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Pwc tco 2011


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Pwc tco 2011

  1. 1. The hidden realityof payroll & HRadministration costsExploring hidden costdrivers and characteristicsof cost-effectiveorganizationsJanuary 2011
  2. 2. ContentsExecutive overview 1Methodology 3Key findings & recommended strategiesto reduce administration costs 5Conclusion 15
  3. 3. In this white paper, we’ll break downthe different cost drivers of payrolland HR administration and lay outthe strategies that are making someorganizations more cost-effective atthese functions.As a general rule, we have found thatorganizations tend to underestimatethe true expense (the “total cost ofownership,” or TCO) of processingpayroll, administering employee healthand welfare benefits, and managingother key HR systems and functions.While most organizations consider costssuch as a payroll department’s staffor the acquisition costs of a new ERPsolution, many fail to recognize certain“hidden” costs necessary for operatingand integrating these interdependentprocesses. Additionally, organizationsoften apply separate technology andprocess solutions to these individualadministration functions withoutconsidering how those solutions workwith each other. This fragmentationdrives up administration costs throughtask overlap and other inefficiencies.For nearly a decade, PwC, withthe sponsorship of Automatic DataProcessing (ADP), has studied theseTCO costs and how to mitigate them.Executive overviewPast studies have focused exclusivelyon large organizations (more than1,000 employees). For the first time,the inclusion of mid-size organizationsin our most recent study providesadditional insight into this issue, andhas allowed us to also measure baselineTCO costs for organizations between100 and 1,000 employees.As with previous studies, our currentTCO study analyzed the TCO ofkey payroll and HR administrationfunctions. The new data from thisyear’s study, collected from 279participating organizations, showsthat administration of payroll (PR),workforce administration (WA), time &attendance (TA), and health & welfarebenefits (H&W) remains expensive foremployers—and it has gotten costlierover the years, despite a number oftechnological advances designed todiminish costs.Do you know how much yourorganization is really spending onpayroll and HR administration?Chances are you may not beconsidering major cost componentsrelated to administering theseimportant functions and maybe spending more than youthink as a result.1 The hidden reality of payroll & HR administration costs
  4. 4. Although these functions are expensive,analysis of data collected in thesePwC studies has uncovered severalopportunities for increased costeffectiveness. The top cost reductionstrategies, measured by overallTCO, are:• Outsourcing—organizationsmanaging payroll, workforceadministration, time & attendance,and health & welfare benefits in-house using premise-based or hostedsoftware solutions spend on average18% more administering thesefunctions than organizations thatoutsource1these functions• Utilizing a common vendoror solution—organizationsadministering these functions in-house using software solutions frommultiple vendors spend on average18% more than those organizationsadministering them in-house usinga common vendor. Organizationsoutsourcing multiple functions to asingle vendor see even stronger costefficiency—on average 32%—versusorganizations using a multiplevendor or “best of breed” in-houseapproachIn addition to the above findings,which are discussed in detail in thiswhite paper, analysis of the datacollected for this study also confirmedthat two of the key findings of theearlier TCO white papers continueto present opportunities for increasedcost effectiveness:• Providing payroll and HR self-servicefunctionality to employees—thisstrategy results in a 50% lower TCOof workforce administration for largeorganizations compared with peersmanaging the function withoutthese features• Integrating time & attendancewith payroll—this leads to a costefficiency of 14% over a manualapproach or an approach that isnot integratedFurthermore, the current studyclearly suggests that cost effectivenessstems from comprehensive processtransformation, not just technologyinnovations. The required change isn’talways easy, but significant financialbenefits may await for organizationsready to really embrace and implementthese changes.1. The term “outsourcing” in this paper specifically refers tooutsourcing to ADP as this study used only ADP clients tomeasure the TCO of organizations outsourcing payroll andHR functions.2
  5. 5. This primary research study includesdata collected from 279 participatingorganizations, ranging in size from100 employees to more than 100,000employees. This study marks the fourthinstallment in a series during whichPwC has surveyed more than 600organizations. Previous studies occurredin 2003, 2004, and 2006.The current study set out to measure theTotal Cost of Ownership (TCO) of fourcore business functions—payroll (PR),workforce administration (WA), time &attendance (TA) and health & welfareadministration (H&W)—and to analyzefactors impacting these costs. Becausethis study focused only on TCO, areassuch as quality of administration werenot addressed.PwC conducted this TCO assessmentprimarily through use of a confidentialweb-based questionnaire administeredfrom May to August of 2010. Seniorfinancial and HR executives (i.e., CFOs,VPs of HR, VPs of Finance, Directors ofPayroll and Controllers) were