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Answer
Many companies regard HRMSes as nonstrategic support systems
and attach a low funding priority to these applications as IT investments.
Giga believes that these systems are investments that can be clearly cost-justified
in terms of business process efficiency and strategic value for managing
human capital. Based on our experience and research, we have found that most
companies can realize a positive return of investment (ROI) within three
years of deploying these systems, based on process efficiencies alone.
Paper forms are a common characteristic of the human
resources function. While many companies have invested in high-end HRMS
solutions, most have failed to substantially eliminate the paperwork that
supports personnel administration, benefits and payroll. This shortcoming is
often a result of rapid system implementation approaches that left most of
the original business processes essentially intact.
As adoption of business-to-employee (B2E) solutions has accelerated
during the past year or two (see Planning Assumption, HR and Administrative B2E: Maturing and Expanding,
Paul Hamerman), companies have begun to leverage their HRMS investments by
extending business processes via the Web to employees and managers. The ROI
that companies realize from HRMS investments is dependent in large measure on
the extent to which processes are automated with B2E. HRMS solutions from the
leading vendors (see Planning Assumption, Market Overview: Human Resources Management Systems — From
Administration to Asset Optimization, Paul Hamerman) now all have
substantial HR B2E functionality that is integral to the solution’s value
proposition. Giga believes that the transactional B2E functionality of HRMS
applications (or best-of-breed solutions, if preferred) should be regarded as
a fundamental component of the overall HRMS environment rather than an
optional add-on.
In order to demonstrate the efficiency benefits of an
automated HRMS environment, organizations need to take an inventory of their
HR business processes and capture metrics on those processes. Process metrics
should include effort levels (staff time consumed), process cycle (elapsed)
times, transaction volumes and error rates. Additional metrics on the overall
HR business environment should be captured as well, including current systems
costs, number of support systems, staff costs, headcount, forms printing
costs, paper storage costs and outsourcing costs. On a process-by-process
level, savings can be estimated based on the impact of automating each
process.
Benefits: Survey data compiled by Cedar (formerly
The Hunter Group) indicates that the costs of HR administrative processes can
be reduced by an average of 60 percent through automation. Process
effectiveness is also impacted significantly, with error rates lowered
substantially and cycle times reduced from days and weeks to minutes.
Improved process effectiveness reduces staff time for rework and phone calls
associated with errors and pay timing issues. On an overall basis, Giga
believes that HR departments can reduce time spent on administrative work by
40 percent to 50 percent, resulting in either the elimination of headcount or
the redeployment of effort to higher value tasks, such as decision support
and employee development. Employees and managers throughout the organization
are also key beneficiaries of the efficiency improvements, minimizing the
time they spend dealing with administrative processes.
In addition to process costs, one of the biggest
opportunities for savings is the reduction of systems costs. A typical HRMS
environment consists of potentially dozens of “one-off’ applications, both
within HR and in other departments. Companies find many uses for employee
data, and the data is often transferred to one-off systems through manual
procedures rather than system integration. Hackett Benchmarking Solutions,
a division of AnswerThink Consulting, finds that companies on average
maintain 8.7 HR systems per 1,000 employees, with a best practice target of
1.4 systems. The number may actually be much higher when considering HR
applications maintained by line departments using spreadsheets and similar
methods. A comprehensive HRMS environment can replace many supplemental and
duplicative one-off systems, eliminating the related IT and procedural costs.
These savings will offset the IT investment in the new HRMS environment to
some extent, particularly where legacy systems are being replaced.
While the HRMS investment can often be cost-justified solely
on the efficiency opportunity, the employee retention and productivity
opportunity may also be significant. Best practice companies have
successfully transitioned HR from an administrative function to a strategic
management function. The strategic value aspect of the HRMS investment
focuses on managing human capital by supporting functions such as
recruitment, performance/competency management, employee development and
employee customer service. By executing well in these areas, companies can
measurably reduce employee turnover, reduce hiring costs and improve
individual performance.
Costs: The costs of deploying a comprehensive HR
solution include license fees, implementation, technology, training and
ongoing maintenance. Costs typically range from $300 to $700 per employee as
an initial investment for companies with more than 1,000 employees, depending
on the solution, size, complexity and other factors. Alternatively, a
solution can be deployed on a rental basis through an application service
provider (ASP). This alternative is generally more suitable for smaller
companies.
A key part of the overall HRMS value proposition is cost
reduction of HR support, based on efficiency improvements. Hackett’s
benchmark for the average annual cost of HR services per employee is
approximately $1,900, with a best practice goal of less than $1,200. By eliminating
paper and process inefficiencies in a traditional HR environment, many
companies can realistically expect cost reductions of $200 per employee,
while improving levels of service. Giga’s Total Economic Impact™ (TEI) model
is a framework that can be used to justify the value of HRMS as an IT
investment in terms of costs, benefits, flexibility and risks.
Recommendations
ROI from investing in HRMS solutions can be accelerated by
focusing on quick wins in terms of process improvements and the elimination of
redundant systems and paper. Rather than defer implementation of the B2E
functionality until core applications are in place, companies should focus on
accelerating the ROI by including selected B2E functionality in the initial
rollout (see IdeaByte, Achieving Rapid Return on Investment on Administrative B2E
Projects, Paul Hamerman). Transforming the HR organization from an
administrative orientation to a strategic focus provides another level of
benefits that will take longer to achieve. A quantified business case should
be used to demonstrate the attractive ROI that can be realized from investing
in HRMS. Companies that have already made a substantial investment in a comprehensive
HRMS solution but have not realized the expected ROI, should review their
business process and systems environment and take appropriate steps to extend
and enhance the utilization of the solution.
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