vii. standing committees b. finance and asset management ... · comprehensive information about...

F–4

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VII. STANDING COMMITTEES B. Finance and Asset Management Committee HR/Payroll Modernization Project – Adopt Project Budget, Approve Financing Plan and Delegate Authority to Execute Vendor Contract It is the recommendation of the administration and the Finance and Asset Management Committee that the Board of Regents:

1) Adopt a project budget of $70 million for the HR/Payroll Modernization project;

2) Approve project financing up to $65 million; and

3) Delegate authority to the President or his designee to execute the vendor

contract. BACKGROUND The UW's existing payroll system, the Higher Education Payroll Personnel System (HEPPS), was technologically advanced and met business needs when it was implemented in 1982. In the intervening 32 years, the UW added two campuses, experienced tremendous growth in its research enterprise, and watched the demand for its medical services skyrocket. As a result, the UW's workforce has doubled to more than 40,000 employees. The UW's large and diverse workforce has many complexities that impact HR and payroll practices. This includes varying employment conditions, such as different leave plans, salary schedules, employment policies, and pay practices. The UW has more than 365 earning types and more than 165 unique pay differentials or premiums that must be factored into payroll processing. The UW also must track varying statutes, laws, and regulations that apply to employees located across 50 states and 26 countries. Yet, the underlying technology for HEPPS has not changed. As a result, the UW's payroll system has significant operational inefficiencies and service deficits. It is increasingly difficult to keep pace with ever-changing regulatory requirements. The UW also lacks basic, enterprise-wide human resources functionality. UW's existing payroll system was designed to pay people at a point-in-time; it was not designed to keep a history of employee records or to manage employees. An information item on the HR/Payroll Modernization project was presented to the Regents in January 2014 (Item F-6).

VII. STANDING COMMITTEES

B. Finance and Asset Management Committee HR/Payroll Modernization Project – Adopt Project Budget, Approve Financing Plan and Delegate Authority to Execute Vendor Contract (continued p. 2)

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PROJECT DESCRIPTION The HR/Payroll Modernization effort will replace HEPPS with a modern, integrated human resources and payroll system. As part of this effort, it will also implement a set of standardized processes to significantly improve support for critical HR and payroll work across the UW. The benefits of modernization are substantial. An integrated system will retain comprehensive information about positions, appointments, and employees, including a full life-cycle of activities ranging from recruitment to retirement or separation—sharing information such as who is employed and in what position, which benefits they are eligible for, and so on. As a result of modernization, the UW can reduce its risks, realize efficiencies, enable modern practices, be more competitively positioned in the higher-education sector, and set the foundation on which it can choose to connect to or integrate with other systems, such as a financial system. PROJECT SCHEDULE The first phase of the project is expected to result in a “go-live” date in 22 months. The scheduled stages within the first phase include:

• Plan (Now – April 2014): The HR/Payroll Modernization project team is

finalizing the implementation plan.

• Architect (April – October 2014) and Configure (November 2014 – May 2015): The project team will calibrate the design with campus stakeholders and then will configure the system to align with design decisions.

• Test (June – November 2015): Additional stakeholders will have hands-on exposure to the new system's look, feel, and functionality. Similar to previous phases, testing will be a collaborative and iterative process. The project team will look to confirm the solution’s usability and to identify opportunities for refinement prior to system deployment.

• Deploy (November – December 2015): The team will engage future system users in pre-deployment activities such as campus forums and training activities to demonstrate how to use the new system. As the “go-live” date approaches, the team will increase the amount of regular communication with impacted users in order to prepare them appropriately. During and



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following go-live, support structures will be put in place to help users with questions and guidance on the new system.

• Go Live (January 2016): The new system is expected to "go live" on January 1, 2016. At this time, the old payroll system will be retired.

• Stabilize and Optimize (January – June 2016): Following implementation, the project will enter a six-month period of system stabilization and optimization. Support will be provided to the units to identify and help them act on soft savings.

