and receiving and coordinating incoming calls.

(HR’s)

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Build from the bottom upPlan HR budget to execute HR strategy

� Compare with prior year’s budget and spend

– Why do they vary?

– Challenge historical assumptions

– Don’t transfer the problem to someone else

� Determine core and non-core services

– How do you know which services are core? And non-core?

– Which services ensure alignment and support the business strategy?

– Which services put the organization at strategic, regulatory or legal risk by not providing them?

� Pay close attention to redundancies across departme nts

– Are any lines of business providing duplicate HR services?

– Are any vendors providing duplicate HR services?

� Evaluate the ROI on each vendor contract

– What leverage do you have to decrease your cost with your existing vendor or by changing vendors?

– Can you cancel non-core contracts, renegotiate others?

– Can you extend payment terms or challenge vendors to increase the value of their services?

� Increase the involvement of the HR department

– How are you engaging the HR team?

Define relationships and delineate HR organizationa l ROI PlanPlan1

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Build from the bottom upPlan HR budget to execute HR strategy

� Benchmark your performance against peer organizatio ns

– Do you have a larger or smaller HR staff? Are you getting half the work done with twice as many people?

– How do you compare to the national average? If you are larger, does your staff level provide you with flexibility to redeploy staff in times of crisis?

– Are there key departmental processes and controls that are undefined, limited or missing altogether that have indirect costs associated with them?

– Is there a lengthy termination process that encourages workarounds?

Define relationships and delineate HR organizationa l ROI PlanPlan1

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9%

16%

7%

9%

7%8%

7%6%

5%

15%

3%

8%9%

13%

6%

8%

13%

4% 4%

13%

3%

14%

17%

13%

2%

21%

16%

6%7%

5%

9%

2%1%

8%6%

0%

5%

10%

15%

20%

25%

Compen

satio

nEm

ployee

Rel

ation

s

HR Depa

rtmen

t Man

agem

ent

HRIS/H

R App

licat

ions

Labo

r Rela

tions

Non-R

etire

ment

Benefits

Organ

izatio

n Deve

lopmen

t

Payro

llRet

irem

ent B

enefits

Staffin

gTi

me and

Atte

ndan

ce

Traini

ng

Time Allocation by Function: Benchmark Current vs D esired

Sample HR benchmarksBenchmark your HR department against comparable organizations

26%

11%

33%

13% 13%14%9%

30%

21%

28%27%

6%

53%

7% 7%

0%

10%

20%

30%

40%

50%

60%Tra

nsacti

ng/R

ecord

keepin

g

Complianc

e/Aud

iting

Deliveri

ng HR S

ervic

es

Designing

HR Serv

ices

Strateg

ic Par

tnerin

g

Percentage of Time Spent by HR Staff: Benchmark Cur rent vs Desired

Trends in Time Allocation by Roles

2,001-5,000 FTEsCompany X

44638121841.3Field HR & Generalists

1529152921851.3Employee Relations

8534223428.3Learning & Development

2016169211362.5Compensation

84067611362.5Benefits

5924004736Recruitment

Benchmark by Industry

Benchmark by SizeEEs per FTEStaff (FTEs)Function

2,001-5,000 FTEsCompany X

44638121841.3Field HR & Generalists

1529152921851.3Employee Relations

8534223428.3Learning & Development

2016169211362.5Compensation

84067611362.5Benefits

5924004736Recruitment

Benchmark by Industry

Benchmark by SizeEEs per FTEStaff (FTEs)Function

HR FTE Ratio By Function

Sample OrganizationDesired BenchmarkCurrent Benchmark

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Connecting the DotsGetting from where you are to where you want to be

Develop a solid plan on which you can execute DoDo2

� Do you have the right people, with the right skills, in the right roles at the right time?

� To what degree are current personnel professionally and technically proficient?

� What is gap between where they are today and where they need to be?

� What kind of training is in order to keep pace and to be a market leader?

� How many people fill a gap instead of maximize their abilities or potential for the role?

People4

� How well do your systems and processes support the revised strategy and structure?

� How aligned is your compensation and incentive-based pay structure to support use of new systems and processes?

� Given that public sector is now competing for the same talent as the private sector, how competitive is your compensation with the labor market for the talent in harder to fill roles?

� If there are gaps, then how can systems and processes have a greater impact?

� What training are you providing to clarify and calibrate performance expectations across the organization?

� How are you tapping into your employee value proposition and considering implementing things your employees may have been asking for, like flextime, mentoring, work-site development and career advancement (especially for your best and brightest – if you know who they are), or access and exposure to senior leaders?

� How are you building your bench?

� What kinds of revisions and investments are in order?

Systems and Processes

3

� How does the departmental structure support the new departmental strategy and overall operating model?

� How much harmony is there between functional and corporate/overhead functions?

� How does the current HR strategy support and positively impact the business strategy?

� Does the HR strategy make the best use of the core resources and assets that you have or are you trying to force a square peg into a round hole?

� If there is a gap between present and needed resources, how will you develop or acquire them?

Structure

Strategy

2

1

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Restructure HR departmentNext time change is in order, the HR function will be ready for it

Remain a key contributor to organizational success

� Continuously review budgets and contracts on a regular basis to make sure that they reflect the truth.

� Take a pragmatic look at core services, systems, processes and technology behind them to ensure that as the market changes they continue to support the strategy.

� Create feedback loops to ensure people are heard and that you are alerted to potential issues before they become problems.

ReviewReview3

Potential Tools and Resources

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Potential tools and resourceshttp://www.mercer.com/unprecedentedtimes

Available Podcasts, Web Articles and Special Reports include:

� Changing times: The impact on employer-provided health benefits

� Sculpt benefit programs to cut costs, retain talent

� Tough economic times: Rapid cost savings opportunities for employers

� Focus on the markets

� Mercer’s investment consultants speak about the current market events

� Heads up: Communication strategies for tough times

� Fast forward: Accelerating business change through effective communication

� Strategic funding policies for pensions

� Volatility affects pension funding status

� Surviving uncertainty: Benefits in a time of recession

� Chaos in the markets…so what’s my pension budget?

� Managing health care benefit expense in today’s unprecedented economic times

� Is spending on health and benefits a good investment?

� Turbulent financial markets: Impact on DC plans

About Mercer

Mercer is a leading global provider of consulting, outsourcing and investments services, with more than 25,000 private, public NPO and public sector clients worldwide. Mercer consultants help clients optimize workforce performance and maximize the effectiveness of their health, retirement and other benefits. The firm also provides customized administration, technology and total benefit outsourcing solutions. Mercer’s investment services include global leadership in investment consulting and multi-manager investment management.

Mercer’s global network of more than 18,000 employees, based in over 40 countries, ensures integrated, worldwide solutions. Our consultants work with clients to develop solutions that address global and country-specific challenges and opportunities. Mercer is experienced in assisting both major and growing, mid-size companies.

For information contact:

Michelle Lewis-Blossman

(713) 276-2277

michelle.lewis-blossman@mercer.com

www.mercer.com