Do You Know Your Big Number?
Human Capital Management

The Flaw in the Way Midsized Companies Calculate Workforce Costs

Sixty-nine percent of managers studied who are responsible for at least one key HR function say their company manages its workforce well. But when it comes to the costs of doing so, more than half of them worry daily—for good reasons, it turns out.

In many cases, HR professionals are grossly underestimating the costs of managing their organizations’ workforce, according to a new study by the ADP Research Institute (ADPRI). As a result, managers often end up spending valuable time solving unexpected problems instead of focusing on the vital role they play in their companies’ missions.

Consider the findings of the 2014 Total Cost of Ownership study sponsored by ADPRI and conducted by Harris Poll:

  • Almost seven in 10 (69%) senior HR managers at midsized companies expressed confidence that they’re managing their costs well.
  • When asked what HR managers worried about on a day-to-day basis, more than half (54%) cited the total cost of managing their companies’ employees – a concern second only to lowering their companies’ overhead costs (64%).

It’s a mixed message.

The 5 Functional Pillars of Human Capital Management

At the heart of the confusion is a misunderstanding of all that goes into the total cost of ownership (TCO) of human capital management (HCM), which includes five pillars:

  • Payroll
  • Employee Benefits Administration
  • Talent Management
  • Human Resources Management
  • Time and Attendance

Midsized company executives and managers think they know what’s involved in their TCO, but when asked for an estimate, only about one in four of those executives include all five pillars.

What’s more, most are not tracking their total costs in a meaningful way or on a regular enough basis to truly understand their big number. Only slightly more than one in three midsized companies have formally analyzed costs in any one area of HCM in the past year and a half. Even fewer, one-fifth, formally analyzed costs across all five pillars of HCM, and on average, only one in six have done any kind of analysis in three years or longer.

There’s a good reason they’re unaware or not tracking their total costs: Senior HR managers at midsized companies are challenged with a particularly daunting mix of expectations and regulations. Accounting for all of the daily distractions can undermine the larger business mission — especially for HR professionals who manage multiple offices across geographies.

Managers are tasked with the critical goal of maintaining a happy, engaged workforce, and that means maintaining a broader understanding of HCM. The point of understanding the total cost of ownership is to prevent company missions from falling prey to daily worries.

The answer? Managers at these companies must plan for formal analyses in all five HCM functions to estimate their true TCO. Only then can they focus on their big picture.

For more information on how midsized companies analyze their TCO, get the full results from the ADP Research Institute.

From recruitment to retirement, ADP offers integrated HR, payroll, talent, time, tax and benefits administration solutions and insights that enable you to unlock your midsized business potential.

This article originally appeared on the ADP@Work Blog.

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