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Software Costs Can Add Up Quickly

October 1, 1999
Related Topics: Human Resources Management Systems (HRMS/HRIS), Featured Article
A human resources software project requires multiyear, multidimensional investments, and thus crosses traditional annual budget cycles.

There’s a direct correlation between the scope of the project and the needed investment—in other words, as the number of modules, complexity of processing, geographic span, number and types of employees, and pace of deployment increase, the cost will increase, too.

However, the common experience is that costs related to the implementation efforts—customization, interfaces, conversions and training—are a multiple of the software license fees. A two to three times multiple is not uncommon, and in the most complex cases, a ten or more multiple may have been necessary.

For example, if the software license fees were $200,000, costs associated with the implementation efforts could be $400,000 to $600,000, and as high as $2 million in very complex projects. In fact, more complex projects are likely to have a higher software fee since more software may be required, so that a software license could be $1 million with implementation costs of $10 million.

These cost estimates reflect an organization purchase, and ongoing maintenance and support. Most of these costs are incurred during the implementation project—the initial 12 to 24 months. Specific accounting treatment of each cost varies. Software license fees and hardware expenses are sometimes treated as a "depreciable" expense.

Putting a price on service
Human resources software can also be acquired by using a service/transaction cost model, or as a leased application from a service provider—an option that’s becoming increasingly popular.

For example, basic HR functionality is available as part of many payroll services, in which the costs are a modest set-up fee, and then a per-check charge. This charge can be as little as a few dollars per check. Companies like ADP, Ceridian, Pro-Business and many banking institutions offer these approaches.

The application server model can be priced somewhat differently, because the software fees, customization and so on may be paid for in a similar fashion as the purchase approach, or by bundling the cost into a multiyear support, enhancement, operation and maintenance payment schedule.

Measuring ROI
Virtually all HR software projects are subjected to return-on-investment models of various types. The cost/ benefit analyses are oftentimes driven from three basic perspectives.

First, reductions in administrative costs can represent a significant benefit. These savings result from streamlined, automated processes that require fewer processing steps and ultimately fewer people.

Savings can also be identified in fewer printed forms and other documents, less overtime, and reduced costs associated with software support and maintenance. Certain external costs may be eliminated, since the new system will replace these external service providers.

Second, cost/risk avoidance has been a primary benefit in many of the Y2K projects in the past year. The risks and costs that were involved—in terms of information chaos, missed or erroneous payrolls, faulty benefits calculations and so on—essentially created a "gun-to-your-head" ROI scenario for many organizations.

Third, value-added benefits—in other words, shifting the role of HR from administrative to strategic—have generally been less quantifiable. However, organizations in which best-practice business alignments are being made, are quickly able to express their HR software investments as part of increasing their enterprise performance. After all, the best way to increase enterprise performance is to increase the effectiveness of the employees inside the enterprise.

Clearly, all this can’t be achieved without comprehensive HR programs that are supported by comprehensive HR software.

Workforce, October 1999, Vol. 78, No. 10, pp. 98-100.

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