Metrics for justifying the cost of automation

Article Summary - This article provided by Perfect Software, provides an outstanding resource for anyone who is looking to cost justify an upgrade or purchase of a new HRIS application.

Increase Company Profits through Better HR Management

With profits and stock prices under pressure from a slowing economy, many companies are searching for ways to deliver better results to Wall Street. In an effort to increase earnings, we suggest the opportunity that management look more closely at streamlining employee and benefit expenditures.

Human Resource Professionals generally agree on the value, even necessity, of HR automation. But most HR professionals, either process data manually or express dissatisfaction with whatever automation they use. Why do we have this contradiction? From our, over 20 years of, HR experience we have found that HR professionals have not been as effective as their counterparts in accounting, marketing, manufacturing, etc. in justifying their human resource software investment to corporate management.

The HRIS Investment

Justifying the investment in a new HR system requires HR professionals to address management’s concerns on issues such as ROI (Return on Investment). As former HR practitioners ourselves, we at PerfectSoftware, know how difficult it is to show ROI for human resources dollars.  We, at PerfectSoftware, work with our clients in assisting to develop a payback analysis to present the value of our system to upper management. Our analysis details and quantifies” the cost of doing nothing” and then outlines the hard dollar savings that would be possible by implementing a modern HRIS like hrWindows to streamline HR duties. 

Basically, if our system costs more than maintaining the status quo then there will be problems selling the solution to management. If on the other hand, an investment in PerfectHR is LESS than maintaining the status quo, then justifying the investment to upper management becomes an easier task..

Predictable Business Improvements

Employee pay and benefits usually account for 30% to 50% of a company’s total expenses and for some professional service firms can go higher. These costs are frequently its largest single annual expense. Any improved control over these expenditures should have a significant effect on the company’s financial performance. For example, if a HR professional was shopping for a new merit-increase policy, many different plans could be tested through the HR system, providing the forecasting needed to choose a policy that would stay within the operating budget.

The HR department of a national hotel chain used its HR system to show how the company could save up to $110,000 per year in excess premiums by notifying its insurance carrier about employee terminations more quickly and accurately. The HR system was extremely valuable because it alone cut two to three weeks off the previous reporting time.

At one of our larger clients, after installing the PerfectHR product, they were able to identify under withheld benefit costs that resulted in them paying for the system with the change in deductions alone. 

Still another client landed a $5,000,000 contract because they were able to produce EEO reports to satisfy government requirements for a sub contractor and do it in two days.

Another by-product of a good HR system is the information that can be used to improve a work force’s overall job satisfaction. With automated employee information, managers are quickly reminded of important HR events that help improve employee morale (e.g., employee performance reviews, salary reviews, service anniversaries and birthdays).

Other employee-relations issues are not solved as easily, but a HR system can make noticeable improvements. Losing a valued employee is a significant expense because of recruiting costs, training costs, and lost productivity. Particularly in light of the current labor market and the difficulties associated with finding talented employees. Recruiting costs alone average $4,200, exclusive of paid search fees. Reducing turnover is therefore a quantifiable cost savings that should be calculated into the cost justification analysis and contribute to management’s acceptance of your proposal to purchase HR software.

Does HR affect company revenue?

While on the surface one would say no to this question. Human Resource has always been considered non-revenue generating necessary expense to a company. We think differently at PerfectSoftware. Every company operates basically the same and can best be described as a pyramid.

The best way to describe this pyramid is the lower level or red represents all of the support functions of an organization. This would include accounting, human resources, maintenance of the building, IT and every other department or person that makes sure a company has phones, computers etc. The green section represents company management and their job is generally to navigate the pyramid that is to decide where the pyramid is headed. The second level or gold section is a key part and represents the departments that make revenue happen. These departments normally touch customers and produce dollars. These departments are sales, customer support, attorneys, or any person that can influence revenue. It is important to note that keeping this gold area happy and productive has a direct effect on the company’s top line performance. For instance if a company has any reasonable size sales force one can think about the amount of revenue that is lost for each day a sales representative is not selling or for a law firm how much is lost for each day an attorney or associate is not billing. Going back to the sales example if a sales rep has a quota of $2,000,000 then theoretically each non-productive day costs the company $7,692. While this may not be true for one sales rep it is true across all sales people over time. So if it takes an extra 2 weeks to hire and bring a sales person into the organization, which would cost the company $76,923.  You can further refine this analysis by taking the number of revenue producers such as sales attorneys etc. Multiply the turnover percentage times the group size, figure their daily revenue production and you will have a starting point for calculating potential savings for turnover, speed to hire, and speed to absorb, train and put someone in the gold line. 


