This document summarizes the hidden costs associated with managing HR processes internally. It finds that the average company spends over $2,000 per employee per year on payroll, benefits, and HR administration alone when managing these processes internally. Hidden costs, like system maintenance and indirect labor, account for 63% of total spending. Outsourcing individual HR processes fails to reduce total costs of ownership, as integration between systems introduces additional expenses. The document advocates taking a holistic approach to HR that considers processes, technology, and people in order to gain efficiencies and better control costs.

1. HR.Payroll.Benefits.
Exposing the
Hidden Costs
CFO Executive Brief

2. 2 | Exposing the Hidden Costs - CFO Executive Brief Exposing the Real Cost of HR - CFO Executive Brief | 3
The financial case for
HR transformation
Businesses are under constant pressure to
reduce their costs. The biggest costs relate to
people - who are, of course, the drivers of any
company’s revenue. Cut people-related costs
too far and there is a risk the business will not
generate any revenue at all.
Back-office HR processes account for a huge slice of these costs. Often
introduced one process at a time over many years, they are not only
expensive to operate individually but also to integrate with each other.
As a result, companies spend on average over $2,000 per employee per
year managing payroll, HR administration, benefits administrations
and time & attendance in-house, according to research by ADP. For
companies that need to manage disjointed systems across national
frontiers, the costs are even higher. A study by the Ponemon Institute,
an independent research center, found that multinational companies
spend an average of $3.5 million a year on global payroll compliance
alone.
“The cost
analysis is
­­­too complicated
with our
current system.”
Executives are worried about:
The total costs of
managing employees
Finding ways of
lowering overhead costs
64%
54%
Underestimating
costs
New research commissioned by the ADP Research Institute
confirms that companies often have a poor grasp of their HR
TCO. “The cost analysis is too complicated with our current
system,” commented one of the 1,004 executives from mid-
sized companies surveyed for the study. Another said: “We do
not keep track of TCO.”
While most respondents considered payroll and benefits
administration when estimating HR TCO, many failed to
include time & attendance. This meant that they grossly
underestimated their companies’ HR costs.
The Total Cost of Ownership Awareness study conducted by Harris Poll
also found that senior executives generally thought they were doing a
very good job of managing HR processes and containing costs. Yet at
the same time 64 percent said that finding ways of lowering overhead
costs was their top daily concern, while 54 percent were worried about
the total cost of managing employees.
These figures may sound exaggerated.
But that is because spending on HR
processes typically comes from several
different budgets, including those held
by IT, finance and HR functions. With no
single function responsible for the total
cost of ownership (TCO) of HR processes,
it is all too easy to overlook some costs.
per employee per year
to manage payroll
$2,000

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Uncovering
hidden costs
HR TCO consists of visible items such as the cost of buying and installing
new systems, as well as the hidden costs of maintaining, running and
upgrading these systems – with all the direct and indirect labor costs
associated with those tasks. In fact, a PwC study sponsored by ADP
found that hidden costs account for the bulk – 63 percent - of spending
on HR processes.
Controlling
costs
ADP carries out TCO studies to help clients identify - and ultimately
reduce - the total costs of running payroll and HR administration.
But TCO studies are not just about cost cutting. The TCO journey is itself
useful, providing information that helps businesses streamline and
improve their HR processes to make them more flexible and compliant.
By making the cost structure of HR processes more transparent, a TCO
study also gives the finance function better control of spending on these
processes. For example, once the exact costs of upgrading a payroll
system have been revealed, it becomes easier to convert some of the
fixed costs into variable costs - and so bringing them under control.
We use some fairly
standard KPIs, such as the ratio
of HR staff to employees,
to measure the performance
of the function and its costs.
Philippe Cuenot
Director, Executive Vice President
Human Resources and Internal
Communication at Bouygues Telecom
System
Installation
System
upgrading
Direct
labour
Outsourcing
Breakdown of TCO by Cost Type
System Maintenance
Training
Indirect Labour
Direct Non-labour
Seams Costs Data CONSOLIDATION
Quality- related costs
Hidden costs
63%
Visible costs
37%

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Adopting a
winning approach
Using anonymous data collected from thousands of TCO studies over a
periodofmorethan10years,ADPhasdevelopedauniquebenchmarking
resource. This indicates that companies running their HR systems
internally face the highest costs. Finance executives recently
surveyed by ADP agreed that in-house solutions consistently
failed to reduce the TCO of HR processes.
But outsourcing isolated HR processes is not the answer.
ADP has found that companies face software integration
costs of around $200 per employee per year when they
operate HR systems separately. In other words, even state-
of-the-art technological solutions carry hidden costs when
they are used in separate administrative silos.
The PwC study already cited confirms these findings. It found that
companies needing to integrate isolated software systems spend on
average 21 percent more per pay check than those outsourcing payroll,
time and attendance and HRIS to a single provider.
Even state of-the-
art technological
solutions carry
hidden costs.
21%extra average costs
per paycheck with
isolated systems than
outsourced payroll
ADP’s data suggests that companies
need to take a holistic approach to
managing HR processes. That means
considering not just technological
solutions but the processes themselves
and the people who operate these
processes. All the research shows
that companies taking this approach
have a clear edge over those that focus
on technology or outsource isolated
processes.
Understanding
your TCO
ADP has developed a dedicated approach to help you understands your
real HR TCO numbers. You will benefit from more than 10 years of
experience in building HCM TCO business cases, you will access a unique
worlwide database of 926 audited HR organizations to benchmark your
HR organization against and will get your detailed numbers to start
driving your HR performance.
Sounds familiar?
Call ADP, it’s time to know
your big number.
Comments from the ADP Research Institute survey reveals how poorly
people understand their TCO:
“The top people
keep some of that
confidential...”
“I’d have to look into
QuickBooks to figure it
out...”
“The cost analysis is
too complicated with
our current system...”
“That is a cost that is
very hard to track...”
“We do not keep track
of TCO...”

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