How to Evaluate HCM Costs and ROI

Efficiency remains the foundation of HCM initiatives. The pressure is for more transactions to be completed at lower costs, while processes are becoming increasingly complex to manage. A typical 10,000-employee company handles more than one million employee-related transactions annually, each of which costs anywhere from $10 to $50.

The top 10 recruiters in the United States report that they are placing 35,000 to 95,000 workers annually. Managing the recruitment pipeline, the selection process, and the induction process is a complicated endeavor.

At the same time, leading enterprises are looking beyond the execution of human resources transactions to a more value-added and strategic focus. These companies are aligning human resources and workforce planning functions with overall business strategies to help increase profit margins and support long-term goals. ²¹

The perception that managing human resources is straightforward and transaction-oriented—and can therefore best be measured in terms of efficiency (i.e., the lower the transactional costs, the better)—remains a common one. But this is changing as approaches to Human Capital Management cover an increasingly wide spectrum. At the opposite end of the range from traditional cost-centered, back-office organizations, many HR units now have the principal goals of providing the best possible business support and investing in resources and sophisticated tools, while lowering the priority of cost containment or dispensing with it altogether.

Top-performing companies strike an optimal balance between the two extremes of this spectrum. These companies are transforming the way they look at human resources, with HCM taking a stronger role in contributing to the drive for higher profit margins and long-term growth. Top-performing HR organizations strive to optimize both efficiency and effectiveness by minimizing transactional costs through standardization, automation, and self-service, freeing up resources that can be used to align HR with the businesses to support growth.²²

Research has shown significant gaps between organizations that are most effective in instituting HCM best practices and those that are average when it comes to implementation. The former group had staffing ratios that were more than 50% better than the latter group’s, as well as HR costs that were at least 30% lower. A single full-time HR employee in the first group served 120 employees versus 77 employees served in average organizations. While companies with higher HR staffing levels or costs tend to have more complex organizations or industry environments, the gap between effective and average performers in many cases indicates an opportunity for improvement in efficiency among the lesser-performing companies.

The best companies look for competitive advantage in HCM by adding capabilities to increase the effectiveness of service delivery and bring HR more in line with business processes and strategies, while striving for the right balance in cost control. These organizations follow three main imperatives:

1. Align HCM closely to the business
2. Outsource wisely and with effective control
3. Leverage IT

Companies wanting to enact initiatives embraced by top HCM performers need to specify their goals, building a road map to achieve a balance between reducing costs and driving company growth. The best-run HCM organizations share the following crucial practices and goals:

• Optimize process and transactional support
• Benchmark processes and performance
• Consolidate systems
• Adopt shared services
• Invest in people and talent
• Align HR with overall business strategy and goals
• Focus on value, not effort

As an initial step, top companies optimize process and transactional support instead of concentrating on payroll and compensation administration. This yields a better focus on strategic workforce planning, career planning, employee development, recruitment, and retention.²³

Create a Clear Understanding with HCM Vendors

To have a clear understanding of costs, companies should demand that HCM vendors provide them with a statement of work (SOW). The SOW is an important document because it enables the service provider and the client to have clear understanding of the scope of work to be performed (and how changes in scope will be managed), the resources required to do the work, and the expected cost. Even small organizations that are buying relatively inexpensive applications should insist on at least a basic SOW that includes the following items:²⁴

• Scope: Gives the provider’s overview of the project and the solution proposed.
• Approach: Tells the customer how the vendor is approaching the project and includes methodology.
• Resource Requirements/Staffing: Includes a project organizational chart with external staffing roles identified.
• Roles and Responsibilities: Provides additional detail for the roles identified on the organizational chart.
• Implementation Tasks and Estimates: Outlines the major tasks and activities, and the estimated effort to complete those tasks.
• Assumptions: Explains the assumptions the provider made in estimating the work effort and duration in the previous section.
• Billing Rates: Provided in two ways -- billing rates by role or blended average rate. For ongoing work, create a master service agreement that includes agreed-to terms and conditions, and billing rates for all service engagements with the provider.
• Costs: Lists a summary of costs by either high-level task/activity or role (or both) and how the client will be billed for the services performed (time and material, fixed price, milestone-based, etc.) 
• Engagement Guidelines: Includes items such as issue management, change order management, and travel and expense policies.²⁵