ADP conducted over 400 audits of companies of all sizes and sectors and presented the findings in a white paper called: ‘TCO Analysis by ADP 2021: ‘Faced with a business crisis, is payroll outsourcing the solution? Identifying the true cost of HR administration’.
This article focuses on the hidden costs of the HR administrative function, and how outsourcing can help reduce those costs, as identified in this ADP white paper.
HR is evolving
With the advent of COVID-19, the rules of HR administration were thrown into disarray almost overnight, sometimes to the point of completely transforming companies’ HR strategies. As businesses continue to emerge from the pandemic, teams are grappling with ensuring timely and accurate payroll, delivering administrative services and managing cost control. But added into the mix, too, is an imperative for HR teams to focus more on the human cost of the pandemic:
- Transferring staff from one role to another
- Facilitating skills transfers
- Putting plans in place for redundancies when out of options
During these challenging times, it’s no longer a question of whether HR needs to evolve, or when. The ADP white paper found that company survival depends on HR teams’ ability to respond to these complex issues.
Visibility into HR costs is key to survival
To help you navigate your way through the challenges, it’s essential to assess as accurately as possible the total cost of ownership (TCO) of your payroll and HR. To do this, ADP used the Gartner Group’s method for calculating manufacturing costs, and transposed it to HR. The resulting equation looks like this:
By identifying both the hidden and visible costs of HR, companies can focus on opportunities for reducing those costs, highlight the most productive areas and establish an explicit link between HR activities and operational results.
The total cost of payroll ownership
As part of its research, ADP looked at the TCO per country, per year and per employee. The results make interesting reading: on average, hidden costs and costs related to international structures increased total costs by over 25.5 percent
(One point to bear in mind is that TCOs are highly unique, depending on the individual circumstances in each country, and the payroll-related legislation there.)
What are hidden costs?
Visible costs come down to three essentials:
- Installing the system
- Upgrading the system
- Direct labour
In contrast, hidden costs of HR admin management exceed visible costs most of the time, because they often involve additional functions such as IT and finance. These hidden costs can include:
- System maintenance
- Temporary workers
- Commissions and overheads
- Interface costs such as API integration
- Data consolidation
- Outsourcing services
- Quality or non-quality management
- System reliability, security and payroll compliance
Many companies have little room for manoeuvre when it comes to visible costs. However, most underexploit the potential productivity gains from analysing and optimising hidden costs.
How outsourcing payroll reduces TCO per country
ADP’s research shows the savings to be made per country when outsourcing payroll:
If you factor in the average annual costs of employing a full-time HR and payroll administration manager in each country, you can see the TCO per country:
What the findings tell us is that outsourcing payroll and HR improves productivity by 55 percent in all countries.
Using the TCO going forward
The TCO benchmark reveals the true cost of HR administration by including the hidden costs – which are typically unknown or barely identified in the business. Carrying out a TCO audit while considering outsourcing is a good way to become clearer about your costs, while highlighting potential productive areas. Outsourcing HR services generates savings and increases the level of expertise, ready for today’s challenges and tomorrow’s unknowns.