How much HRMS costs and how to set your budget
According to respondents to the annual Sierra-Cedar HR Systems Survey, a change in HR technology is regularly in the top five strategic initiatives, year on year – in the 2017-18 report, 40% of respondents are looking at replacing or refining an HR system.
If you’re looking to upgrade or replace your HRMS then one of the key factors will inevitably be price – they don’t call it the ‘bottom line’ for nothing! However, given the complexity of vendors’ pricing models, and the many potential hidden HRMS implementation costs, creating an HRMS budget can be far from simple. The following guide looks at the costs and price-related issues associated with selecting and installing your new HRMS, including:
- Justifying the cost of HRMS investment
- Pricing models
- Deciding on system features
- Installation costs
- Total Cost of Ownership (TCO)
- Compiling your HRMS budget
- Return on Investment (ROI)
1. Justify the cost of an HRMS investment to senior management
The easy answer to this question is, by knowing exactly how much the project will cost, and being able to prove that the value of the new HRMS’ benefits and savings will outweigh that cost (i.e. demonstrate an attractive return on investment).
In other words, you need to consider every HRMS cost point, both obvious and hidden, from the price tag on the vendor’s website to the expense of employee time take up with user training.
The acid test of your budget and HRMS cost justification will be whether you can convince whoever holds the purse strings; usually your organization’s c-suite or equivalent. To persuade them to support the project, you’ll need to show clearly-defined benefits to the company – for example, a reduction in overheads or other costs, a reduction in staffing, a redeployment of existing staff, more efficient HR services, or all of the above.
One tip is to beware of pushing the cost reduction line as this is essentially a negative (i.e. there is still a cost) dressed up as a positive (it will be less than it is right now). Instead, focusing on additional benefits is much more persuasive; such as measurably better quality services, new services that could not be offered before, or contributions to achieving the business’s KPIs.
Just remember: most C-suite executives are looking for hard facts and figures relating to business performance AND – you’ll be held accountable for whatever outcomes you promise!
2. HRMS price comparison – a choice of two models
HRMSWorld’s 2016 HRMS Software Project Report shows a definite preference (61%) for cloud technology over ‘traditional’ on-premises systems. Unsurprising given that cloud HR software systems are usually quicker to implement, involve minimal commitment in terms of hardware and cost, and often come with a more flexible cost structure.
Put simply, HR in the cloud is moving on from past concerns about data security, control issues, and vendor stability to become the go-to option of the majority. Let’s compare and contrast the two basic pricing models:
The subscription model (cloud): Usually paid on a monthly basis, the amount typically depends on either the number of system users or, more often, number of employees in the client organization.
The license model (on-premises): More of a ‘purchase’ than a ‘rental’, this one-off license fee may come with additional costs for an ongoing maintenance or support package.
Advantages of cloud HRMS
- Costs less upfront
- Ever-increasing range of options available on the market
- No hardware costs
- Maintenance and upgrades done automatically, according to the vendor’s schedule.
Advantages of on-premise HRMS
- Once you’ve paid for it, it’s yours
- Such systems are often more customizable
- Control over hardware
- Control over upgrades and maintenance.
3. Decide on system features
The most obvious cost factor is the system itself: broadly speaking, the more it does, the more it will cost you. This element of your HRMS budget is also the most easily calculated. Having gone through the process of gathering user and stakeholder requirements, you decide on the feature set your business needs and then check the price tag (subscription or license) that different vendors are asking.
4. Factor in installation costs
The cost of system installation is the cost of getting the new system up and running. It includes:
- Data cleansing and migration
- System testing
- User training
- Staff time
- Internal communications and other internal change management costs
- Consultancy fees
- Hardware costs (if you opt for an on-premises deployment)
Some of these costs are potentially ‘hidden’ in the sense that they are easy to overlook during the project planning stages. These hidden costs are explored in the following section.
5. Calculate your TCO
Ultimately, the TCO (total cost of ownership) of your new HRMS is the only figure that matters. What you pay at the time of purchase (either for a license or a subscription) is only the first ‘instalment’. Your TCO is whatever the system costs you during the entire period you’re using it. The basic ingredients of your TCO are:
- The license OR the monthly subscription fee (depending on your HRMS pricing models)
- Labor costs (internal staff)
- Labor costs (external supplier)
- Data cleansing and migration
- Updates and maintenance for the lifetime of the system
- Staff training (both the cost of training materials and also staff time spent being trained)
It’s worth noting that while the cloud/subscription model is almost always cheaper upfront, from a TCO perspective, there comes a point when a licensed system may make more financial sense.
