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Calculating the Human Factor: Why Midsized Firms Must Keep “Workforce TCO” Top of Mind

Do you know the real cost of your workforce?

This is an increasingly important question – and one that’s getting harder to answer.  Many organizations experienced some degree of restructuring or downsizing as a result of the recent economic downturn.  Unfortunately, leaders at midsized companies may have made those hard decisions without accurate, comprehensive data about their workforce.

While executives in many midsized organizations think they have a handle on the numbers, the reality is they often miss the complete picture.  Actionable insights that can enhance decision-making do exist, but you have to know where to look.

Many companies currently calculate workforce costs by analyzing just salaries and benefits.  Yet, that formula is too simplistic in today’s competitive environment.  Focusing on these two variables alone can be misleading and result in poor strategic and tactical business decisions.

Midsized companies must instead look at the total cost of ownership (TCO) for their workforce.  TCO offers the full scope of what an organization spends on employees as well as its workforce management activities.  In addition to benefits and salaries, TCO includes costs such as recruitment, compliance efforts, time and attendance, and the systems required to manage, process and support all of this activity.

A survey of 1,000 midsized company executives by the ADP Research Institute, in conjunction with Harris Poll, found only 27 percent consider all factors when calculating  the TCO of their workforce.  Even fewer – just 22 percent – formally analyzed their TCO in the last 12 months.

Yet, a surprising two-thirds of survey respondents believe their organizations control and manage human capital management (HCM) costs well.  The survey findings reveal that beneath this sense of HCM well-being is a potential weakness that could hinder midsized companies’ ability to compete and grow.

Despite a feeling of confidence that their company efficiently manages all of its HCM functions, including cost containment, some midsized business leaders also expressed a sense of unease about their companies’ employee costs.  When asked what they worry about most, survey respondents ranked the total cost of managing their employees and ways to lower their overhead costs as their top two daily concerns.

With financial capital losing some of its primacy as a catalyst for growth, effective workforce management is poised to become one of the biggest variables when it comes to a company’s productivity and profitability.  Poor workforce planning and employee engagement can lead to higher operational costs in the form of high attrition and inefficient human resource processes.

This can ultimately lead midsized companies to lose a competitive advantage.  A 2014 study by NelsonHall titled “Targeting Payroll Outsourcing” revealed that North American firms implementing a workforce management strategy are able to reduce TCO by 26 percent.  That’s a huge potential savings in what typically amounts to the biggest expense for most businesses.

But with so few midsized companies calculating the TCO of their workforce, many lack the information they need to refine their human capital management strategy.  Midsized organizations should consider the following five functional pillars when examining their “Big Number”:

  1. Payroll – Including both full- and part-time employees as well as compliance with evolving tax laws.
  2. Employee benefits administration – Including design and maintenance of benefits plans and employee wellness programs as well as meeting government reporting requirements related to the employer provision of the Affordable Care Act (ACA).
  3. Human resources administration – Including maintenance of employee records and other ongoing HR support activities.
  4. Time and labor management – Including scheduling and other activities associated with evolving labor laws and regulations.
  5. Talent management – Including activities such as employee engagement, training and development, performance management and succession planning.

Each of these pillars involves both direct and indirect costs in the form of systems and overhead expenses.  Although companies most often calculate TCO in connection with information technology, it now plays a role in nearly every aspect of business to help leaders estimate the total cost of services, systems and processes.

When midsized companies examine all five of these pillars, they often find opportunities to boost their operational efficiency.  For example, many organizations manage their core HR tasks on multiple platforms.  With the increased importance of finding and retaining top talent and the complexity of linking payroll with HR data on disparate systems, midsized companies should make it a priority to consolidate their HR functions on a common platform.  This approach not only increases operational efficiency, but also helps simplify regulatory reporting.

According to a 2011 PwC study on “The Hidden Reality of Payroll & HR Administration Costs”, outsourcing core HCM tasks to a single vendor can increase cost efficiencies by 32 percent.  This is just one example of hidden value leaders at midsized companies can find by analyzing their workforce TCO.

Despite this, when it comes to the ways executives at midsized firms look to lower their direct and indirect payroll costs, HR systems and processes are not top of mind, according to the same ADP/Harris Poll survey.  Among the three-quarters of companies included in the study, the most frequently mentioned efforts to reduce their labor costs focus on their employees’ salaries, benefits and workforce.  These midsized companies make very few, if any, mentions of introducing more cost-efficient systems and processes.

In today’s competitive landscape, midsized businesses must continue to differentiate themselves externally as well as internally.  Attracting, engaging and retaining top talent comes with a cost.  Some of those costs are monetary while others take the form of operational inefficiencies and, ultimately, the potential loss of personnel.  Yet, optimizing workforce management strategies requires timely, accurate information. Midsized company leaders must take a more comprehensive approach to analyzing the total cost of their workforce in order to gain – and maintain – a competitive advantage in the current “war for talent.”

Tom Perrotti_PRINTTom Perrotti is President of ADP’s Major Account Services and ADP Canada organizations, which provide Human Capital Management services to businesses with 50 to 1,000 employees across the United States and Canada.

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