Home » Articles » Real Costs of Buying an HRMS Friday, November 21, 2008




Real Costs of Buying an HRMS

-by Al Doran, CHRP

For anyone who is setting out to buy their first human resource management information system, just a word of warning that is not quite like buying a word processing package for the Payroll department. The cost of the project does not start and end with the purchase of the “shrink wrap” that the CD ROM and user manual comes in.

Actually anyone buying an application, even like a word processing package for a single department, probably has gone through a small sample of what an HRMS project will include. They will have found out what the basic requirements for the end users will be and they will have found out what the company policy is on buying software. No sense buying Word Perfect if the company insists everyone use Microsoft Word.

Well buying HR and Payroll software is very much like this however the overall impact on the company can be substantial, therefore the time and care taken to buy the “right” application for your organization is even more critical.

For many, the concern is “what is the true cost of implementing the new application, once I pay for the shrink wrap”. But before we get to that its very important to keep in mind that you should have made a significant investment in the project before buying that “shrink wrap”. The time and effort spent on clearly identifying the needs, costs and benefits of your organization before making a vendor selection will determine to a large degree just how successful you are in implementing your new application and meeting your objectives of keeping costs under control.

First off a Reality Check, courtesy of Fred Lievertz, of the Consulting Team:

a) On average the project life cycle takes from 6 to 14 months from Start to Purchase.
b) 30% of projects are never completed.
c) 35% of projects missed time, budget or functional goals.
d) Only 30% of new system capabilities are utilized.

As the acquisition of a new HR/Payroll system is a major corporate project it is very important to structure the project for success. A formal process should be developed to identify your organization's needs. This should include the identification of your current processes, resources, and costs. Be very careful to try and identify savings and any cost avoidances a new system should deliver. You should calculate the Return on Investment (ROI) that you can expect from your new system. Buying a new HRMS is not all cost, it should provide a pay back and pay for itself over time.

Without turning this paper into a “how to do a needs analysis”, here are some basic guidelines on how to structure your project to ensure a high degree of satisfaction with the resulting decisions.

a) Plan the steps that must be taken to identify requirements, goals, objectives, and costs. Do not focus on products until you have a clear statement of requirement. Resist the urge to look at the vendors recommended by management or others.
b) You will be expected to cost justify your decisions (and recommendations) so keep that in mind at all times.
c) Make use of consulting expertise where your company lacks the skills to complete difficult analysis, and to have an external validation of our findings.
d) A steering committee composed of senior management representatives is crucial to your success. That team will ensure that you have an executive sponsor and support from the top; that strategic decisions are dealt with in a timely manner; that the project is kept on track.

When identifying your organization's needs:

a) Involve key management personnel. Ask each manager his or her 3 to 6 Critical Success Factors for managing to get a perspective of how important HR/Pay information is.
b) Involve line managers, they are the true users of a corporate HR/Pay system.
c) Involve payroll and human resource members with expertise in the functional areas of the enterprise.

When you identify your current processes, resources and costs:

a) Document your current workflow.
b) Identify your current resources:

i) Staff costs to support the current systems.
ii) Current licensing fees and maintenance fees.
iii) Hardware costs.
iv) Paper forms and reports.
v) Outsourcing.

Before documenting your requirements, consider what the future will bring. Will the company business stay the same, will there be new demands? Consider new strategies, including new technology and methodology:

a) Web enablement, corporate internet/intranet applications, as well as scanning and imaging.
b) Re-engineering your business practices, especially those associated with the systems you are looking at (HR and Payroll).
c) What will be the impact of the Virtual Office?
d) Will your company be conducting business in a global economy?
e) What will be the organization structure of your company in two years, five years?
f) What technical skills will be required in your changing workforce?

When determining your requirements for the purposes of identifying the “best fit” vendor, consider:

a) Your technical architecture:

i) PC/LAN
ii) ClientServer
iii) Mainframe
iv) Web applications

b) staffing levels
c) cash flow, budget.

So now assuming you have done your absolute best to identify your functional requirements, your technical direction, and your budget considerations, you are ready to look at the vendors who have products in this area. We cannot do justice in a short paper to the vendor selection process, but we will mention the importance of some key considerations in making your choice of vendor:

a) Best fit with your functional requirements.
b) Technology platforms supported.
c) Service provided to similar clients.
d) Vision of the vendor.
e) Financial stability of the vendor.
f) Cost of their products and services.

