Businesses evaluating the benefits of human resources outsourcing often focus on the improved productivity of internal HR staff. But the real reason to outsource rote administrative tasks, say analysts at PriceWaterhouseCoopers, is cost savings.
By the Numbers
A study conducted by the research group over a two-year period found that in-house human resources carry hidden costs that most companies dont take into account when they compare internal and outsourced HR options. The studys sponsor, a leading human resource outsourcing provider, observes: "this years study showed that outsourcingandhellip; offers an average 35 percent savings on payroll and more than 50 percent savings on HRIS (human resource information systems)." The study concludes that "in-house human resource systems are more expensive and less strategic" than outsourced HR.
Total Cost of Ownership (TCO) of In-House and Outsourced Models
PriceWaterhouseCoopers white paper "The Total Cost of Ownership: Warning Signs of Hidden In-House System Costs" details the factors that obscure the true total cost of ownership of internal human resources.
The two costs that businesses typically overlook when assessing TCO are:
- Costs associated with payroll systems
- Non-payroll department costs attributed to time collection
These costs generally escape the financial assessment of in-house HR. The study cites the example of a business that assesses their in-house cost per paycheck at two to six dollars. Taking into account the two missing factors raises that estimate to sixteen dollars per paycheck. Taking all factors into account, the study found that "hidden costs account for sixty percent of the total cost of ownership component costs for payroll."
Human Resource Information Systems (HRIS)
Human resource information systems represent another source of cost underestimation. The hidden cost drags of an internal HRIS include:
- Future upgrades to the system. The useful life of in-house systems appears to be decreasing. HRIS technology is subject to a rapid rate of obsolescence, compelling businesses to invest in frequent system upgrades. PriceWaterhouseCoopers estimates that "the average in-house system has been upgraded within the last eighteen months." Yet few of the senior financial executives the study consulted anticipate any economic value added as a result of continued investments.
- Maintenance costs. Many businesses fail to account for all the costs associated with maintaining an HRIS system. The study finds that maintenance costs represent 72 percent of an internal HR systems total cost of ownership. Taking into account the following factors, the study estimates the average cost per employee per year for owning and maintaining an HRIS is $88.
- Application maintenance
- Daily application support
- Database administration
- Network and communication costs
- Help desk and end-user support
- Facilities and other overhead
- Unused HRIS functionality. A significant number of respondents to the studys survey indicated that significant portions of the human resources system have not been deployed. Unused functions include recruitment, employee and manager self-service, and competency andamp; career development. The cost of unused functionality goes beyond the initial cost of the software, since often the company continues to pay ongoing maintenance fees for the unused modules. Most cost assessments take into account only the costs associated with the core modules that the company actively uses, which typically include core HR, base benefits, compensation, and compliance and regulatory reporting features. Taking into account unused system modules added an average $30 per employee to the cost assessment for HRIS.
The exact figures may have changed in the intervening five years since PriceWaterhouseCoopers released these results. But what remains is the central insight of the study: its easy to overlook hidden costs when assessing the TCO of in-house human resources. Businesses that take advantage of human resource outsourcing save more in hard costs than they may realize.