invitedto participate, and in cases where anorganization had multiple respondentsprovide input, we created a singleconsistent response. Many organizationsalso participated in phone interviewsconducted by a PwC representative.MethodologyPwC also conducted multiple follow-up calls with respondents to verify,clean and complete data. In total, PwCperformed more than 500 phone andemail follow-ups to clarify completedparticipant data. This approach enabledrespondents to provide total costs,rather than just labor or system costs.The dataPwC defined TCO in a mannerthat broke down total cost into itscomponent parts. For the purposesof this study, the four core functionsare defined briefly, as follows:• Payroll (PR): The process ofcollecting and entering datarelated to employee hours worked,determining taxation, calculatinggross and net pay, and distributingcompensation.• Workforce administration(WA): The maintenance andadministration of the core HRdatabase (often referred to as theHuman Resource InformationSystems or HRIS) and the activitiesassociated with maintainingemployee information and variousprocessing activities such as payroll,health & welfare administration, andother HR activities.• Time & attendance (TA):The process of collecting, reviewing,submitting and approving timereporting data, including employeehours worked, paid time off(vacation, sick, holiday) andleave balances.• Health & welfareadministration (H&W):The administration of employeeH&W benefits and programsincluding open enrollment and lifeevent status change maintenance.Collectively, these four componentsprovide a comprehensive measureof TCO of payroll and HRadministration costs.In addition to measuring the TCO ofthe four processes, and providing anoverall TCO, the current study sought toupdate the original studies conductedin 2003, 2004, and 2006, especially inlight of significant market changes inthe delivery, technology, and scope ofHR systems since 2003.Respondents were asked to answerquestions that quantified all one-timeand ongoing costs for the areas ofPR/WA/TA/H&W administration.Detailed component descriptions wereprovided in the survey itself as well asvia personal follow up from PwC wherenecessary. PwC contacted participantsdirectly when data fell outside thenormal range of responses andnormalized data where necessary.3 The hidden reality of payroll & HR administration costs
  6. 6. Profile of participants279 organizations (consisting of 205 organizations that do not outsource thesefunctions and 74 organizations that outsource to ADP) participated in this study.120 (43%) are classified as large organizations, with more than 1,000 employees;159 (57%) are classified as mid-size organizations, with 100–1,000 employees.Figure 1. Survey participants by organization size100–300 employees2,501–5,000 employees1,001–2,500 employees301–1,000 employees5,001 + employees29%29%18%12%12%Note: Percents may differ slightly from other figures in the paper due to rounding.The larger sample in the 100–1,000space is due to the larger numberof organizations operating in thesesegments, and the need to augmentthe work completed in previous studies,which focused exclusively on largeorganizations.The term “outsourcing” in this paperspecifically refers to outsourcing toADP as this study used only ADP clientsto measure the TCO of organizationsoutsourcing payroll and HR functions.The study did not evaluate, and thusfindings cannot be directly applied to,ADP’s HR business process outsourcingofferings. PwC makes no representationthat the comparative key findings ofthis survey can be generalized to otherpayroll and HR outsourcing providers.Organizations surveyed used a widerange of platforms and solutions,including approximately 65 platformsin payroll alone. Payroll vendorsrepresented in the in-house analysisinclude the market-leading softwarevendors.Because of the economies of scale wesee in larger organizations (which arediscussed within this paper), when wecompare the TCO of organizations thatoutsource to organizations that usein-house solutions, it was importantto normalize the results for the effectsof size—in other words, we comparedthe results as if both groups hadorganizations of similar size.All participating organizations areU.S.-based companies or subsidiaries orbusiness units of non-U.S. companies,and come from more than 17 industries,with the most prevalent industriesbeing manufacturing (15%), healthcare(13%), and finance, insurance andreal estate (10%). Federal and stategovernments were not specificallyaddressed in this study. This study,like previous studies, is focused onlyon costs.This white paper has been researchedand prepared by PwC. ADP is thesponsor of this TCO study.4This publication has been prepared for generalguidance on matters of interest only, and doesnot constitute professional advice. You shouldnot act upon the information contained inthis publication without obtaining specificprofessional advice. PricewaterhouseCoopers LLP(PwC) has exercised reasonable professionalcare and diligence in the collection, processing,and reporting of this information. However,data used from third-party sources has notbeen independently verified or audited. Norepresentation or warranty (express or implied)is given as to the accuracy or completeness ofthe information contained in this publication,and, to the extent permitted by law, PwC, itsmembers, employees and agents do not acceptor assume any liability, responsibility or dutyof care for any consequences of reliance oninformation contained in this publication.
