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Total Cost of Ownership
by Donald Glade, Sourcing Analytics, Inc.
As presented in the IHRIM.link February/March 2008

 

In an effort to lower cost, enhance productivity and better manage risk, companies are constantly searching for technologies, which will enable their organizations to attain these goals. Oftentimes, companies are successful in this pursuit. In fact, the unprecedented technology-driven productivity gains of the 1990s are credited by many as a primary reason for the longest peacetime expansion of the U.S. economy in history.

But does the acquisition of technology automatically bring about higher productivity at a lower cost? For every success story, there is undoubtedly a story of costly and/or failed implementations or bankruptcy. WebVan comes to mind, but that’s another story for another day.

How can companies determine if the introduction of technology will or has resulted in economic gain? Total Cost of Ownership (TCO) can help provide the answer. Invented by the Gartner Group, TCO is a methodology for identifying all costs incurred for the life of technology. It tends to be expressed as a total dollar value.

In the areas of HR, payroll and benefits administration, we can modify the TCO concept to express TCO as an annualized cost for delivery of services to employees. This TCO will include both the technology costs such as:

• Implementation
• Upgrades
• Maintenance
• Hardware, and
• Software, etc.

The TCO will also include the administration costs such as:

• Labor costs including payroll, tax and benefits
• Non labor costs including facilities, supplies, training, expenses, telephone, computer, etc.; and,
• Outside service costs such as consulting and outsourcing services.
  

A ground-breaking study commissioned by ADP in 2003 calculated the TCO of end-to-end payroll and implementation and maintenance of HRIS for large companies administering payroll and HRIS in-house. Two follow-up TCO studies looked at TCO for companies that outsource payroll and also the TCO for in-house and outsourced benefits administration. The author of this article designed, analyzed, and compiled the results of all three studies. Much has been written about these studies, and white papers are available that provide the detailed results.

In this article, we will highlight a few of the results, discuss some of the non-published findings of the studies, and discuss how these findings can be used by practitioners to aid in the decision-making process.

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