Justifying A New HRMS/Payroll System

Traditionally, in IT, Return on Investment (ROI) has been defined as the monetary benefit derived from having spent money revising a system. The costs of the old system are added up, matched against the proposed costs of the new system, and the difference is the return on investment. It may be very difficult to justify a new Human Resources Management System based solely on these “visible costs”. There are several reasons for this: 

• Many organizations have not made significant investments in HRMS technology: Many HR Departments are using 10 + year old legacy or Client/Server systems, or systems “cobbled together” over the years. The “visible costs” of these systems are relatively low. Solely displacing these costs will not justify any meaningful technology investment.  
• HR is perceived as an administrative function: Other departments are typically viewed as having more operational impact. Thus, investment in these areas is commonly viewed with a higher priority.  
• HR customer support has traditionally been personal in nature: Most HR organizations provide a high level of employee interactions and support, but this is both costly and inefficient. Many standard HR interactions can be addressed by web-based employee self-service technology, allowing HR staff to concentrate on more strategic activities, such as planning and analysis, training, organizational structure, etc.

Therefore, when considering the return on investment for a new HRMS/Payroll, it is important to capture both the hard and soft costs in the current processing environment.

ROI Components

There are four primary components to the HRMS Return on Investment process:

1. “Hard” versus “Soft” Dollars: “Hard” dollars are the direct savings or displaceable costs that the new system will provide. “Soft” dollars are the indirect savings. “Soft” dollars are often associated with productivity improvements and other intangible savings.
2. Tactical and Strategic Gains of the New System: A new system will provide many benefits to the organization. Some of the benefits will be tactical, such as reducing the amount of payroll adjustments each pay period. Others will be more strategic, such as developing a succession plan for each position. Quantifying these benefits is an important part of the return on investment process.
3. Areas of Risk Reduction: A new system will offer areas where exposure and risk to the organization can be reduced. Risk reduction opportunities should be quantified.
4. Headcount Avoidance: Most new systems provide features that will allow the organization to maintain (or in some cases reduce) staffing levels. Further, maintaining status quo and not making the systems investment often results in having to increase technical and end user headcount to support a system that is providing less value to the organization.

“Hard Dollars” versus “Soft Dollars”

A primary goal in investing in any systems technology is improving productivity. This is clearly the case with HRMS technology. The last several years have seen the emergence of “enabling technologies” that dramatically improve HR productivity. These technologies are now an integral part of any effective HRMS solution. Examples of these technologies include: Workflow; Employee Self Service; Manager Self Service; Reporting; WEB Access from anywhere in the world at any time using only a web browser and Electronic Forms.

Many of these technologies did not exist years ago. Thus, in many cases there is no direct cost replacement for these tools. These technologies will, however, have a dramatic impact on employee productivity and the ability distribute data throughout the organization. Although they do not provide hard dollar savings, the soft dollar impact of these technologies needs to be quantified and documented.

Hard Dollars:

Hard dollars are the direct costs that will be replaced by a new system. Examples of hard dollars include:

• Software Maintenance: The maintenance dollars that are being paid to the current HRMS vendor for upgrades and support.
• Software Add-ons: The fees associated with purchasing standalone software products to provide functionality not available in the current system.
• Third Party Administrator Fees: Fees paid to outside administrators for services that the new system will provide (e.g. Open Enrollment, etc).
• Technical Support Costs: The fees paid to internal and external technical resources to support the existing system (fixes, report writing, tax table support etc.).

Soft Dollars:

Soft dollars are the indirect costs that are associated with data collection, editing and report preparation etc. “Soft” dollar savings are less tangible than “hard” dollars. Examples include:

• Eliminating redundant data input: Current day systems use the same data record throughout the system, which greatly increases data input efficiencies while reducing data errors.
• Improved data integrity: An integrated database will insure clean data and eliminate the need for HR to develop processes to ensure the data is accurate, and facilitates accurate reporting.
• Process Standardization: Standardization in most cases eliminates, or at minimum dramatically reduces, the need to have labor-intensive processes that could otherwise be automated.
• Improved access: Allow the users to access the system when and where they need it.
• Improved controls: Controls over the editing and validation of data which results in a reduction in errors and adjustments thereby producing “clean” reports.