  7. 7. 1. In-house administration of payroll,workforce administration, time& attendance, and health &welfare requires a surprisinglylarge commitment of time andresources—typically over $1,400 peremployee per year (PEPY) for largeorganizations and nearly $2,000PEPY for mid-size organizations.• “Hidden costs,” as defined below,continue to account for more than50% of the TCO of administeringthese functions in-house.2. TCO for payroll is actuallyincreasing—contrary to ourexpectation, and despitetechnological advances,administration costs have actuallyincreased rather than decreasedsince 2003 as organizations focus ontechnology transformation ratherthan process transformation.3. Outsourcing continues to deliveroverall TCO advantages—usingin-house payroll, workforceadministration, time & attendance,and health & welfare solutionsincreases TCO by 18% on average.4. Utilizing a common vendor orsolution to manage multiplefunctions, rather than leveraginga “best of breed” approach ormaintaining disparate legacysystems, can deliver tangiblecost efficiencies—organizationsadministering these functions usingsoftware solutions from multiplevendors spend on average 18%more than those organizationsadministering them in-house usinga common vendor. Organizationsoutsourcing multiple functions to asingle vendor see even stronger costefficiency—on average 32%—versusorganizations using a multiple vendoror “best of breed” in-house approach.In the remainder of this section, we willexplore each of these findings, and theirimplications for organizations.Key findings & recommendedstrategies to reduceadministration costsFour key findings in connectionwith the cost of administeringpayroll and HR in-house surfacedduring our analysis of the datacollected in the study:5 The hidden reality of payroll & HR administration costs
  8. 8. This study, like PwC’s previous benchmark analyses, showed that many organizationsmay be unaware of the true expense of administering the PR, WA, TA and H&Wfunctions because not all costs are readily visible. Organizations may find that,upon detailed examination, their actual costs far exceed their expectations, byup to several hundred percent.Visibility into the total costs, especially across functions, is low in part becausethese related functions are often “owned” by different functional leaders (Finance,HR, IT). Accordingly, many organizations make decisions about the technologyand sourcing that work best for the individual function without consideration ofthe potential synergies across the enterprise.In-house administration of payroll, workforce administration, time& attendance, and health & welfare requires a surprisingly largecommitment of time and resourcesA complete cost analysis shouldconsider the following types ofcosts across all four functions:• System installation costs—The one-time costs relatedto the initial acquisition andimplementation of an organization’sPR, WA, TA, and H&W systems• System upgrade costs—The periodic acquisition andimplementation costs related toupgrading to a more current versionof the PR, WA, TA, and H&W systems• Direct labor costs—The cost oflabor (salary plus benefits) of thedirect staff necessary to support thePR, WA, TA, and H&W functions• Direct non-labor costs—Thetotal costs of consultants, vendorfees and facilities, G&A, andcorporate overhead related to thePR, WA, TA, and H&W functions• System maintenance costs—The IT costs specifically related tomaintaining the current systems• Indirect labor costs—Cost oflabor for employees not directlyrelated to the payroll and HRdepartments supporting thesefunctions in the field (i.e.,collecting, approving andpreparing employee hours forpayroll; distributing paychecks;answering employee questionsabout benefits, etc.)—whereemployees are typically spendingonly a fraction of their time onthese activities• Outsourcing costs—The totalannual costs of any outsourcedservices related to processing ofPR, WA, TA and H&W such astax filing, paycheck printing, etc.6