Once you have determined which vendors offer the best fit for your needs and that meet your expectations related to your needs, it will be time to investigate further the true cost of buying their product.

a) Acquisition costs (buying their application):

i) Buying their “shrink wrap”.
ii) Application and database software purchase. This may be a new technology for your company, e.g., moving to an Oracle database.
iii) Purchase or upgrades of servers and workstations. Current computers may not support the new applications and major upgrades may have to be completed. This may or may not also be required to support other business applications so potentially some of the costs may be charged to other cost centres.
iv) Communications protocols. Existing LAN's, WAN's, etc. may not be adequate to support the demands of the new application. Major changes should be in line with the corporate Information Technology strategic direction of the company.

b) Implementation costs:

i) User training. This may be partially included in the purchase cost of the software, but do not forget the cost of the time of your staff to attend the training, and the cost of replacement staff who may have to back fill key positions. Travel, meals and accommodations may be a cost factor if the vendor does not deliver local training.
ii) Training on new technology. This applies especially if a switch has been made to new data base technology or communications protocols, as well as security software.
iii) Consulting expertise. Many companies use the expertise of the vendor or a third party implementation partner for difficult or hard to fill roles and it gives instant knowledge to the project, plus an external validation to the process.
iv) Modifications to the delivered system take time to make and test but are often the only way to meet specific business requirements. Make only those that are necessary but keep in mind that not only is there a “cost” for the time it takes to make the changes now, but there may be an additional cost each time the company upgrades to a new release of the software.
v) Conversion of data from the old system/s to the new. Programs must be developed and tested to collect data from the old system/s and move it to the new system.

Industry norms have been stated by many in the business that range from less than 1x the cost of the software to many times the cost of the software. Here are some norms sited by the Gartner Group:

(Total cost of implementation of the system including system license fees, initial testing, and installation and consulting fees associated with the implementation):

PRODUCT COST TO IMPLEMENT TIME TO IMPLEMENT
Product “A” 2 times initial software license 6 to 12 months
Product “B” 4 to 5 times initial software license 5 to 8 months
Product “C” 4 to 7 times initial software license 10 to 12 monhts
Product “D” 6 to 10 times initial software license 14 to 24 months.
Average 4 to 6 times cost of software license and 9 to 14 months to implement.

I will point out that many vendors will quote an implementation record of less than 1x the cost of the software license so it would be best to have them show you just how applicable that may be to your specific situation.

In addition to the cost of purchasing the software and implementing, there will be costs associated with maintaining it in an ongoing business environment. Items to consider:

a) Ongoing staff salaries for specialist staff in Payroll, HR and IT to operate it.
b) Outside (outsourced) services, if applicable.
c) Forms. This should be reduced over time as companies move to electronic forms.
d) Maintenance fees for the software (including the HRMS, database, etc.) and hardware.
e) Costs associated with upgrades and testing of subsequent releases of the software).
f) Documentation of the system and the changes made to it.

A project should identify the cost savings while identifying the projected costs of the new system. Some items to consider:

a) Elimination of redundant data and dual (or triple) data collection. This is one of the key cost benefits of an integrated HR/Payroll system in comparison to separate HRIS and Payroll systems.
b) Wages and benefit costs to support the new procedures in comparison with the old system/s.
c) Report generation costs. Forms and other paper costs. System and processing costs. Labour required for distribution. Significant savings are being found by moving reports to a corporate Intranet and eliminating paper.

Some actual examples of Cost Savings identified in payroll applications associated with new HRMS:

a) Reduced cost per cheque.
b) Reduced labour in producing manual cheques.
c) Reduced cost in reconciling manual cheques.
d) Eliminate manual entry of sick and vacation accruals.
e) Reduced labour in data entry.

There are many examples of what can be identified both in Payroll and in HR functions as well as “soft” savings:

a) Management supplied with accurate and timely data for decision making:

i) staffing
ii) salary budgeting
iii) employee development/succession planning
iv) attrition rates
v) cost per hire

b) Increased data reliability through single point of data entry and verification.
c) Improved employee satisfaction through ability to easily access data.
d) Improve employee morale through an accurate and timely payroll process.
e) Allow managers more time to manage the business instead of chasing after payroll related problems.
f) Flexibility to adapt to new company policy procedures, priorities and organizational changes.
g) Facilitate the compliance with mandated regulatory reporting requirements.
h) Avoid grievances by properly tracking seniority, caps on overtime, etc.

So, it comes down to sound project management, identifying your specific needs and making the best match possible. Keep a sharp eye on the costs and savings thorough each step of the process.

“Good HR systems are like good highways. They cost lots of money and you had better know where you are going with them before you start to build them”. Paul Piper, former Chair of Business Information Technology.

-Al Doran is President of Phenix Management Int=l, a Toronto, Ont. management consulting firm specializing in HRMS issues. He is co-author of the HRMS book published by Nelson Canada, AHuman Resource Management Systems@. http://www.hrmsbook.com He may be reached at: aldoran@pmiHRM.com and his home page is http://www.pmihrm.com/ PMi is a partner of Global HR Solutions http://www.globalhrsolutions.com

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-Al Doran, CHRP
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