Calculating the true cost of your investment in HR software can help you define a business case that stands up to scrutiny and wins executive endorsement smoothly. In this executive guide, Ananda Roy, Associate Vice President of Adrenalin eSystems crunches the numbers the helps many businesses plan and implement effective HRMS projects.
Developing a business case for investment in HR software requires a risk-mitigated approach: that is, a thorough estimation of the costs and project risks set against expected tangible and intangible benefits.
The upfront costs of software typically only reflect 10 to 20% of the Total Cost of Ownership (TCO). Some software vendors will present TCO estimates that fall short of the true cost because they only reflect the initial licence costs involved.
What is the True Cost of Ownership?
The True Cost of Ownership attempts to be more ‘conclusive’. Using traditional cost-analysis, it tries to estimate the actual cost of the investment over its lifetime. This is a vital input for any business case that wishes to examine the total business impact of the HR software investment.
In our experience, the True Cost of Ownership typically stands up to scrutiny and has helped a number of HR and IT managers win rapid financial endorsement for their HRMS investment.
Calculating the True Cost of Ownership
There are three basic clusters: Upfront, Ongoing and Hidden costs. Elements within these clusters add up to the true cost.
- HRMS Licence Fee
- Other Software Licence Fees
- Annual Maintenance Costs, including upgrades
- Operations & Administration
- System Downtime
- Managerial Time & Effort
- Change Management
Allowing for industry and regional variances, and largely dependent on the scope and complexity of your HR software project:
- Upfront costs are roughly 10 to 20% of the true cost
- Ongoing costs add 15 to 25% of the initial upfront investment every year
- Hidden costs are often equal to the initial upfront investment
A. The Product Licence Fee
This covers the number of user licences for the software. HRMS licence fees are typically sold in one of three ways as Enterprise licenses, Named users or Server Licences.
An Enterprise licence fee model charges a flat fee for the organisation irrespective of the actual number of users for the specified number of modules. The Named users model allows only a limited number of users who are authorised to access the system. A server licence fee specifies the number of servers where the product can be installed.
This is likely to be only 10-20% of your total cost.
ACT: Choose a fee structure that suits your organisation
- If your organisation structure is large, that is, it is greater than 500 employees consider an enterprise license model to allow for cost-effective upscaling to other staff.
- For an organisation with less than 500 employees, a per user licence fee might be a better and more affordable option.
- If your organisation is geographically dispersed with employees across locations, a server-based fee would be best.
An HR software vendor may not propose the right pricing models for your company but you can insist on one that is right for you.
B. Other Software Licence Fees
Your HR software may require allied software to function optimally, for example, a back-end database, an upgraded mail system or a reporting software to provide the rich analytics you require.
ACT: Unravel the entire software requirement
- Check whether these additional software licences are ‘bundled’ into the cost-proposal. These may be quoted directly from the companies that developed them (and not necessarily from your HR software vendor).
- Some large companies may pass on volume discounts to you on request, leveraging their partner relationships with the allied software companies. Or you may have valid licenses that you can use.
- If not included, add this cost to the proposal.
C. New Hardware Investment
This covers the hardware infrastructure that needs to be in place before you can install and operate the HRMS. Can your desktop handle the new system and will someone need to manually install the software at every desk? (Here, web-based HR software, that is accessed over the intranet/internet through a browser has a distinct advantage). If your existing IT infrastructure doesn’t meet the basic requirements, you could be investing heavily in application and database servers.
This could form up to 30% of your total cost of ownership.
ACT: Include the IT department in the evaluation process
- Ask the vendor to clearly provide a list of hardware requirements.
Your IT department can then check whether you have complementary systems and capacity.
- If you don’t, this is going to add cost. Some HR software vendors can leverage partnerships with hardware companies to provide you a discount on hardware purchases as well.
Installing and configuring the software to the exact specifications laid out in your agreement is not going to be easy. Being prepared will save money.
Remember, over 40% of IT projects fail to meet time and cost limits, sometimes jeopardising the business objectives underlining the investment.
ACT: Have a rigorous plan for implementation with strict milestones in place
- Established HR software vendors provide an implementation process and plan that can often, reduce cost and time of implementation significantly.
