Tuesday, February 28, 2012

TCO Stories - "I had no idea that was going on!"

After doing as many TCO analyses as we have, it has become apparent  to me that the process of determining the costs for payroll, HR and benefits administration is oftentimes more valuable and illuminating than the actual calculation, reporting and benchmarking of the costs.  Read on to learn why!

In order to determine TCO, it is necessary to collect information from across the organization.  Most don't realize it, but only about 35% of the cost to deliver payroll resides inside the payroll department.  Costs are also typically experienced in:
  • The IT department to implement, keep current, and maintain the systems used to calculate payroll
  • The IT department for the creation and maintenance of the infrastructure the systems sit on
  • The Field for collection, approval, editing of time worked
  • Legal for wage garnishments
  • The mail room for the print and delivery of paychecks or advices
  • Accounting for the posting, reconciliation and correction of pay activity to the GL
  • Tax for the remittance of taxes to the appropriate reporting agencies and to research and respond to tax tracers
There are more sources of cost, and sure, sometimes some of the items above take place in the payroll department.  Every organization differs as do the accounting systems and methods for tracking costs and allocations.

Our methodology for determining costs cuts across all departments and requires data from each.  Fortunately, the process we use allows us to effectively collect the data in only a day.  Oftentimes, this results in putting people in a room together to get at the information.  And this is where it actually gets fun and illuminating at the same time!  You see, it seems that at the majority of organizations, all these people don't talk much on a day to day basis as they do their jobs.  Amazing, huh?  But not surprising.

I have actually heard first hand the following during different data collection meetings:
  • When hearing of a particular process payroll was performing that was taking 20 hours a week, an IT director asked "Why are you doing that?  We made a system enhancement a year ago that means you don't have to do that anymore!"
  • When talking about a process payroll wished they could automated, they indicated that when they asked IT about it, the cost would be prohibitive.  IT's response: "Remember last year when we implemented the new PeopleTools? Well we can now do that fix in an afternoon for next to nothing!"
  • When talking through the people involved in the process and portion of their time allocated to payroll it became clear that a particular individual had been averaging over 55 hours per week because of the loss of another employee and a hiring freeze that was in place.  At hearing this, the Sr VP of HR said "I had no idea that was going on!"
The point of relating these instances is to demonstrate how each of these organizations derived value from the process alone long before their costs were actually calculated and benchmarked.  

I often marvel at how illuminating the process is and how much organizations actually don't know about what is actually going across the organization because of the demands of day-to-day work and the inevitable silos that are created within. 

About the author - Donald Glade is president and founder of Sourcing Analytics, Inc., an independent consulting firm specializing in helping companies optimize their HR / benefits / payroll service delivery through financial analysis, relationship management, and process improvement.

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