Common HR and Payroll Outsourcing Mistakes #2: Underestimating your HR costs
Posted by: on 22 February 2016 in Human Capital Management
The cost of running Payroll, Time and Attendance and HR administration processes is often drastically underestimated. In fact, a 2012 PwC total cost of ownership study found that only 37% of the Payroll and HR administration cost is visible with the remaining 63% being hidden away. As a result, the true HR costs of running Payroll and other HR services is often not known. One reason why some costs are hidden is that HR processes are often “owned” partly by HR and partly by Finance, IT, or other functions.
BOTTOM LINE, RISK AND ROI
Not knowing the total cost of ownership (TCO) impacts the bottom line, increases risk and affects the ROI of outsourcing as the business case is understated and incomplete. When developing the business case and potential ROI for Payroll and HR outsourcing engagements, the costs of IT components for example form a large part. Software fees, maintenance and upgrade fees, system integration and interfaces, hardware and subcontracting costs, and time spent by staff on payroll systems need to be included as these costs are transferred to the service provider. Outsourcing isolated HR processes is also not the answer. The PwC TCO data found that companies face software integration costs of around $200 per employee per year when they operate HR systems separately. Even state-of-the-art technological solutions carry hidden costs when they are used in separate administrative silos.
In order to calculate the TCO, companies need to look at all their processes – and not focus on any one process in isolation. They also need to identify the critical “hidden” costs, in addition to the more obvious costs. Only by developing a real understanding of these costs will Finance and HR be able to deliver the efficiency, savings, and service improvements so critical to business success.
BUILDING THE BUSINESS CASE NOT JUST ON COSTS
It has never been more important for companies to understand the total cost of ownership of their HR processes. However, assessing TCO is a complex task that requires high levels of expertise. Having a partner that has a methodology of measuring the end-to-end costs of running HR processes is essential. But the TCO studies should not only identify opportunities for cutting costs, it should also examine how the current processes work, as this will assist HR leaders build a compelling business case for change that turns HR into a true business partner.
A complete cost analysis or TCO scan of HR processes should consider all the following costs, including those that are visible and the less obvious, “hidden” costs listed below.
1. System Maintenance
IT systems need infrastructure, support, software, and regular maintenance – which all carry costs. But with IT staff often involved in maintaining HR systems, it can be difficult for HR Managers to track their system maintenance costs.
The cost of training employees to use HR systems is sometimes overlooked.
3. Indirect Labour
Indirect labour costs relate to people working outside HR who help deliver HR processes.
4. Direct Non – Labour
The total costs of operating Payroll and other HR processes may include fees paid to consultants and vendors, as well as corporate overhead, such as rent and building maintenance.
5. Seams Costs
The cost of integrating Payroll, Time and Attendance and HR data administration. HR Departments often install these systems separately without considering the costs of transferring data from one to another.
6. Data Consolidation
Companies with multiple local HR systems, rather than a single database may need to pull all their data together – for example, to calculate global employee numbers.
Outsourcing can deliver significant savings, but it also carries costs. Even companies that have not outsourced entire processes often outsource selected services linked to those processes, such as tax filing.
8. Quality Related Costs
Perhaps the hardest costs to detect are those linked to the quality – or lack of quality – of HR solutions.
Written by: The ADP@Work Team