PROJECT COST A projected HR/Payroll Modernization implementation cost of $30 million was included in the One Capital Plan and Debt Capacity reports shared with the Regents in July 2013. After an extensive procurement process, the UW received an initial cost estimate of $30 million from the apparent successful bidder. This figure, which was presented to the Regents in January 2014, aligned with the UW's initial analyses for undertaking this project. Through vendor negotiations, the vendor’s implementation costs have been reduced to $27.9 million. Total capitalized UW costs, contingency and financing costs have been determined to be $40.2 million for a total project cost of $68.1 million.



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The sources and uses of funds for the project are as follows (a detailed project budget is shown on Attachment 1): Sources of Funds ($000) UW Reserves 6,398 Debt 61,678

total 68,076 Uses of Funds ($000) Vendor Costs 27,879 UW Costs 29,586 Contingency 10,000 Financing Costs (estimated 1%) 611

total 68,076 PROJECT FUNDING The project will be funded through a combination of reserves and debt. Reserves will be used to fund the non-capitalized implementation costs. During implementation all costs will be paid by the Provost. One half of this will be considered a permanent investment by the Provost. The remaining half will be allocated to campus units on a straight line basis over 10 years. Following implementation, all ongoing costs will be allocated to campus units. These costs include UW costs, vendor subscription fees, and debt service. After the debt is retired, UW costs and vendor subscription fees will continue to be paid by campus units. ANTICIPATED SAVINGS The projected savings include hard savings due to cost reductions and potential savings due to institutional efficiencies. An estimated $1.8 million in annual hard savings will come from elimination of support, maintenance, and licenses for information technology supported systems. An additional average of $9.5 million could be saved each year due to departmental system support efficiencies, eliminated central and departmental system licenses, improved processes, reduction in redundant data entry, and



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reduction in time spent on compliance reporting and audits. The HR/Payroll Modernization project team will work in conjunction with UW leadership to provide a framework to campus units to proactively identify and realize additional savings and efficiencies. VENDOR SELECTION A RFP bidders’ conference was held in October 2012. Following the conference, the procurement office received six vendor bids—five of which were invited to present more detailed proposals. After a staged evaluation approach, Workday was selected as the most qualified vendor for this project. Workday is a provider of enterprise Software-as-a-Service (SaaS) for human resources and finance. Founded in 2005, Workday delivers human capital management, financial management, and analytics applications designed for the world’s largest organizations. Hundreds of companies, ranging from medium-sized businesses to Fortune 50 enterprises, have selected Workday. Other higher education institutions implementing its software include Brown University, Carnegie Mellon University, Georgetown University, New York University, University of Southern California, University of Texas–Austin, and Yale. Contract negotiations with Workday are expected to be complete by February 13, 2014. Through these negotiations, Workday’s implementation costs have been reduced to $27.9 million. CREDIT ANALYSIS In conjunction with the project sponsors and executive leadership, the Treasury Office performed a comprehensive due diligence on the financial plan for the HR/Payroll Modernization project. This process included reviewing the base case proforma, evaluating the key risks, performing stress tests, and identifying appropriate mitigation strategies. In addition to working with project sponsors, the Treasury Office reviewed the Gartner1 and Bluecrane2 risk and quality assurance assessments. 1 Gartner is an IT research and advisory firm, and conducted a readiness assessment at the beginning of the procurement process. 2 Bluecrane is an external quality assurance vendor, and conducts ongoing risk assessments.



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Base Case Assumptions and Proforma The base case assumes a 22-month implementation period, a six-month stabilization and optimization period, and a 10-year borrowing rate of 4.1% (Attachment 2). For purposes of financing, the HR/Payroll Modernization project is considered personal property. Therefore, it is excluded from the Internal Lending Program and will pay actual interest cost.

