Businesses that fully understand their costs, right down to cost per employee, have a competitive edge over those that don't. In the mid-sized company arena, more than half of companies that participated in a study have only a modest understanding of where their investments in personnel truly stand.
The study was commissioned by ADP with findings delivered via a Harris poll of more than 1,000 mid-sized (50 to 999 employees) firms. Participants were specifically asked about their understanding of their total cost of operation, a measure of the true investment a company makes in its business. TCO includes measures that, according to the study, many businesses do not factor in.
The major conclusion drawn by the researchers: 73 percent do not calculate TCO correctly. That's because they're not considering one or more of the five following "pillars of TCO:"
- Payroll
- Employee benefits administration
- Talent management
- Human resources administration
- Time and labor management
"While about six in 10 respondents indicated they have a good familiarity with the TCO concept, only 25 percent could provide an estimate of their human capital management TCO across [the five pillars]," the report said. "One of the key findings the study revealed is that it appears midsized businesses tend to underestimate the all-in costs of managing a workforce."
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Mid-sized companies tend to worry a lot about managing overhead, but they tend to be less focused on managing their human capital, the survey found. The result: the cost of an employee is often determined in terms of pay and benefits only.
"One of the most important metrics any organization needs to think about is TCO related to managing their employees. Their 'Big Number' is much more than salaries and benefits," said Anish Rajparia, president of Major Account Services at ADP. "Understanding your all-in TCO allows businesses to obtain a realistic picture of what they spend on their employees and what it takes to manage them."
About 60 percent of respondents claimed to be familiar with the concept of TCO. But when asked to calculate it, three-quarters of those surveyed couldn't do so correctly. The study identified one probable cause: Most of the respondents said they haven't fully integrated their human resources functions.
Of the major HR/HCM functions — payroll, time and attendance, benefits administration, HR management and talent management — payroll tended to be the only one consistently integrated with any of the others, the study found.
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"One of the underlying cost drivers of HCM is the fact that most companies operate their HR tasks on different platforms. This leads to cost inefficiencies among other things," the report said. "With the increased importance of HCM and the complexity of linking payroll with multiple administrative tasks, it will become increasingly imperative that in order to optimally manage each of the HCM tasks they be integrated onto a common operating platform."
The study found another gap in strategic planning: Only half of those surveyed have a plan in place to manage or reduce their labor costs going forward, and just over a third of those "planners" aren't sure the plan will produce the desired results.
"Our study reveals that midsized companies have a long way to go with respect to HCM and understanding its associated costs. It would appear that these companies are not as educated as they need to be about the topic and despite feeling TCO is important, their behavior does not reflect their attitude. This leaves the door open for significant education of this market segment about what constitutes HCM TCO, the best practices for managing it, and the financial risks associated with not completely understanding it," ADP concluded.
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Dan Cook
Dan Cook is a journalist and communications consultant based in Portland, OR. During his journalism career he has been a reporter and editor for a variety of media companies, including American Lawyer Media, BusinessWeek, Newhouse Newspapers, Knight-Ridder, Time Inc., and Reuters. He specializes in health care and insurance related coverage for BenefitsPRO.
