Revealing the iceberg of hidden costs of payroll, HR

Tracking total expenses across functions a challenge
By Sarah Terrelonge
|Canadian HR Reporter|Last Updated: 09/10/2012

Do you know how much your company is spending on HR, payroll and benefits administration? Many companies are spending much more than they realize.

Many employers underestimate the true expense — or total cost of ownership (TCO) — of processing and managing payroll, time and attendance, HR data administration and health and benefits — by more than 60 per cent — according to a 2012 study by consulting firm PwC Canada and payroll, HR and benefits administration service provider ADP Canada.

Exposing the Hidden Cost of Payroll and HR Administration: A Total Cost of Ownership Study was based on data collected from 125 organizations, ranging in size from 50 employees to more than 5,000, to examine the issue of hidden costs and TCO across four core business functions: payroll, time and attendance management, HR data administration, and health and benefits administration.

The study also identified strategies that allow organizations to deliver these functions more cost-effectively.

The iceberg

The challenge facing many organizations and executives is identifying costs not easily recognizable — the hidden operating costs that contribute to a higher TCO. Think of it like an iceberg — only 20 per cent of it appears above the water with the remaining 80 per cent hidden below the surface.

While the visible costs for HR and payroll administration include system installation and direct labour costs, only 37 per cent of the costs associated with business processing are these top-of-mind costs, according to PwC, with the balance lurking below the water line.

Almost two-thirds (63 per cent) are hidden costs, such as indirect labour and system maintenance costs, and careful evaluation is required to identify them. For example, an HR executive might be challenged to report how different lines of business managers are tracking hours or vacations.

Hidden costs can represent more than one-half of the total costs for HR and payroll administration.

Although costs can vary, when all costs associated with the four core business functions are taken into consideration, large organizations (more than 700 employees) spend an average of $722.46 per employee per year and mid-size organizations (50 to 700 employees) spend $1,165.63 per employee per year, found the study. If an organization has hundreds of employees, those costs can quickly add up.

So, why is this happening, when cost-containment is often a top priority? Tracking total costs, especially across functions, is challenging because related functions are often owned and administered by three different departments — HR, finance and IT. As a result, many of the decisions made about HR and payroll administration are made solely in relation to each specific function, rather than looking at how efficiencies could be found with an enterprise-wide perspective.

In hindsight, this can seem obvious. For example, an HR manager estimating systems costs will consider the setup and licensing fees for the solutions used by his staff.

But to understand the total cost, he would also need to identify the ongoing system maintenance costs and the requirements — technology and people costs — to interface with other systems. He would also need to allocate a percentage of any shared system costs, as most IT systems support multiple processes.

With so many interconnected components at play, it’s easy to see how organizations could omit costs and, ultimately, underestimate the TCO.

A checklist of elements that should be included when undertaking a complete cost analysis includes:

• one-time system installation costs, periodic system upgrades and system maintenance

• direct and indirect labour costs

• the annual costs incurred when using a service provider.

How to reduce costs

One of the top cost-reduction strategies unearthed by the PwC/ADP study is choosing to use an HR and payroll services provider. A provider can manage a business’s payroll function costs for 30 per cent less than when a business performs these functions in-house.

Employers that move to a service provider for multiple functions realize even better savings — up to 43 per cent less than in-house processing. This is valuable money and time that could be reallocated to managing departments and running the company more efficiently.

Where do these cost savings come from? If an organization consolidates its business functions with a single service provider, it doesn’t incur the costs of technology and process integration that multiple systems require. Many organizations fail to realize the presence of these “seams costs” or the cost associated with integrating and managing what would otherwise be a series of disconnected business processes.

While these seams costs are present within many HR departments, they are largely absent from organizations that outsource payroll, time and attendance, HR and benefits administration functions to a single provider, according to the study.

It’s important to think strategically about HR service delivery and look at the whole picture, across functions. It’s critical to consider the hidden costs in delivering on these functions and push to uncover them, because they can be the lion’s share of the TCO.

Once that cost picture is outlined, it’s easier to address the often substantial costs of having multiple systems in place and to identify if an opportunity exists to generate positive differences in TCO by bundling these services with a single service provider.

Sarah Terrelonge is the Toronto-based director of market intelligence at ADP Canada, a provider of HR, payroll and benefits solutions. The full PwC/ADP study can be found at www.adp.ca.

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