  9. 9. Figure 2. Average TCO per employee peryear by function for organizations managingthe process in-house7 The hidden reality of payroll & HR administration costsEconomies of scale lead to a gradualshift in TCOWhile we show two segments for organization sizethroughout this study, and the difference in results bysegment can appear quite dramatic, we find that economiesof scale within segments are generally more gradual. Incentralized processes like PR and WA, we find that theseeconomies occur quite smoothly. In more distributedprocesses like TA, however, they are not always as apparent.Figure 3. In-house payroll TCO per paycheck byorganization size$348$507$354$321$221$1,403$809$484$312$1,953LargeorganizationsMid-sizeorganizationsHealth & Welfare (H&W)Payroll (PR)Workforce Administration (WA)Time & Attendance (TA)100–300 301–1,000 1,001–2,500 2,501–5,000 5,001–15,000$34$22$21$18$17EmployeesNote: The trend line depicts the gradual decline of TCO per paycheck as organization size increases.It is no surprise that large organizations achieve greatereconomies of scale, and have lower TCOs per employee.With the amount of centralized labor required for thesefunctions, larger organizations are better able to a) havean individual staff role support more employees; and b)develop specialization among staff roles to further driveefficiency. Systems spending results also demonstrate theimpact of size, as systems costs can be spread over a greaternumber of employees.When all of these costs are included, largeorganizations (more than 1,000 employees)spend $1,403 combined PEPY on the four keyfunctions surveyed and mid-size organizations(100–1,000 employees) spend $1,953 PEPY asshown in Figure 2.
  10. 10. Hidden costs account for more than50% of the payroll TCOWhen evaluating their current or potential future systems,most organizations fail to consider the significant costsbeyond the direct labor needed to use the systems and thecost of the systems themselves. Overlooking these “hidden”costs could result in an underestimate of 50% or more asshown in Figure 4.Figure 4. Breakdown of TCO by cost typeHidden costs drive up the total TCO of these functions beyondwhat conventional wisdom generally suggests. The largestdriver of TCO for PR, for instance, is labor costs, specificallyindirect labor costs. The indirect time of employees toperform such tasks as approve and assemble submitted timefor processing, distribute paychecks, and maintain the corePR system represents a substantial cost—nearly $10 perpaycheck for both large and mid-size organizations.Analogous sets of hidden costs apply to the other processeswe examined, including H&W, where business managers,HR professionals, plant managers, supervisors, and othersare involved with activities such as enrollments, life eventchanges and plan support.“Seams” costsWhen viewed individually, each of the four processescontains unrecognized expense. But there is a bigger picturehere, too, as the inefficient interaction between processescreates additional costs at the “seams.” The administrationfunctions covered in this study are interdependent and relyon one another to work. Seams costs refer to the activitiesorganizations must undertake to provide integration betweenand among various processes, and occur when there is aneed to implement a new interface or manually supportor otherwise maintain the interaction between processes.We have differentiated these “seams” costs from “hidden”costs because seams costs refer to costs incurred fromoperating separate processes and systems within a single,interdependent business environment—and both havebeen captured in TCO.The 2006 PwC study identified these “seams” and quantifiedtheir costs and found that, among the four processes wehave studied, the average organization was spendingapproximately $100 per employee per year. The currentstudy, which evaluated PR, WA, TA, and H&W functionssimultaneously, suggested that organizations with seamsexperience higher costs—$200 per employee per year ormore—to, among other things, get disparate systemsworking together.8Mid-sizeorganizationsLargeorganizations“Visible” costs“Hidden” costs65%35%51%49%
  11. 11. Figure 5. Average cost of integrating core HR systems9 The hidden reality of payroll & HR administration costsThe TCO for payroll is actually increasingMost would expect PR TCO to have dropped since 2003, the year of PwC’sinitial benchmark study. A focus on improved technology, new delivery models,department cutbacks, and other factors should have reduced PR TCO over theyears.But that has not happened. In fact, the TCO for PR has actually risen a full $1per paycheck since 2003 for large organizations that use in-house solutions.The increases are primarily driven by the hidden costs described in the sectionabove. TCO for mid-size organizations and functions beyond payroll was notmeasured in the initial 2003 study, so TCO trending for those segments cannotbe included in this study.Figure 6. Average TCO per paycheck in 2003 compared to 2010 forlarge organizations managing payroll in-houseOrganizations with software integration “seams” face an increased TCO of $200per employee per yearTime &attendancePayroll HRISHealth &welfareDenotes integration and data flow required between different HR systems2003 Study$16$172010 Study+6% ActualMarketExpectation
