SOP 98-1 and the HP PPM Center Capitalization Framework

· Based on the EmblemHealth's SOLC, we implemented a standard project template withinHP PPM Center.

· Within the standard project template each of the SOLC phases is identified as eithercapitalized or non-capitalized according to the guidelines under SOP 98-1 (see SOLCproject phases listed below, including their capitalization designation).

· By assigning the capitalization designation at each phase level, we alleviate thenecessity to define each individual task within each phase level as either capitalized ornon-capitalized.

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EmblemHealth• Group Health Incorporated (GHI) and HIP Health Plan of New York (HIP) announcedtheir intention to merge in 2005 and both are currently affiliated and operating under acommon parent company, EmblemHealth, Inc.

• With 5,400 employees, HIP and GHI together are now the largest health insurerbased in New York State, serving more than 4 million people with over 92,000providers in 142,000 locations across the Tri-State region.

HP Project and Portfolio Management Center - phase I• GHI started using HP Project and Portfolio Management (PPM) Center for time entry,anddemand management for 150 users in late 2005. The initial implementationsatisfied the following goals:

1. IT work requests demand management2. Allow departmental chargebacks for staff operating costs3. SOX compliance4. Provide real time reporting for business users on request status

Classification of Non-Eligible Capital Labor Costs

Based on the guidelines for SOP 98-1, certain costs will not qualify for capitalization.The following non-qualifying costs are exempt from capitalization:1. Preliminary Project Stage Costs:

a. Making strategic decision regarding allocating resources betweenprojects.

b. Determining what the software and systems need to do.c. Exploring alternate means to achieve specific performance goals.d. Determining if the technology required exists.e. Vendor selection process for purchasing external software.f. Consultant selection process to work on the project.

2. Post Implementation/Operation Stage:a. Training costsb. Application Maintenance

3. Process of converting data from the old to the new system

Classification of Eligible Capital Labor Costs

Getting Started• To standardize the classification of capital projects, the project submitter is required

complete the following questions within HP PPM Center. These questions are basedon the criteria within SOP 98-1.

1. Is this project for the development or purchase of internal use software?2. For existing internal-use software, does this project add additional software

functionality (i.e., does the modification or upgrade enable the software toperform tasks that it was previously incapable of performing)?

3. Is this project for the development or purchase of a new hardware system?

• A "yes" response to question 1 and a "yes" response in either 2 or 3 would qualify theproject as capital eligible.

• A representative of the Finance committee will review and approve a project's capitalstatus.

• Once Finance approves the designation of the project as a capital project, theprojects labor costs will be reported as capital or operating based on the associated~SD..LC..pbase where the labor costs 'HeF8 incurr@d, _

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HP PPM Center Configuration Issues for Capitalizing Labor Costs

Initial Challenge• Employee hourly pay rates were assigned a blended rate that is based on an

average within their IT peer group and includes their base salary and fringebenefits. Without an assigned cost for each staff member, we could only report onhours. This would limit our ability to compare budgeted costs against actual costs.

Solution• By adopting the 4-5-4 retail calendar, we were able to standardize the number of

hours in a month. A month would either be 4 weeks at 140 standard hours or 5weeks at 175 standard hours.

Results1. We will be able to always close the weekly staff time entry period on Sunday.This will facilitate closing the monthly period and producing the chargeback reportsby the first week of the next month.

2. When we use standard hours, it will allow us to normalize the hours in a givenmonth. By normalizing the hours in the month, we ensure that we are notoverstating costs in a given period for an employee who worked more than 35 hoursin any week during the month. The formula for normalizing monthly hours is «(allactual hours on a task / all actual hours) x (standard hours for month) * Rate ofpay)).

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HP PPM Center Configuration Issues for Capitalizing Labor Costs

EXAMPLE: Use the retail calendar to normalize the employee's hours:Employee number 1 is a salaried worker and is paid $2,800 monthly. Based on a 35 hour weekhis hourly wage is $20. Based on the 4-5-4 rule this month's standard hours is 140 (4 weeks *35hrs).

• In this month the employee worked 46 hours over the normal 35 hour week for a total of 186hours. The employee's time was split between multiple tasks that included capitalized and non-capitalized work.

• If we used the base configuration within the system, we would enter $20 per hour as the rate ofPay. The month end report would show that the employee worked 186 hours at $20 dollars perhour for a total pay of $3,720. The net outcome is that the employee's salary is overbooked by$920 dollars.By using the formula ((all actual hours on a task / all actual hours) x (standard hours formonth)* Rate of pay)) we are able to normalize the employee's hours and limit the accruedcosts to the employee's actual pay. See the calculation below:

Task # Actual Hrs. Formula Normalized Hrs. Monthly Costs

Task 1 100 (100/186)*140 75 $1,505

Task 2 23 (23/186)*140 18 $346

Task 3 15 (15/186)*140 11 $225

Task 4 8 (80/186)*140 6 $120

PTO 40 (40/186)*140 30 $602

Totals 186 140 $2,800

Monthly Capital Labor Costs Chargeback Report

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Incorporating Non-IT Users into HP PPM Center

Primary benefit of using HP PPM Center for non-IT groups:• Service groups within the organization can chargeback labor costs for services delivered.

Projects can be controlled through the PPM system project governance model.

Configuration Guidelines:• Any business unit that has defined resources and a defined customer base can utilize HP PPM

Center.• All chargeback reports are resource concentric. If you own the resource, you would chargeback

the resource cost to the department that requested the work and you would credit yourdepartment for the resource costs expended.

Monthly IT Cost Allocation

• Operating and capitalized labor costs will be credited to the IT budget and charged totheir respective cost center accounts.

• Capitalized labor costs will be pooled on the balance sheet, and as the projects arecompleted, these capitalized costs will be amortized across the organization.

• Non-project related costs will be charged back based on PC count.

Net Impact:• IT budget is right sized

for internal IT costs• Business budgets now

accurately include all oftheir operating costs. H

• Corporate leaders canmore effectively alignand allocate resourcesfor maximum return

Capitalization(cap hours)

Chargeback(non-cap hours)

Remaining ITOosts Allocatetl Based on Departmental pes

Improved visibility and management of demand queue:• By implementing HP PPM Center in 2005, we were able to control the business IT requests and

to allow the business users to view the status of their work requests in real-time mode.

Increased budget accuracy• By charging back their direct operating expenses, we were able to properly allocate a portion of

the IT budget.

Accurately report on capitalized labor costs• Today, not only are we able to control the inventory of work requests in the system but by

creating the standard project template, which is based on the seven phases of the SOLC, we areable to segment and report on capitalized labor costs.

Single instance of the truth for all project and non-project work requests• By selecting HP PPM Center as the EmblemHealth tool for reporting and controlling projects, we

are able to present a common, consistent view and status reporting for all enterprise projects andnon-project work requests.

Establish a framework for monitoring and controlling labor costs• Our goals have been to consistently add value by providing a framework for monitoring and

controlling labor costs, business departmental work requests and projects. By using HP's PPMCenter we have been able to reach those goals.