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 By Micah Fairchild

The Top 3 Most Misunderstood Facets of HR Software TCO

With Human Resources budgets tightening and a global economy exhibiting signs of schizophrenic improvement at best, many organizations are still laser-focused on keeping HR software costs down—while at the same time increasing tactical and strategic capabilities. Unfortunately, these mounting pressures to demonstrate cost savings are often made more difficult by vendors and pundits alike. Specifically, these forces lay equal claim to the idea that that their respective HR software deployment option has a lower Total Cost of Ownership (TCO) for your organization. Whether it's Software-as-a-Service (SaaS) or "on-premises", a healthy amount of debate revolves around which deployment option you pay more for in the end. The truth is though, that these talking heads wind up skirting some of the most important TCO elements, and regrettably cast more confusion on the issue than anything else. Here we outline what we consider to be the top 3 most misunderstood facets of TCO that organizations should consider for their next HRMS software selection.

1) HR Software as an Asset vs. HR Software as an Expense

Like it or not, the accounting rules look at HR software deployment options differently. On-premises software is viewed and treated as a capital expenditure; which means this method catapults the software solution into the realm of a one-time, long-term investment. In other words, accounting rules stipulate that on-premise software be seen as an asset investment that will be depreciated over future periods. SaaS deployments on the other hand (per accounting rules) are seen as recurring operating expenses. Because of these capex (capital expenditure) versus opex (operating expense) differences, financial executives can highlight the advantages and disadvantages of the HR software acquisition method under both scenarios, and determine which better supports the company's financial strategy. It should be noted though that usage and utility of the solution will determine Return-on-Investment (ROI), not accounting rules.

2) HR Software Cost Visibility

There can be no doubt that the cost of an HR SaaS solution is highly visible. Indeed, the entire software-as-a-service model is set up to be a subscription-based, as-close-to-all-inclusive-as-possible solution. As such, add more employees, grow your business, or in other way alter your usage of the SaaS HR solution and your costs will likely change—both up and down. This tends to be the sticking point with pundits advocating against SaaS (i.e. that costs are tied to your usage of the solution); however, the bottom-line is that (subject to vendor-specific stipulations) the technology has costs that, while potentially high, are predictable and easily seen.

Cost specifics for on-premises HR software solutions on the other hand are far from precise (save for licensing and deployment fees). In large part, this difference can be attributed to the internal costs of IT resources and how difficult it is to precisely gauge the actual IT cost of running a given business application. In order to be able to compare deployment option costs as accurately as possible though, certain specifics must be accounted for in an on-premises HR solution. Namely:

  • Server and other hardware component costs;
  • Physical infrastructure costs (e.g. heating and cooling, electricity, etc.);
  • Software infrastructure costs;
  • Backup, archive, and other redundant system costs;
  • Disaster recovery costs;
  • Platform costs (e.g. annual maintenance costs for databases, operating systems, etc.);
  • Specific software maintenance costs (even if "bundled");
  • HR Software support and help desk costs; and
  • Operational personnel costs

3) HR Software Lifespan

Attacked by both pundits and analysts alike, the argument for on-premise HR software deployment based on "years of usefulness" has largely been destroyed. Indeed, thanks to the changing technology landscape, the HR "system of record" that stood stalwart for decades is now facing unprecedented innovation and change. Whereas on-premise systems were historically deployed and used for years upon years, the pace of change has increased to the point that HR software solutions now have lifespans which are drastically shorter than their predecessors. Many analysts firms now suggest the average HR software life is between four and five years. HR applications could continue to be used after their useful life, however, in reality businesses will find it advantageous to replace their HR systems with newer, less costly systems.

As Gartner research points out, organizations are now increasingly looking for "Systems of Differentiation" and "Systems of Innovation" that can be easily and quickly deployed—and they're favoring flexibility over stability. Organizations must be cognizant of this fact when considering the Total Cost of Ownership (TCO) of a given HR software solution because it greatly impacts the timeframe with which to achieve ROI. After all, what organization is going to shell out the cash necessary to fund an on-premise solution if that solution is only going to be truly useful in the very short term?

Bottom-line for HR Software TCO

Evaluating each deployment alternative will take due diligence, and the ability to completely grasp how each HR software solution will be able to contribute or detract from your organization's strategic goals. In order to fully understand the Total Cost of Ownership of each solution however, you must create a model that looks at all costs (over multiple years), factors in the lifespan of the solution, and convinces your organization's executives to leverage the solution as an enabler—regardless of which deployment model is chosen. End

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On-premises HR software is viewed and treated (per accounting rules) as a capital expense; a distinction which catapults the HRMS software solution into the realm of a one-time, long-term investment."


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