  12. 12. Additional costs lurk in the mismatchof technology and business processBecause organizations have tight budgets and timeframes,they often implement technology improvements withouttaking into account the impact of technology on businessprocess. Technology alone is viewed by many as the solesolution to cutting costs. However, by implementing orupgrading technology, whether in traditional or newtechnology models (such as Software-as-a-Service or SaaS),organizations will likely incur additional, unintended costs—such as manual activities to conform technology to existingprocesses, to accept customization within the organization, orto link the SaaS technology to existing technology within theenterprise.It seems self-evident that organizations would seek toemploy technology solutions that best support their businessprocesses. But in reality it often does not work this way.Many organizations have not matched their businessprocesses with technology and thus cannot take fulladvantage of the applications available to them. The resultsof the study suggest that many organizations need to focuson process redesign when they decide to change software.Failure to do so drives both the hidden and seams costsdescribed above.Findings on Software-as-a-Servicedelivery modelsSoftware-as-a-Service (SaaS) is a prominent deliverymodel that has gained momentum since we published ourinitial TCO study in 2003. This deployment model enablesorganizations to host applications as well as store and managetheir data on remote, virtual servers, rather than on theirin-house computers (premised-based model). Some softwarevendors now offer their solutions exclusively through a SaaSor on-demand model accessed via any Internet connection,while other vendors provide customers a choice of a SaaS orpremise-based delivery model.This study found that SaaS helps reduce costs for manyorganizations—but only to a point. It is clear that while SaaScan reduce a mid-size organization’s total administrationcosts over a premise-based or traditional software model,organizations outsourcing process functions such as PRand H&W administration still demonstrate additional costsavings over organizations leveraging a SaaS model. Ouranalysis also showed that the benefits of SaaS models, whendeployed without the added benefit of process outsourcing,taper off as organizations get larger and actually provided noTCO savings, on average, over on-premise software solutionsfor large organizations with more than 1,000 employees.These findings reinforce the discussion above regarding theimportance of process transformation in conjunction withtechnology investment to reduce administration costs.10
  13. 13. Consistent with the findings of our priorstudies, the current study shows thatoutsourcing is a cost-effective way toadminister these four functions. It ismore cost effective than the various in-house solutions we reviewed. This studyshows that organizations using in-housesolutions for PR, WA, TA and H&Wspend on average 9% more (for mid-sizeorganizations 100–1,000 employees)and 27% more (for large organizationsover 1,000 employees) than those thatuse outsourced solutions. Of course,costs for any individual organizationdepend on the specific circumstancesof the functions outsourced and theorganization’s needs.In our analysis, organizations thatoutsource experience lower direct non-labor costs, indirect labor costs, andsystem maintenance costs (“hidden”costs). These efficiencies are likelydue to the strong process governanceframework and increased processstandardization that is typical in theoutsourcing model.Even allowing for economies of scale,where TCO drops as organizations arebetter able to spread labor and systemsinvestments, large organizations thatoutsource core HR processes see anadditional cost benefit when comparedto in-house organizations.Outsourcing continues to deliver overall TCO advantages—using in-house payroll, workforceadministration, time & attendance, and health & welfare solutions increases combined TCOby 18% on averageMid-size organizations that use outsourced solutions demonstrate a lower TCOacross the comprehensive bundle of the four processes—PR/WA/TA/H&W—than organizations that use in-house solutions. Given the extensive bundlingof solutions in this segment of the market, this comprehensive approach is themost accurate approach for cost analysis.Figure 7. TCO (PEPY) comparison by method across all four functions11 The hidden reality of payroll & HR administration costsOrganizations OutsourcingHR & PayrollOrganizations ManagingHR & Payroll In-House18% Higher TCO$1,388$1,634