Stress Tests Two stress tests were performed on the base case proforma: a cost stress and a rate stress (Attachment 3). The cost stress assumes that the system takes two years longer to implement and comes online in January 2018—more than doubling the project cost and increasing borrowing from $61.7 to $125.8 million. Accordingly, annual debt service increases from $7.5 to $15.9 million. The cost stress causes greater interest rate risk and increases unit operating costs. It has a lesser impact on institutional debt capacity. The rate stress assumes that interest rates are 1% higher than in the base case, which increases annual debt service from $7.5 to $7.9 million. The cost stress has a larger effect on unit operating costs than the rate stress. The interest rate scenarios modeled under the base case and two stress cases are summarized in the table below.

Project Cost ($ millions)

Takeout financing in FY

Assumed Interest Rates* Alternative FY2014-16 FY2017-18 FY2019+

Base Case 67.5 2017 1.10% 4.10% 4.10%

Cost Stress 137.6 2019 1.10% 2.40% 4.85%

Rate Stress 67.5 2017 2.10% 5.10% 5.10% *Future interest rates are estimated using current rates and adding a forward premium derived from interest rate swap curves.



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Mitigations for Stress Already Undertaken As part of the project planning activities, efforts were undertaken to develop a realistic scope, timeline, and budget. This included: a campus-wide Business Process Redesign effort to draft future states for key processes (change management); a complete statement of work, work plan, joint resource plan, and defined change control processes with the vendor (time, budget, and scope management); and a contractually agreed-upon fixed price budget for implementation fees to the vendor (budget management). For similar projects at peer and other organizations, these critical steps are often not taken at all or done well after system implementation, which minimizes the efficiencies and change management opportunities and results in cost and time overruns or reductions in scope. Additional Mitigations As an alternative to more debt, the UW could fund any increased cost out of its own reserves. This approach would preserve the UW's external debt capacity, but reduce cash balances. The long-term financing is expected to be amortized over 10 years. In the event that costs are substantially higher than planned, it is possible to extend the term of the debt to 15 years. To maintain the same annual payment with a 15-year term, the project cost could increase by $20 million from base case to $88 million. This longer term maintains the same annual payment, but leads to higher interest rates and total borrowing costs. Impact of Stresses on Large Borrowers The costs of the HR/Payroll Modernization project will impact the net operating margins and debt service coverage of the business units. Impacts of these costs on the debt service coverage ratio of the largest UW borrowers were assessed. As shown on Attachment 4, the impacts on the debt service coverage on Intercollegiate Athletics, Housing and Food Services, and UW Medical Center are manageable, even under the cost stress.



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Impact on Institutional Debt Capacity The Treasury Office reviews three key financial ratios when assessing the impact of a project on institutional debt capacity:

1) Expendable Resources to Debt 2) Debt to Operating Revenues 3) Debt Service Coverage

The chart below shows these ratios assuming UW borrows $62 million (the base case), and $125 million (the cost stress) for the HR/Payroll system. These ratios are benchmarked against current projections without HR/Payroll debt. Under the cost stress, key UW ratios remain above peer minimums.

If the HR/Payroll system does significantly exceed budget as shown in the cost stress, the increase would likely delay future system implementations (e.g., Finance and Budget). REVIEW AND APPROVAL The HR/Payroll Modernization budget, finance plan, and contract recommendation have been reviewed and recommended for approval by the University President, Provost, Senior Vice President, Vice President for Information Technology and Chief Information Officer, Financial Planning



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Officer for UW Medicine Health System, Vice President for Human Resources, and Vice Provost for Academic Personnel. The project budget and finance plan have also been reviewed and approved by the Vice Provost for Planning and Budgeting and the Treasury Office. The State Investment Plan was submitted to the Washington State Office of the Chief Information Officer for the vendor solution and total project costs. The University expects to receive approval by February 13, 2014. Attachments 1) Summary Project Budget 2) Proforma and Cost Allocations – Base Case 3) Proforma and Cost Allocations – Cost Stress and Rate Stress 4) Impact on Large Borrowers – Debt Service Coverage