Identifying Tactical and Strategic Benefits

The new system should provide both tactical and strategic benefits to the organization. Identifying these benefits is an important part of the cost justification process. Some of the areas where a new system can add value include:

 

Tactical Benefits	Strategic Benefits
Automate Benefit Enrollments	Develop Career Planning Database
Automate Training Registration	Improve Internal/External Recruiting
Reduce Forms Processing	Improve Employee Retention Rate
Reduce Payroll Adjustments	Improve Report Writing Capabilities
Reduce Manual Checks	Provide Managers Secured Access to System
Reduce IT Support	Improve Consolidated Reporting
Provide Employees Secured Access	Assess Effectiveness of Training Programs
Improve Compliance Reporting	Build A Skills / Competencies Bank
Reduce System Downtime	Improve Turnover Analysis Capabilities
Reduce Reliance on Outside Administrators	Reduce Job Vacancy Costs
Reduce Reliance on Outside Consultants	Reduce Absenteeism
Improve Time and Attendance Reporting	Project Employee Training Needs
Accurate Paid Time Off Tracking	Create Succession/Ascension Plans
Improve Service to Employees	Improve Compensation Analysis Capabilities
More Effective Scheduling Capabilities	Perform Compensation Modeling
Improved Flexibility to Adapt to Change	Develop Effective Incentive Plans
Reduce Manual Activities	Improve Budget vs. Actual Reporting
Reduce System Interfaces	Improve Employee Communications
Improve System Security	Facilitate Organization Restructuring
Improve Staffing / Headcount Capabilities	Reduce Hiring Costs
Reduce Payroll Cycle Time	Improve Employee Training
Reduce Benefit Inquiries	Improve Labor Relations
Improve FTE Tracking	Improve Decision making
Reduce Exposure to Wrongful Termination	Perform “What If” Benefit Modeling
Create On Line Job Descriptions	Improve Labor Distribution Reporting
Automate Job Requisitions	Distribute Data to Managers
Automate Job Postings	Perform “What If” Salary Modeling
Automate OSHA Tracking and Reporting
Reduce Workers Comp Claims
Administer FMLA
On Line Benefit Plan Descriptions
Reduce Benefit Overpayments
Generate Benefit Statements
Automate G/L Interface
Automate Benefit Eligibility Calculations
Improve Pension Administration Capabilities
Improve 401k Administration Capabilities
Automate 401k Discrimination Testing
Automate 401k Withdrawals/Loans
Improve Flex Administration Capabilities
Automate Flexible Spending Administration
Process FSA Claims
Automate COBRA Processing
Improve EEO Tracking and Reporting
Improve AA Tracking and Reporting
Improve Tax Reporting
Improve Wage Assignment Capabilities
Automate Time Collection
Automate Attendance Tracking
Automate Benefit Inquiries

Risk Reduction

Risk is not something that is often considered in traditional return on investment exercises. There is no direct saving associated with risk reduction; however it should be factored into the overall ROI plan. There are three risk areas to be explored:

1. Technology: The foundation for any successful HRIS is a stable technology platform that can be easily supported by the internal IS staff.
2. Employee Litigation: An effective HRMS can place a vital role in reducing the exposure to litigation by current and former employees. By having a unified system of record regarding an individual’s employment history, and by documenting disciplinary actions, organizations can minimize the possibility of litigation regarding unlawful treatment.
3. Government Compliance: Ensuring that the policies, practices and processes of the organization are in compliance with federal, state and local government regulations is a critical task for every Human Resources Department.

Headcount Avoidance

For many organizations, the current HR system is governed by the law of diminishing returns: more and more effort is expended on a system that is providing decreasing value to the organization. These organizations can factor headcount avoidance into their return on investment.

As systems age, they tend to need an increasing amount of IS support. In addition to the increased technical support, older systems tend to create more administrative burden for the users. Non-optimal, and usually non-integrated processes, are created to replace system inefficiencies. Manual databases and HR subsystems begin to proliferate due to functionality issues. This hidden cost, while hard to quantify, is difficult to manage and correct, which leads to employee dissatisfaction, wasteful spending, incorrect data, and poor managerial decision making.

The investment in a modern HRMS/Payroll solution is a very important decision for any organization, and will deliver benefits in terms of cost, business process improvement, managerial effectiveness and employee satisfaction for many years to come.

About the Author: 
This article contributed by George Brady, PDS Software, which provides HR software applications that enable organizations to focus on more strategic issues. PDS Vista HRMS® is a privately-held company headquartered in Blue Bell, Pa.

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