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Do you know how much your organization is really spending on payroll and HR administration?

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To my knowledge, PwC has yet to publish an update to it's 2011 study, "The hidden reality of Payroll & HR administration costs".  With the passage of the Affordable Care Act and it's regulatory and compliance burden laid at the feet of employers, the findings of this study are even more relevant today and worth a re-visit.  The study attempts to measure the Total Cost of Ownership ("TCO") of four core business functions:

  • Payroll (PR) - The process of collecting and entering data related to employee hours worked, determining taxation, calculating gross and net pay, and distributing compensation.
  • Workforce Administration (WA) - The administration of the core HR database (HRIS) and activities associated with maintaining employee information and various processing activities such as payroll, health & welfare administration, and other HR activities (recruiting, talent management, etc).
  • Time & Attendance (TA) - The process of collecting, reviewing, submitting and approving time data, including employee hours worked, PTO (vacation, sick, holiday) and leave balances.
  • Health & Welfare administration (H&W) - The administration of employee H&W benefits and programs including open enrollment and life event status change maintenance.

Collectively, these four components provide a comprehensive measure of TCO of payroll and HR administration costs.  The study shows that many organizations may be unaware of the true expense of

administering the PR, WA, TA and H&W functions because not all of their costs are readily visible and thus easily identifiable.  Not surprisingly, this is due, in part, because for many companies these related functions are often “owned” by different functional leaders (Finance, HR, IT). Consequently decisions about what technology solution to purchase are then based on what works best for the individual function/department without consideration of the potential synergies (READ: cost-savings) across the enterprise.  

The study concludes that the TCO for the Payroll function alone ranges from $507 - $809 per employee per year (PEPY), while TCO for all four functions range from $1,403 - $1,953 PEPY.  Of these figures, "hidden costs" and "seams costs" account for over 50% of the TCO. Hidden costs include:

  • Indirect labor costs - Cost of labor for employees not directly related to the payroll and HR departments supporting these functions in the field (i.e., collecting, approving and preparing employee hours for payroll; distributing paychecks; answering employee questions about benefits, etc.)—where employees are typically spending only a fraction of their time on
    these activities
  • Direct non-labor costs - The total costs of outside consultants, vendor fees and facilities, and corporate overhead related to the PR, WA, TA, and H&W functions
  • System maintenance costs - The IT costs specifically related to maintaining the current systems

What also jumped out to me was the study's treatment of "seams costs", which refer to the activities organizations must undertake to provide integration between and among various processes and/or separately maintained databases, and occur when there is a need to implement a new interface or manually support or otherwise maintain the interaction between processes. The inefficient interaction between processes creates additional costs at the “seams" which can account for an additional $100-$200 PEPY costs.

In summary, the study's key findings are:

  1. In-house administration of PR, WA, TA, and HW requires a surprisingly large commitment of time and resources—typically over $1,400 per employee per year (PEPY) for large organizations and nearly $2,000 PEPY for mid-size organizations (100+). “Hidden costs,” account for more than 50% of the TCO of administering these functions in-house.
  2. TCO for payroll is actually increasing—contrary to expectation, and despite technological advances, administration costs have actually increased rather than decreased since 2003 as organizations focus on technology transformation rather than process transformation. 
  3. Outsourcing continues to deliver overall TCO advantages—using in-house payroll, workforce administration, time & attendance, and health & welfare solutions increases TCO by 18% on average.
  4. Utilizing a common vendor or solution to manage multiple functions, rather than leveraging a “best of breed” approach or maintaining disparate legacy systems, can deliver tangible cost efficiencies—organizations administering these functions using software solutions from multiple vendors spend on average 18% more than those organizations administering them in-house using a common vendor. Organizations outsourcing multiple functions to a single vendor see even stronger cost efficiency—on average 32%—versus organizations using a multiple vendor or “best of breed” in-house approach.

Because organizations have tight budgets and timeframes, they often implement technology improvements without taking into account the impact of technology on business process. Technology alone is viewed by many as the sole solution to cutting costs. However, by implementing or upgrading technology, whether in traditional or new technology models (such as Northgate's SuiteHR SaaS), organizations will likely incur unintended costs if they fail to focus on process transformation in conjunction with technology investment to reduce administration costs.  

It seems self-evident that organizations would seek to employ technology solutions that best support their business processes. But in reality it often does not work this way.

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