Put simply, the longer you use cloud HR software, the more the subscription cost increases, month by month, whereas a license fee is a one-off expense. Some industry pundits are suggesting that many businesses are aiming to get 10 years out of an HRMS before replacing it. At around the seven-year mark, the TCO of the two different pricing models converge and after that point, the license model becomes gradually cheaper overall.
5. Compile your HRMS budget
Time to pull it all together. What follows is a step-by-step template for compiling your HRMS project budget. By all means, use your own process, but feel free to use this as a foundation:
- A ballpark figure: this will NOT be your final figure but we have to start somewhere. One option is to take a look at the prices on a selection of systems. Alternatively, allocate an amount per employee per year (the Sierra-Cedar HR Systems Survey 2017-18 suggests a figure between $150 and $460 USD, depending on size of organization).
- Functions and features? Decide what you need the system to do for your business and then add in the cost of any ‘non-standard’ bells and whistles. If you’re worried about attaching too high a figure to the project at this early stage, one option is to focus only on basic features but add a variable cost line for ‘additional functionality’ to cover more advanced functionality to be added at a later date.
- Deployment-related costs: adjust your figure according to whether the system will be cloud-based or on-premises.
- Customization: your new HRMS may need to integrate with other systems, or require a tailored mobile app, or perhaps you want to apply some custom corporate branding… customization costs extra.
- Consultancy fees: an HRMS consultant offers specialist experience in the selection and implementation of HR technology. They can save you time and aggravation and in return, they add another cost line to your budget.
- User training: resist the urge to cut costs on training. The slickest system is worthless if nobody uses it. A significant part of your HRMS project is engaging with users – to establish their needs, encourage adoption of the new system, and to train them to get the most out of it.
- Updates and maintenance: hardware changes, legislative/compliance changes, procedural changes, user changes… your HRMS must change with you and that means an agreed maintenance and updating schedule.
Finally, it’s good practice to increase your final budget total by 10% as a buffer to allow for unanticipated expenses or price increases.
6. Calculate your return on investment
Any investment is made in the expectation of a return, and your new HRMS is no exception. When it comes to conducting an HRMS cost benefit analysis, your budget-holding stakeholders will want to see proof that the expenditure was worth making.
A basic ROI forecast exercise will look like this:
1. Decide what performance improvements and business impacts you expect from the new system.
Possible ROI metrics include:
- Total operating costs linked to your workforce
- More efficient recruiting (for example, the time from vacancy to post filled)
- Employee engagement (measured using a staff opinion survey or similar exercise)
- A reduction in certain types of calls/queries to HR
Whatever measures or metrics you choose, there should be ‘pre-system data’ as a basis for comparison; otherwise how will know whether an improvement has taken place?
2. Collect the relevant data, statistics, and other information about the agreed metrics; i.e. measure your baseline.
3, Agree on ‘reasonable improvements’ for each identified metric, based on the impact you expect the new system to have.
A final thought…
Having read through the above material, you have all you need to begin costing your HRMS project. However, it’s worth being aware of a few classic pitfalls which can blow your project off course…
- The temptation to ignore labor costs – a low budget total is more likely to be signed off by your C-suite but they’ll soon complain when the project starts absorbing significant staff time (and it will). Better to argue over a larger-but-honest figure at the beginning.
- Forgetting about IT – it may be an HR project but it’s also a technology project and as such should involve your in-house IT team. The budget should factor in all staff time and expense.
- Going overboard on features – nice as it is to be at the cutting edge of technology, don’t be swayed by the vendor’s glossy advertising. Every feature you opt for should have a specific, useful and preferably measurable impact on your organization. Choose what you need and what you anticipate needing in the next few years and then stop.
- A lack of detailed planning – plan the project in as much detail as you can. Yes, you will almost certainly amend those details as things progress but it’s that detail that informs the HRMS budget. And budgets changes are more likely to be accepted if you can show exactly how and why a reasonable estimate turned out to be wrong!
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