- Conduct a due-diligence of your vendor’s proposed project team to ensure you get quality resources with sufficient experience for your requirements.
Expect most HR software to meet 80% of your functional requirements, you will need to customise it further to ensure no compromise in usage by HR and your employees. Customisation is usually billed on a time and effort basis once the scope of the work required has been studied and properly documented.
ACT: Choose HR software that matches current and future business needs
- HR software designed and built in collaboration with recognised HR consultancies may ensure many industry best practices are ‘burnt-in’.
- HR software vendors prevalent in your industry may have built ‘industry templates’ based on their past client’s requirements which they can use rapidly to your benefit.
F. HR or IT Training
Training the systems administrators (HR or IT) and the system facilitators (HR functional users) to understand how your HRMS is installed, configured and administered ensures you can get full ownership of the product. This may require classroom sessions (more expensive) or remote training. Do not assume extensive implementation manuals will be self-explanatory.
ACT: Allocate time and opportunity costs for training both HR and IT
- Choose an HRMS that is intuitive and graphical in presentation. An easy-to-use system will naturally reduce the time and cost of training required to master the system.
Checklist 1: One Time Costs
* Software licensing cost
* Server Hardware & Software upgrades
* Desktop Upgrades
* Implementation Labour
* Development & Customisation
* Professional Services
* HR & IT Training
Annual Maintenance Costs
Most vendors provide 90 days warranty after which the client needs to enter into an annual support and maintenance contract. This is typically between 20-25% of the product licence fees.
- Ensure that your terms of agreement contain mutually acceptable Service Level Agreements (SLAs) and access to free upgrades.
- SLAs categorise the types of issues/bugs likely to be faced by the users and define support levels for each grade. For example, it could define that a grade A bug would be resolved in 24 hours, grade B in 48 hours and grade C in one week.
Operational and Admin Costs
Large, complicated HRMS may require technical and on-going support by various functional facilitators. If the HRMS is complex in structure and operation, you may require a dedicated team to provide operations support and act as a helpdesk. This typically occurs in the case of large ERP based HRMS packages.
ACT: Match software to business needs.
- Simple software that meets your business needs is going to be easy to implement, configure, administer and upgrade. This saves you labour and infrastructure costs and provides an incremental return on usage as well. Why pay for complex software no one will use.
The cost of lost HR and organisational productivity, missing data and its retrieval, together with the loss of reputation, merits a system that is proven and reliable, even if its upfront costs are slightly higher.
ACT: Choose software products that are reliable and vendors who have experience and fail-safe processes that support you speedily when issues develops.
Checklist 2: Ongoing costs
* Application Maintenance
* System Administrator Cost
* Helpdesk Support
* Implementation Labour
* Ongoing Development & Customisation
Managerial Time and Effort
Management or Business Unit Costs are required to define HRMS goals and objectives, outline the scope of functionality module wise and identify areas of customisation in this software or modifying existing practices to fit the systems functionality.
Providing the specifications, periodic review of project documentation and progress, user acceptance testing can be quantified especially if you have ‘billable’ senior resources involved.
ACT: Calculate the opportunity cost.
An HR vendor with strong processes and experience will reduce this indirect cost considerably, requiring only limited time from your end.
Helping your employees make the shift to the new system rapidly and effectively is vital for the projects success yet most often poorly planned.
You can avoid errors in employee data and services, lost productivity and deviation from policy in the transitory period. Most HR directors now include internal programmes to train and help employees use the new software, especially for self-service modules. While they have nothing to do with the product per se, this cost must be built in to the investment case.
ACT: Budget time and cost for user training and adoption
Consider the following:
- User training labour and expenses in all your key offices
- Office promotional and display materials
- Helpdesk & FAQ services, either online or consultative, to iron out early wrinkles in user ownership and compliance
- Professional training fees if provided by an external trainer or the vendor
Business Unit costs usually equal the cost of the initial IT Investment
Checklist 3: Hidden Costs
* Coordination and planning meetings
* Course fees
* User Training Labour
* Promotional Materials
* Helpdesk Services
* Professional Trainer fees and costs
Ananda Roy can be reached at [email protected]