_______ (Number of revenue producers) X total annual production =  ________ total annual dollars/260 days = daily cost per employee
Number of days to replace * result from above = current cost
Current cost * potential percent savings


The savings formulas will vary widely from company to company but this is an important analysis as there is a potential to impact top line revenue. This is often overlooked in most cost justification. 

If two companies are in the same business the difference in their performance will be how successful either one is at managing the gold section of the pyramid. This will eventually determine how large the pyramid is versus the competition.

Reduce the Need for Additional Administrative Staff

HR departments rarely if ever reduce their staff size after implementing a HR system. The administrative staff that was previously responsible for recording and tracking paper-based employee data will instead record the same data in the HR system and produce reports automatically. Functional experts, including compensation, benefits, employment and health and safety managers, must still determine the content and administration of the HR system. So, where are the savings?

Most HR system related staff savings result from curtailed growth in the staff’s size; each member of the staff becomes more productive. Areas of performance that were either neglected, or simply accepted, because of a lack of time and analytical capabilities, are now looked at more closely for savings and improvements. Although more responsibilities are being thrust upon HR (largely because of increased regulatory compliance and corporate restructuring), increasing administrative headcount alone cannot accommodate the increased amount and complexity of human resource work. Only through careful process reengineering and automation can one expect to help reduce workload and improve information delivery.

Where do we begin? The following is provided as a strategy that you might follow in order to calculate the value to your company of purchasing HR software.

Better Risk Management

In today’s legal climate, a company must take every possible measure to pro-actively manage its liability exposure and comply with the constantly changing landscape of government regulation.
COBRA, Employees who do not receive a COBRA notice on time may be paid up to $100 a day from the date of failure to comply. What would be the potential financial liability to you company if one employee per quarter, or 5% of separating employees, failed to receive their COBRA notification within seven days of the date of their separation?
PROOF OF CITIZENSHIP, For each employee for whom an I-9 immigration form is not completed properly, employers can face up to $1000 in civil penalties.
OSHA, In 1994, OSHA issued 3,941 citations to companies for failure to maintain an OSHA Log. The financial penalty for that infraction, first offense, is $7,000. Are you currently in compliance or are you in jeopardy of having to pay a $7000 fine?
WORKERS COMPENSATION, Workers’ compensation costs have grown from $20 billion in 1980 to $70 billion in 1992. How much did your company spend on lost time due to injuries? Where did the injury occur? What department? What work was being performed? Was the employee properly trained? If you had the capability to analyze lost time due to injury, could you reduce that expense? If so, by how much: 5%, 10%? What would that be worth to your company?

HR software allows you to easily maintain and report on all of the information necessary to manage these costs. Workers’ Compensation, I-9 Status and OSHA information are a few of the details that HR Software keeps for you. One of the most important features of an HR system is that it keeps a complete history of all your employee data, giving you the ability to analyze your data on the basis of any previous time period, the current period or a particular point in time. Many other HR systems write over old data whenever a change is made. You have the ability to conduct analysis with reports such as EEO Work Force Analysis, Veterans Employment Report (VETS 100), OSHA Accident Profile (OSHA 101, OSHA 200) and the Workers’ Compensation Claim Report. HR Software allows you to stay on top of these issues and plan programs to minimize any disruptive effect on your company’s performance.

Reduce Your Benefit Expenditures

Total health benefit costs increased an average of 13.9% between 2002 and 2003. Depending on the type of provider and election it can cost between $3,500 for a single employee up to $9,000 for a family per year. In an effort to control these expenses companies have tried implementing flexible benefits plans, increasing deductibles, and offering HMOs and PPOs as alternatives to their employees.

Is it possible that your company is being billed monthly for employees who are no longer participating in your benefit plans due to termination? Is this caused because the insurance carrier wasn’t informed of the termination in a timely manner? Maybe not informed at all? What would that be worth to your company if, due to your ability to compare your insurance premium statement against your benefit plan participation report, you were able to identify one employee per month who was no longer employed? 


_______ (Monthly premium cost) X 12 months =  ________ Insurance Premium Savings

Example: $800 X 12 months = $9,600 Insurance Premium Savings


What premium discount would your insurance carrier provide your company if you were able to provide them with benefit participation information via electronic media?  Call them and find out! PerfectHR has the capability to electronically send information to your benefit carrier automatically.