HR/Payroll Modernization – Summary Project Budget Implementation Budget FY14-16

Project Budget Total Cost ($000) % of Total

Vendor Consulting $ 25,175 37.3%

Vendor Travel $ 2,336 3.5%

Vendor Training $ 368 0.5%

Vendor Subtotal $ 27,879 41.3%

UW Staff $ 28,205 41.8%

UW Operations $ 1,381 2.0%

UW Subtotal $ 29,586 43.9%

Contingency $ 10,000 14.8%

Total Implementation Costs $ 67,465 100%

Financing $ 611

Grand Total $ 68,076

Estimated date of completion for implementation: January 1, 2016

Estimated date of completion of stabilization and optimization period: June 30, 2016

ATTACHMENT 1F–4.1/202-14 2/13/14

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HR/P Proforma and Cost AllocationsBase Case -- FY2014-2026 -- ($000)

Implementation Phase1 Debt Service Phase

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Total

Project Costs

Debt Service2 23 270 560 7,529 7,529 7,529 7,529 7,529 7,529 7,529 7,529 7,529 7,529 76,140

Implementation Costs Not Financed 1,094 2,691 2,612 - - - - - - - - - - 6,398

Workday Solution Fees 6,400 2,400 2,400 2,400 2,400 3,328 3,461 3,600 3,744 3,893 4,049 4,211 4,379 46,665

Ongoing UW Support - - 840 1,679 1,679 1,679 1,679 1,679 1,679 1,679 1,729 1,781 1,835 17,938

Total Costs 7,517 5,361 6,412 11,608 11,608 12,536 12,669 12,807 12,951 13,101 13,307 13,521 13,743 147,140

Less: Hard Savings - - - (900) (1,800) (1,800) (1,800) (1,800) (1,800) (1,800) (1,800) (1,800) (1,800) (17,100)

Net Costs 7,517 5,361 6,412 10,708 9,808 10,736 10,869 11,007 11,151 11,301 11,507 11,721 11,943 130,040

Less: Initial Cost Paid by Provost (7,517) (5,361) (6,412) - - - - - - - - - - (19,290)

Provost Recapture - - - 964 964 964 964 964 964 964 964 964 964 9,645

Subtotal: Net Cost to Provost (7,517) (5,361) (6,412) 964 964 964 964 964 964 964 964 964 964 (9,645)

Total Allocations to Campus Units - - - 11,672 10,772 11,700 11,833 11,972 12,116 12,265 12,472 12,685 12,907 120,395

Costs Allocated to Campus Units3

Central Units - - - 1,818 1,678 1,822 1,843 1,865 1,887 1,910 1,942 1,976 2,010 18,751

Academic Units - - - 6,116 5,644 6,130 6,200 6,273 6,348 6,427 6,535 6,647 6,763 63,082

Other (Auxiliaries, Medical Centers)4,5 - - - 3,739 3,450 3,748 3,790 3,835 3,881 3,929 3,995 4,063 4,134 38,562

Total - - - 11,672 10,772 11,700 11,833 11,972 12,116 12,265 12,472 12,685 12,907 120,395

Combined Net Cost with Soft Savings6

Net Costs 7,517 5,361 6,412 10,708 9,808 10,736 10,869 11,007 11,151 11,301 11,507 11,721 11,943 130,040

Soft Savings - - - (6,200) (6,938) (7,675) (8,413) (9,150) (9,888) (10,625) (11,363) (12,100) (12,100) (94,450)

Net Costs less Soft Savings 7,517 5,361 6,412 4,508 2,870 3,061 2,456 1,857 1,264 676 145 (379) (157) 35,590

Running Total7 7,517 12,878 19,290 23,798 26,668 29,729 32,185 34,042 35,306 35,982 36,126 35,747 35,590

1 March 2014 - June 20162 Assumes short-term borrowing through implementation phase

Long-term borrowing of $61.7 million, at 4.1%, assumed in July, 20163 Final cost allocation will be decided by the Provost4 Primarily Medical Centers5 The impact on debt service coverage for ICA and HFS is not significant. See attachment 5 for details6 Soft savings will likely take several years to materialize7 Does not reflect the impact of risk mitigation, which would result in substantial cost avoidance

