The hidden costs of an HRMS investment

Return on investment, or ROI, is the holy grail of any project, including buying and implementing a new HRMS. While the first thought in business often turns to the bottom line, i.e. money, HRMS ROI may be evidenced in one of three ways: financial savings, staff savings, or improved efficiency of HR services. However, simply looking at the system’s price tag, or your HR department’s headcount figures or KPI performance is not enough – there are hidden factors at work when it comes to HRMS ROI…

there are a number of ‘hidden’ costs behind the price tag, whether that be a license or a monthly payment

One of those less evident factors is the pricing model that comes with the new system: the popular subscription/pay-as-you-go structure or the classic upfront license for perpetual usage. Clearly, with the license, the longer you use the software, the better your HRMS ROI as the initial payment is effectively ‘spread’ over more years; whereas the longer you use a subscription service, the more you pay (granted, in return you get a lot of pluses, not least the option of changing whenever you like, but the cost does go up over time).

That said, a few years ago, in the earlier days of SaaS, a study of businesses who changed from licensing software to subscribing to off-premises solutions found the ROI on such systems was 1.7 times better. These days, subscription fees may have increased and businesses tend to hang on to their software for longer; but still…

Recommended Reading: HRMS Vendor Guide - Find the HRMS vendors who can help you achieve your ROI

But it’s not just the pricing model that impacts on your HRMS ROI; there are a number of ‘hidden’ costs behind the price tag, whether that be a license or a monthly payment:

  • System installation – the cost of implementation, getting it all up and running; including data cleansing and migration, and any initial hardware costs if you’re deploying your HRMS on-premises.
  • System upgrades – the periodic costs related to upgrading to the latest version.
  • Direct labor costs - the cost of employing the staff necessary to support the system (these tend to be more when you need in-house IT staff to support on-premises hardware).
  • Outsourcing costs – costs deriving from any outsourced services.
  • Direct non-labor costs – including selection and implementation consultants, the vendor’s added extras and/or facilities, and any related corporate overheads such as the downtime as staff/users undergo system training.
  • System maintenance costs – the IT costs specifically related to maintaining the system.
  • Indirect labor costs - labor costs for employees involved in ‘HR activity’ that is directly related to the system (e.g. collection of staff data, timesheet monitoring, answering staff questions, and so on).

Finally, it’s not only a question of what you pay, but also how you pay it which can affect your HRMS ROI. That’s the OpEx vs CapEx issue. Depending on your organisation, you’ll find it easier to obtain and manage operational expenses or capital funding. That aggravation (whichever way around it is) can make a significant difference to your choice because – once again – the pricing models differ. Given that SaaS/cloud systems are effectively being rented, the subscriptions are classified as operational expenses; however, a perpetual license is usually seen as a capital cost.

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Dave Foxall

About the author…

Dave has worked as HR Manager for the Ministry of Justice for a number of years, he now writes on a broad range of topics including jazz music, and, of course, the HRMS software market.

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Dave Foxall