Why calculating Total Cost of Ownership is critical in payroll
If someone was to ask you how much your payroll operations cost, would you know the answer? It seems like a straightforward question, yet the answer for many HR professionals is often hard to pinpoint. Understanding – and therefore being able to make future projections – about how much your payroll costs requires a clear appreciation of various business components.
So what are the steps you need to take to understand the total cost of payroll over a set period? That’s where Total Cost of Ownership comes in.
For those unfamiliar, Total Cost of Ownership (TCO) is a financial calculation intended to help business leaders determine the direct and indirect costs of the products and systems that their organisation uses. It is often the case, however, that organisations lack the tools and skill sets required to land on accurate internal business calculations – something which has a hugely detrimental impact on cost-management projection and associated business decision-making.
So how often do companies monitor their payroll costs to implement business improvements?
Surprisingly, research carried out in Belgium by our Payroll Service Alliance showed that only a third (35%) of enterprises continually monitor and measure their payroll processes with a view to identifying areas for cost and time savings. In addition, a further 35% of respondents revealed that, while their organisations do monitor payroll costs on an ongoing basis, no efforts – or indeed, plans – are ever made to draw findings from this data. This is quite staggering when considered that these enterprises have gone so far as to set aside valuable time and resource, yet have no opportunity to gain any real return on investment. The situation amongst SMEs (organisations with between 100 and 500 employees) was no better either, with only 10% of respondents saying that their organisation has TCO measurement processes in place when it comes to their payroll operations.
When considering the importance of TCO in the context of payroll and HR – a business function with ever growing importance in the wider context of any organisation – it becomes clear that optimising processes whilst streamlining costs is paramount to ongoing business success.
Here we outline two key benefits that come with calculating payroll’s Total Cost of Ownership:
Clear clarity around cost allocation
By calculating the TCO of an organisation’s payroll, HR professionals can achieve a much clearer overview of their total costs in this area, as well as a breakdown of expenses by service. This breakdown is especially insightful because it enables businesses to easily determine which services are essential versus those which could be discarded, as well as key aspects of the payroll process that need to be changed in order to deliver better ongoing value in monetary terms.
More precision with payroll forecasting
Amidst today’s war for talent, and with millennials’ tendency to career hop, accurately assessing personnel requirements is a growing challenge for all organisations, irrespective of geography, sector and size. The task of determining requisite headcount, and indeed, making future projections relating to skills gaps and recruitment, naturally falls to the HR department – so how can calculating payroll TCO support these HRs in optimising headcount for greater business productivity and performance, whilst at the same controlling payroll costs? Simply put, TCO enables more precise data from which more accurate forecasts can be made. Additionally, better cost control saves significant costs in the long term, meaning HRs can boost their recruitment budgets with the costs that would have otherwise been lost to inefficiencies within their payroll systems.
Ensuring that Total Cost of Ownership is calculated correctly creates a clear foundation from which to further shape – and optimise – HR and payroll operations. So, next time someone asks you how much you spend on payroll and whether your operations are optimised from a cost perspective, you can rest assured that having adopted the TCO model, you’ll be able to answer with clarity and confidence.