With over 50 standard benefits reports, you can easily keep track of the benefits elected by your workforce and your company’s associated costs. Also, you can conduct what-if modeling to determine the best mix of employer - employee benefit contributions. This feature is extremely valuable when negotiating for renewals at the end of the plan year. Companies can expect a significant reduction in costs when utilizing this analysis. Unfortunately, companies that don’t have this ability will pay higher premiums each and every year.

 Our Sample Company:

A 300-person company that saves only 3% in premiums will save a total of $63,000 each and every year.  Current problems with the managed care providers indicate that premiums will continue to rise sharply in the next several years.

This single area of savings could potentially fund your entire PerfectHR investment!

Also don’t forget that if you are currently manually calculating employee deductions and having someone enter those in payroll, there could be errors in the employee withholding amounts. One company had such a significant discrepancy that it paid for the system in less than 1 year. Good systems will automatically calculate all benefit costs and deductions and without human intervention send this information to the payroll system as necessary.

Another area to consider is open enrollment periods for benefit plans. Depending on how your company processes this information it can take several weeks of administrative time to notify employees, track down their election forms and enter the changes into a system. Again don’t forget about the possible errors in manually calculating the deductions.

Reduce the Cost of Unscheduled Absences

Absenteeism among employees, those who are ill or who take time off for other reasons, costs US business $35 billion to $40 billion a year. A recent study by the Commerce Clearing House Inc. of Chicago reports an increase of 36 to 38 percent in the cost of unscheduled absences in the US workplace. Productivity, customer service and controlling costs are the three areas most affected.

Depending on the employee population, US employers indicated that unscheduled absences cost them between $247 and $534 per worker last year, $400 per worker on average. Using this average, what would this be costing your company annually? 


________ (# Employees) X $400 = __________  $ Value of Lost Time

Example:  200 employees X $ 400 = $ 80,000 Value of Lost Time


If you had the ability to determine who was abusing their sick leave (taking the day before/after their two days off, immediately preceding/following a holiday, etc.) by analyzing attendance patterns, could you reduce this expense to your company? If this is so for your company, by how much could you reduce the cost? Multiply the “Value of Lost Time” above number by 5, 7 or 10% to calculate the savings.


$__________ (Value of Lost Time) X _______%   = ___________ $ Potential Savings

Example: $80,000 X .05 = $4,000 Potential Savings


HR Software tracks all forms of employee time off, including vacation, illness and personal time, as well as ‘incident-based’ time off such as bereavement, jury duty and family leave. With HR Software attendance reports, you can spot trends of abuse such as sick days taken around holidays, and prepare the company for times of short staffing during overlapping employee time off.

Our Sample Company:
Using our 300 person company, the annual costs for unscheduled absenteeism is a whopping $120,000 per year.  If we were to use a savings factor of only 10% results in a bottom line impact of $12,000 per year.

Reduce Report Production Expenditures

The real value of a human resource system is the information that it can produce that allows managers to make informed business decisions and the human resource department to comply with regulatory reporting requirements.

The time savings associated with report production can be estimated through a step-by-step process:

Make a list of all HR reports currently produced manually and the number of times that they are produced annually.
1. Make a list of all HR reports that you would like to produce, but don’t produce now because they are either too time consuming or your existing system is unable to produce them. Also indicate the number of times that you would like these reports produced annually. (Note: You may want to examine HR Software’s Standard Reports to assist you with this exercise.)
2. Estimate the time to produce one report and multiply this estimate by the number of times each report is run annually to yield the total hours required to produce reports in a year.
3. Generate a rough estimate of the hourly cost for the HR employee who creates these reports and multiply this amount by the total hours required to obtain a dollar figure for the cost of that function.


Report Name - (# times produced annually) x (time to produce) x (Avg. hourly wage) = Report Cost

EEO-1 Report - 4 (quarterly) x (4 hours) x $15. = $240.
Telephone Listing -12 (monthly) x .25 (15 minutes) x $15. = $45.


When the cost of the reports generated by HR Software is calculated, and compared to the cost of manual reporting, the potential cost savings can be a compelling argument for automation. There is a worksheet attached to assist in preparing these numbers.