ATTACHMENT 2F–4.2/202-14 2/13/14

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HR/P Proforma and Cost AllocationsCost Stress -- FY2014-2028 -- ($000)


2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 Total

Project CostsDebt Service2 23 270 575 1,989 2,727 15,898 15,898 15,898 15,898 15,898 15,898 15,898 15,898 15,898 15,898 164,568

Implementation Costs Not Financed 1,094 2,691 3,192 3,324 2,746 - - - - - - - - - - 13,046

Workday Solution Fees 6,400 2,400 2,400 2,400 2,400 3,328 3,461 3,600 3,744 3,893 4,049 4,211 4,379 4,555 4,737 55,956

Ongoing UW Support - - - - 840 1,679 1,679 1,679 1,679 1,679 1,729 1,781 1,835 1,890 1,946 18,416

Total Costs 7,517 5,361 6,166 7,713 8,712 20,905 21,039 21,177 21,321 21,471 21,677 21,891 22,113 22,343 22,582 251,987

Less: Hard Savings - - - - - (900) (1,800) (1,800) (1,800) (1,800) (1,800) (1,800) (1,800) (1,800) (1,800) (17,100)

Net Costs 7,517 5,361 6,166 7,713 8,712 20,005 19,239 19,377 19,521 19,671 19,877 20,091 20,313 20,543 20,782 234,887

Less: Initial Cost Paid by Provost (7,517) (5,361) (6,166) (7,713) (8,712) - - - - - - - - - - (35,470)

Provost Recapture - - - - - 1,773 1,773 1,773 1,773 1,773 1,773 1,773 1,773 1,773 1,773 17,735

Subtotal: Net Cost to Provost (7,517) (5,361) (6,166) (7,713) (8,712) 1,773 1,773 1,773 1,773 1,773 1,773 1,773 1,773 1,773 1,773 (17,735)

Total Allocations to Campus Units - - - - - 21,779 21,012 21,151 21,294 21,444 21,650 21,864 22,086 22,316 22,555 217,152


Central Units - - - - - 3,392 3,272 3,294 3,316 3,340 3,372 3,405 3,440 3,476 3,513 33,820

Academic Units - - - - - 11,411 11,009 11,082 11,157 11,236 11,344 11,456 11,572 11,693 11,818 113,779

Other (Auxiliaries, Medical Centers)4,5 - - - - - 6,976 6,730 6,774 6,821 6,869 6,935 7,003 7,074 7,148 7,224 69,553

Total - - - - - 21,779 21,012 21,151 21,294 21,444 21,650 21,864 22,086 22,316 22,555 217,152


Net Costs 7,517 5,361 6,166 7,713 8,712 20,005 19,239 19,377 19,521 19,671 19,877 20,091 20,313 20,543 20,782 234,887

Soft Savings - - - - - (6,200) (6,938) (7,675) (8,413) (9,150) (9,888) (10,625) (11,363) (12,100) (12,100) (94,450)

Net Costs less Soft Savings 7,517 5,361 6,166 7,713 8,712 13,805 12,301 11,702 11,109 10,521 9,989 9,466 8,950 8,443 8,682 140,437

Running Total7 7,517 12,878 19,044 26,757 35,470 49,275 61,576 73,278 84,387 94,907 104,897 114,362 123,312 131,755 140,437



ATTACHMENT 3F–4.3/202-14 2/13/14

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HR/P Proforma and Cost AllocationsRate Stress -- FY2014-2026 -- ($000)


2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Total

Project Costs

Debt Service2 43 515 1,070 7,886 7,886 7,886 7,886 7,886 7,886 7,886 7,886 7,886 7,886 80,493

Implementation Costs Not Financed 1,094 2,691 2,612 - - - - - - - - - - 6,398

Workday Solution Fees 6,400 2,400 2,400 2,400 2,400 3,328 3,461 3,600 3,744 3,893 4,049 4,211 4,379 46,665