  14. 14. For many years, the HR communityhas suspected that integrated PR,WA, TA and H&W functions cost lessto administer than separate pointsolutions. The survey empiricallyconfirmed that conventional wisdom.This applies both to in-house solutions,and, to an even stronger degree, toorganizations that outsource multiplefunctions.Unfortunately, for most organizations,common platforms remain a missedcost-savings opportunity. In fact, ouranalysis of the common platformapproach could not look across allprocesses because there were simplynot enough organizations with acommon platform for all four processes.However, sufficient data is availableto evaluate the impact of a commonplatform for three of the processes (PR,WA, and TA) as shown in Figure 8.12Utilizing a common vendor or solution to manage multiple functions delivers tangible cost efficienciesFigure 8. TCO (PEPY) comparison by platform type for payroll,workforce administration, and time & attendance18% Higher TCO32% Higher TCOOutsourcing Solution—Common PlatformIn-House Solution—Common PlatformIn-House Solution—Multiple Platforms$910$1,020$1,202Additional cost efficiency from using a commonplatform provided by an outsourcerAs shown above, organizations using multiple in-house platformsexperience a TCO that is 18% higher than organizations using a commonin-house solution and 32% higher than organizations outsourcing thesethree functions to a single vendor.In large organizations, the impact was even more dramatic. In-house userson a common platform experience a 29% higher TCO compared to peersoutsourcing the same functions to a single vendor.
  15. 15. Looking down the roadThe need for seamless integration ofpayroll and HR administration functionswill become even more acute in thecoming years. As organizations addadditional solutions to their mix formanaging automated payroll and HRadministration—such as recruiting,talent management, etc.—the lack ofa common platform, and the resultingcost inefficiencies, is likely to increase.Of the organizations participatingin this study, more than half had noautomated solution for performancemanagement, compensationmanagement, or learning management.In addition, more than eight in 10 hadno automated solution for successionplanning.13 The hidden reality of payroll & HR administration costsFigure 9. The lack of systems to manage key HR functions0% 20% 40% 60% 80% 100%SuccessionPlanningCompensationManagementPerformanceManagementLearning ManagementSystem (LMS)Employee Self-ServiceApplicant Tracking/RecruitmentBenefits Tracking/Data MaintenanceCore HRISLarge organizations Mid-size organizationsPercent of organizations without a system or solution to manage the HR function listed
  16. 16. 14If organizationscontinue down thepath of pursuing bestof breed strategies,they will continue toinvest in a philosophythat produces hiddenand seams costs.
  17. 17. Whatever solution an organization chooses, organizational design and processimprovements—in conjunction with straight technology investments—will betteraddress the hidden costs of HR management. Additionally, a comprehensiveevaluation of the integration needs across payroll, workforce administration, time& attendance, and health & welfare benefits administration rather than individualprocess assessments, will allow organizations to identify interdependencies thatcan result in reduced costs for the overall solution. Better understanding of thesources and size of the hidden and seams costs in an organization, and addressingthose process and technology options, will allow organizations to realize theirobjective of reducing TCO.Conclusion15 The hidden reality of payroll & HR administration costs
  18. 18. This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the informationcontained in this publication without obtaining specific professional advice. PricewaterhouseCoopers LLP (PwC) has exercised reasonable professional care and diligence inthe collection, processing, and reporting of this information. However, data used from third-party sources has not been independently verified or audited. No representationor warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PwC, itsmembers, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of reliance on information contained in thispublication.© 2011 PwC. All rights reserved. “PwC” and “PwC US” refer to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a member firm ofPricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. This document is for general information purposes only, and should notbe used as a substitute for consultation with professional advisors. MW-11-0206