Edan Carignan, Caroline Rashidi, Shane Nath

Enterprise Resource Planning Computer System Upgrade

Sponsor: Mr. Gary Radine

Agenda❖ Company Summary

❖ Project Summary

❖ Project Constraints

❖ Financing The Project Using 100% Cash

❖ Maximum Debt

❖ Delayed Completion

❖ Delayed Layoffs

❖ Re-Upgrade of Project

❖ Possible Outcomes

❖ Recommendation

❖ Q&A

Company Summary❖ Non-profit organization founded in 1954

❖ Largest dental plan system in the US

❖ 39 members covering all 50 states

❖ Enrollment and gross revenues doubled by CEO Mr. Gary Radine

Project Summary❖ Best method of implementing ERP system

❖ 35 page report

❖ 5 detailed scenarios

❖ Possible outcomes of each scenario

❖ Recommendation to Delta Dental

Delay of ERP Implementation

Edan

All Cash Max Debt Delayed Layoffs

Shane

Re-Upgrade Possible Outcomes

Caroline

Project Constraints❖ Cash surplus cannot go below $200

million

❖ Only method of raising capital is a 3-year loan

❖ Loan amount limited to $80 million

❖ $20 million annual cash inflow

❖ Management prefers the funding to be from cash flow from operations and borrowings from the bank

Financing using 100% Cash❖ Policy to not go below $200

million in cash reserves

❖ $106 million project cost

❖ Risks

❖ Leverage will decrease $75

$150

$225

$300

Cash Su

rplus

Project C

ost

Cash SurplusProject CostCash Reserve Limit

Financing using 100% Cash

Comparable Companies Leverage Ratio (L/A)United Healthcare (UNH) 0.61Wellpoint (WLP) [acquired by Anthem] 0.63Aetna (AET) 0.72CIGNA Corp. (CI) 0.80Humana (HUM) 0.60Centene Corp. (CNC) 0.70Health Net, Inc. (HNT) 0.71WellCare Health Plans (WCG) 0.67Healthspring (HS) [acquired by Cigna] 0.47Molina Healthcare (MOH) 0.77

Average 0.67

0.18

0.35

0.53

0.70

Delta Dental Top 10

0.670.54

Maximum DebtPros

❖ More Liquid Cash

❖ Current Low Interest Rates

Cons

❖ Risk of Default

❖ Drop in Credit Rating

Maximum Debt

A.M Bests’ BCAR Model

❖ Business Profile

❖ Operating Performance

❖ Balance Sheet Strength

Delayed Completion of Project

59%41%

Exceed Budget

53% 47%

Take Longer

49% 51%

Receive Anticipated Benefits

Delayed Completion of Project

ERP Evaluation TeamPoorly Defined Requirements

Change in Management During Implementation

Choosing a Vendor Based Solely On Sales Pitch

Lack of Employee Training

Reason Solution

Involve more employees than ERP Evaluation Team

Spend time understanding your specific needs

Invest in comprehensive training programs

Delayed LayoffsScenario ❖ Originally 400 layoffs in

year 4❖ Delay of 200 employees

for 2 extra years

Reasons ❖ Project delayed❖ System is not as efficient

❖ Employee adjustment time

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6Cash Surplus $300,000 $397,850 $417,850 $369,500 $403,750 $433,250Cash from Operations $20,000 $20,000 $20,000 $20,000 $20,000 $20,000Borrowed Capital $33,216 -$33,216FTE Reductions $9,500 $14,250 $9,500 $4,750

Total $353,216 $417,850 $414,134 $403,750 $433,250 $458,000

Delayed LayoffsShort Term Effects ❖ Pay extra $28.5 million

Long Term Effects ❖ Fear of layoffs❖ Employee Morale

Decreases❖ Workplace Productivity

Decreases

Outcome ❖ Layoffs are necessary❖ Extra money is spent❖ Fear within employees is set

$28.5 million

Re-Upgrade of ProjectTechnological Revolution ❖ Significant investments in computer upgrades ❖ Opportunities in infrastructure and application development

To Stay Competitive ❖ Keep and increase market share ❖ Appropriate response to competitors

Possible Outcomes❖ Invest in marketing❖ Invest in mobile platform❖ Invest in research and risk management❖ Lower insurance premiums❖ Invest in money-market securities

Recommendation❖ Balloon payment and FTE

layoffs happen concurrently

❖ Strict layoff policy

❖ ERP Evaluation Team

❖ After successful project, Delta Dental should invest in the previously mentioned possible outcomes

68%

32%

Debt Cash

Questions?

Thank You