How to conduct a HRMS cost benefit analysis in four steps
An HRMS is a significant investment of money and time. It’s only reasonable that post-go-live, after the dust has settled, people want to know whether it was worth it…whether the costs incurred were worth the benefits accrued. The question is, was it all worth it?
To answer that basic question, you need to know the full cost of the project, including the system, hardware, supporting software, people’s time, any external consultancy, and training costs, and also the full range of measurable benefits that the system is delivering. Here we go, in four easy (though not necessarily devoid of challenge) steps…
1. Add up the expected cost…
How much did your new HRMS cost? You probably know the license fee or monthly subscription cost, but have you quantified the cost of people’s time taken up with system selection and implementation? Have you counted up the supporting factors? Have you taken into account the ongoing expenses?
The key figure you’re looking for is the TCO, or total cost of ownership. This goes far beyond the figure on your HRMS’s price ticket. In fact, given that the TCO is whatever it costs you during the entire time you’re using it, it’s an ongoing, ever-increasing figure.
The key components of TCO are:
- The price tag: either a one-off cost for a license OR a monthly subscription fee (common for cloud systems)
Labor costs during the HRMS selection process
- Labor costs during the HRMS implementation process
- Labor costs of using the system on an ongoing basis
- Data cleansing and data migration as part of the implementation
- Maintenance and updates for the lifetime of the system (including patches and fixes)
- User training
The good news is that if you put together a proper business case to justify investing in a new HRMS in the first place, then these costs will have been anticipated and estimated up front.
2. Calculate the actual cost
If the headings above represent estimated costings, the post-go-live step is to calculate the real ‘money spent’ figure for each heading. Warning: not every cost heading is obvious… or easily calculated.
- Price tag – This is the amount you probably saw on the vendor’s website when you first were drawing up your shortlist of possible HMRS options. Effectively, it’s the ‘face cost’ of the system (however, this is often less than 10% of the actual TCO of the HRMS).
- Selection costs – These are likely to relate to the time spent on the selection process: gathering stakeholder requirements, researching available options, sitting through product demos, etc. (Bear in mind that if you run a focus group – for a group of stakeholders – the time cost is not only that of the facilitator but of everyone there who would otherwise be getting on with their day job. Obvious, I know, but easy to forget…)
- Implementation costs – What did have to spend to get to the point of go-live? Your HRMS cost figure should include the cost of people’s time (as with the previous cost heading) and also include any hardware costs, training costs, consultancy fees, and even maybe rented server and/or storage space in the cloud. In other words, consider all the hard work you did to get the system up and running and if you can put a price on it, do so.
- Data cleansing and migration – A generally technical exercise that should be simple to cost; however, if you enlist employees’ help in checking and updating their information on the system, their time should be factored in.
- System maintenance and upgrades – Including equipment costs, system upgrades and patches/fixes, and any regular payments to ‘rent’ cloud space or expertise from the vendor/provider in line with the service level agreement.
- Ongoing costs – This figure will inevitably be an estimate and should include any maintenance contract fees, and staff time for maintaining the system and/or server; i.e. people who spend part of their time keeping the system running: HR, IT, etc..
3. Factor in the benefits
Even if you’ve spent more than you planned, the project may still be a success; that depends on the value of the benefits you’ve realized (and continue to realize…)
The potential benefits of your HRMS to be quantified include:
- Improved HR productivity.
- Labor cost savings due to self-service HR transactions (i.e. less people are contacting their HR service with simple, easy to look up questions); expressed either as full-time equivalents or per capita.
- Time saved due to streamlined (and possibly redesigned) HR processes.
- Improved employee retention and reduced turnover. This may be the result of better engagement with the workforce, or even the HRMS becoming a positive feature of working there (e.g. errors are down, and necessary information is much easier to find). Consider the cost of the recruitment campaigns you’re NOT having to run.
- Headcount reduction (possibly due to requiring less staff to provide improved HR services).
Another source of relevant, measurable information regarding HRMS benefits are your human resources metrics. Whatever you use to assess and manage HR performance can be used to identify improvements in that performance as a result of the HRMS (which is why you buy one in the first place, no?).
Good data sources that can inform possible metrics include:
- The flow of HR transactions – are they being conducted as planned, or are people sidestepping the new system in an effort to stick with the familiar?
- Specific HR processes – certain activities should be quicker and more accurate with a new HRMS; for example, measure the speed and efficiency of a recruitment campaign and compare that with the previous performance.
- Employee engagement – indicators relating to internal communications and quality and speed of internal support services should improve.
- Changes to HR expenditure – your HR budget, before and after: are you making savings or redirecting money to other areas and new projects?
- Management time spent on HR – what about the time of your line managers; is more direct access to HR information and services saving them time too?
4. Decide whether it was worth it
As already mentioned, the cost of your HRMS continues as long as you use it. However, the value of the benefits should also continue to increase and after a certain point, not only will the benefits be worth more than the cost but that value for money should continue to increase for the lifetime of the system.
You’re interested in the tipping point, at which the value of the benefits begins to outweigh the level of investment. When conducting your cost-benefit exercise, bear in mind the date and where it lies in relation to the tipping point.
To sum up, your HRMS cost benefit analysis is looking at the final costs of purchase and implementation PLUS the ongoing operating costs to date COMPARED TO the value of the benefits realized.
Featured white papers
HRMS Software Pricing Guide
Get your comprehensive guide to the cost of HRMS software.Download
How to calculate HRMS ROI in 5 simple steps
Your guide to calculating the financial benefits of implementing HRMS in your organizationDownload
HRMS Software Vendor Directory
Put the most up-to-date HRMS vendor directory on your desk today! Over 60 vendors listed.Download
How much HRMS costs and how to set your budget
All the info you need to calculate how expensive a new HRMS will be
HR metrics that show good ROI
These five HR metrics provide quantitative proof of your HRMS ROI
4 Planning Errors Set to Make Your HRMS Project Budget Overrun
Your HRMS project will have a budget, and so many factors threaten to make you exceed that budget...