Ongoing UW Support - - 840 1,679 1,679 1,679 1,679 1,679 1,679 1,679 1,729 1,781 1,835 17,938

Total Costs 7,538 5,606 6,921 11,965 11,965 12,893 13,027 13,165 13,309 13,459 13,665 13,879 14,101 151,493

Less: Hard Savings - - - (900) (1,800) (1,800) (1,800) (1,800) (1,800) (1,800) (1,800) (1,800) (1,800) (17,100)

Net Costs 7,538 5,606 6,921 11,065 10,165 11,093 11,227 11,365 11,509 11,659 11,865 12,079 12,301 134,393

Less: Initial Cost Paid by Provost (7,538) (5,606) (6,921) - - - - - - - - - - (20,065)

Provost Recapture - - - 1,003 1,003 1,003 1,003 1,003 1,003 1,003 1,003 1,003 1,003 10,033

Subtotal: Net Cost to Provost (7,538) (5,606) (6,921) 1,003 1,003 1,003 1,003 1,003 1,003 1,003 1,003 1,003 1,003 (10,033)

Total Allocations to Campus Units - - - 12,069 11,169 12,097 12,230 12,368 12,512 12,662 12,868 13,082 13,304 124,361


Central Units - - - 1,880 1,739 1,884 1,905 1,926 1,949 1,972 2,004 2,037 2,072 19,368

Academic Units - - - 6,324 5,852 6,338 6,408 6,480 6,556 6,634 6,742 6,854 6,971 65,160

Other (Auxiliaries, Medical Centers)4,5 - - - 3,866 3,577 3,875 3,917 3,962 4,008 4,056 4,122 4,190 4,261 39,832

Total - - - 12,069 11,169 12,097 12,230 12,368 12,512 12,662 12,868 13,082 13,304 124,361


Net Costs 7,538 5,606 6,921 11,065 10,165 11,093 11,227 11,365 11,509 11,659 11,865 12,079 12,301 134,393

Soft Savings - - - (6,200) (6,938) (7,675) (8,413) (9,150) (9,888) (10,625) (11,363) (12,100) (12,100) (94,450)

Net Costs less Soft Savings 7,538 5,606 6,921 4,865 3,228 3,418 2,814 2,215 1,622 1,034 502 (21) 201 39,943

Running Total7 7,538 13,144 20,065 24,931 28,159 31,577 34,391 36,606 38,228 39,262 39,764 39,743 39,943



F–4.3/202-14 2/13/14

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Impact on Large Borrowers - Debt Service CoverageFiscal Year 2016 2017 2018 2019 2020UW Medical Center Current Proforma 5.56 4.38 4.67 4.60 4.79UW Medical Center HR/P Base Case 5.56 4.07 4.34 4.27 4.45UW Medical Center HR/P Cost Stress 5.56 3.77 4.02 3.96 4.12UW Medical Center HR/P Rate Stress 5.56 4.05 4.33 4.26 4.43

Housing and Food Services Current Proforma 1.22 1.18 1.22 1.27 1.31Housing and Food Services HR/P Base Case 1.22 1.17 1.22 1.26 1.31Housing and Food Services HR/P Cost Stress 1.22 1.17 1.21 1.26 1.31Housing and Food Services HR/P Rate Stress 1.22 1.17 1.22 1.26 1.31

Intercollegiate Athletics Current Proforma 1.30 1.34 1.36 1.44 1.45Intercollegiate Athletics HR/P Base Case 1.30 1.33 1.36 1.43 1.45Intercollegiate Athletics HR/P Cost Stress 1.30 1.33 1.35 1.43 1.44Intercollegiate Athletics HR/P Rate Stress 1.30 1.33 1.36 1.43 1.45

* While the planning period for HRP extends beyond 2020, this time period is consistentwith the reports submitted semi-annually to the Board of Regents.

Debt Service Coverage

ATTACHMENT 4F–4.4/202-14 2/13/14

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