Our sample company:
Our 300-person sample company produces 17 reports per month ranging from 30 minutes per report to upwards of 6 hours for complex analysis. The average was 1 hour and 45 minutes. Using our above formula, that resulted in a cost of $1,785 per month of staff time. The annual projected savings for this company would be $21,420.

Decrease Applicant Search Expenditures

Most companies receive hundreds of job applications each year. It takes many hours of valuable time to review all the resumes you receive, not to mention the fees incurred if an executive search firm is used. With the time it takes to manually review and respond to resumes, your best candidates may find opportunities elsewhere. The Employment Management Association estimates that the average cost to hire a new employee in 1992 was $4207, a 22% increase from the previous year. Given the size of this investment, you need to ensure a recruiting process that consistently helps you acquire the best employees.

Maintaining resume files and searching for the best candidates becomes a quick and easy task with HR Software. The Recruiting Manager module allows you to keep all resumes that are mailed in, faxed, or downloaded from the Internet in electronic file format. You may search these files for words that match the skills important to your company. In electronic format, it is easy to save these resume files for EEO reporting requirements. Recruiting Manager also provides easy organization of all your hiring activities, including applicant activity tracking, interview scheduling, questionnaire processing, standard letters and reports, and the ability to move a new hire directly over to an active employee file, with just a few clicks of the mouse!

Our sample company:
Our sample company had a turnover rate of 20% per year. This results in approximately 60 terminations and 60 new hires per year. Not counting outside recruiting fees, using an average cost of $4,200 per employee, the total cost for an employee replacement is $252,000 per year. Saving a mere 10% of this expense resulted in a $25,200 bottom line impact.

Summary of Savings for Sample Company
Our sample company’s bottom line impact analysis using conservative estimates looked as follows:


Item Annual                                                                    Cost Savings
3% Reduction in Insurance Premiums                                   $36,747
10% Decrease in Unscheduled Absenteeism                          $12,000
17 Reports per month reduction in staff time                         $21,420
10% Savings in employee replacement and termination time    $25,200
5 day pyramid savings using 2 sales reps at $2MM quota          $15,384

Total                                                                              $110,751

This company saved an unbelievable $110,751 in expenses during its first year of systems deployment.


About the Author

Michael Gabriele

Michael Gabriele is President and Chief Executive Officer of PerfectSoftware, and also serves on the company’s Board of Directors. Mr. Gabriele founded the company in 1984, serving as a Human Resource Consultant and distributor of 3rd party Human Resource information systems, including InSci, Personality, and ABRA 2000. His expertise includes the areas of HR process development, needs analysis, 401K administration, and the architectural design of applicant tracking and personnel management systems. PerfectSoftware has exhibited phenomenal sales growth under Mr. Gabriele’s leadership.

Mr. Gabriele’s career spans 20 years in the areas of information technology and Human Resources. He has received numerous awards, including the Integrated Systems and Services Division Award of National CSS.

During his tenure at PerfectSoftware, Mr. Gabriele has successfully changed the way the company does business. After conducting a thorough analysis of the middle market, he recognized the need for an affordable, customizable solution for the middle market, built using the latest technology. Such a system was not then available. He purchased the development rights to the HRIS which was best suited to make this vision a reality. Now, PerfectSoftware provides an affordable, high quality, customizable system which meets the individual needs of each client, in its third true Windows version.

By streamlining business practices as well as revamping customer support and implementation procedures, the company has added over 500 customers, since 1989, as the top quality systems provider for the middle market. Today, Perfect Software's customer retention rate is unmatched in the software industry.

Mr. Gabriele’s vision includes a holistic approach to HR functions within the organization. A comprehensive human resource information system should not only enable an HR executive to take control of powerful tracking, reporting, and analysis, but also: 

·        Affect an organization’s bottom-line

·        Make an enterprise-wide, strategic contribution

·        Impact an organization’s key issues

·        Ensure HR’s value throughout the enterprise

Since founding PerfectSoftware, Mr. Gabriele has gained expertise in 18 unique HR applications, and has been instrumental in the architecture and design of HR, applicant, and 401K administration systems. He has also authored white papers, user guides and technical manuals for these systems.

Prior to forming PerfectSoftware Mr. Gabriele was Vice President of Sales and Marketing for a software subsidiary of Contel. While there, he also held the positions of Northeast Regional Vice President and Vice President of Sales for the Application Software Division.  Prior to joining Contel, he held various sales and management positions for Dun & Bradstreet Computing Services.

Additional Perfect Software Article:      HRIS Planner