Understanding the total cost of ownership of your HRMS

The old phrase about knowing the price of everything and the value of nothing is often strangely reversed when it comes to HR software. Most businesses see the value in having an up to date HRMS, but it’s very easy to be misled about the price.

What is HRMS TCO

The TCO, or total cost of ownership, is the key figure, the one you look behind the price tag to find. The HRMS TCO is the only figure that ultimately matters because what you pay at the point of purchase (or subscription) is only part of the picture; the price of your HRMS is whatever it costs you during the entire time you’re using it; and that cost goes beyond whatever you hand over to the software vendor.

So what goes into making up the total cost of ownership? First of all, naturally, comes the one-off cost of the license or the monthly subscription fee (depending on which of the two basic pricing models you’re going for). Then you consider the following (sometimes hidden) factors: labor costs (both internal and external), data cleansing and migration (‘dirty’ data is a clear case of garbage-in-garbage-out), updates and maintenance for the lifetime of the system, then there’s staff training – quite apart from the cost of buying or developing a training package/materials, the trainees (and usually, in these days of employee self-service, that’s every member of staff) will need to take time away from their day jobs.

HRMS TCO differences: subscription versus license

So, are there any differences in TCO between the subscription and license pricing models? The short answer is, yes. Perhaps for a start, just to be pedantic, subscription model SaaS systems should have TCR instead of TCO; total cost of rental?! But apart from the nomenclature…

Installation is often cheaper for subscription systems – being off-premises means there are no hardware costs, and cloud HRMS tends to be much less customizable, much more of an ‘off-the-shelf’ experience; this may mean it’s less flexible but it’s also cheaper. Another facet of using a standardized system is that there are less unique updates and upgrades, and besides SaaS systems tend to have a far less dramatic upgrade schedule than ‘traditional’ licensed options. Similarly, maybe due to its online nature, user training for a SaaS system is more likely to be online, saving on the inevitable overheads of face-to-face training.

That said, on-premises HRMS is still perceived to be just that little more secure and should a data breach occur, you might find that the upfront cost savings of storing all your HR information in a distant data centre are wiped out by recovery costs and non-compliance fines. Also, the longer you use the system (and the previous industry lifespan of 5 years has increased in recent years as businesses seek to get more value from their IT investments) the more inevitable it is that your monthly subscription will add up to far greater than any initial license fee.

Recommended Reading: HRMS Selection Survival Guide - 9 steps to selecting the right HRMS for your business

Pay-as-you-go is always a tempting fee structure but do it for long enough and you may wish you’d gone for a license.

The total cost of ownership will ultimately vary from business to business, knowing how ready you are for the HRMS implementation will give you an indication of any costs you may incur outside of the actual investment. For example you may already have the IT requirements in place or staff that have used certain systems before.

author image
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.

author image
Dave Foxall