Justifying the Cost of a New HRIS or HCMS

Justifying the Cost of a New HRIS or HCMSHuman resource professionals generally agree on the value, even necessity, of HR automation. But many still process data manually or express dissatisfaction with whatever system they use. Why do we have this contradiction? In many cases, it’s because HR professionals have not been as effective as their counterparts in accounting, marketing, manufacturing, and other sectors in justifying their human resource software investment to corporate management.

The Business Case for HRIS Investment

Justifying investment in a new HR system requires HR professionals to address management’s concerns about ROI (return on investment). The problem is that it can be difficult to demonstrate direct ROI for human resources dollars. It takes careful analysis that details and quantifies the costs and then outlines the hard dollar savings that would be possible by implementing a new HRIS to streamline HR duties and leverage relevant data. 

If the new 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 costs less than maintaining the status quo, then justifying the investment to upper management becomes an easier task.

Let’s look at some ways to make that case effectively.

Predictable Business Improvements

Employee pay and benefits usually account for 30% to 50% of a company’s total expenses. For some professional service firms, that percentage can go even higher. These costs usually comprise a company’s largest single annual expense. 

Any improved control over these expenditures should have a significant effect on the company’s financial performance. Here are a few examples of how an HRIS can help companies reduce costs:

  • Analytics and Testing—When considering new compensation policies or benefits, the system provides hard data to support a decision.

Example: If you want to implement a new merit-increase policy, any different plans could be tested through the HR system. The system provides the data and forecasting needed to choose a policy that would stay within the operating budget.

  • Improved Processes and Productivity—Streamlining processes can save money by reducing the time needed to file necessary documents and institute cost-saving changes.

Example: 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.

  • Waste Elimination—HR is uniquely positioned to identify where money can be saved with small changes to current withholdings or deductions.

Example: After installing a new HR system, one large company identified under-withheld benefit costs that resulted in them paying for the system with the change in deductions alone. 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.

  • Improved Job Satisfaction—Performance management tools enhance relationships with employees and remind managers about opportunities for interaction and mentoring.

Example: With automated employee information, the system reminds managers of important HR events like employee performance reviews, salary reviews, goal tracking, service anniversaries, and birthdays. Some systems also include communication tools, mentoring assistance, and social connections.

  • Reduced Turnover—Losing a valued employee is a significant expense because of recruiting costs, training costs, and lost productivity. HR can reduce employee turnover by improving employee relationships and company culture.

Example: Recruiting costs alone average $4,200, exclusive of paid search fees. Intentional HR activities can keep employees satisfied longer and reduce the need for continual recruiting for key roles. 

Does HR affect company revenue?

Human Resource has historically been considered a non-revenue generating necessary expense to a company. But there’s another side to the story. Keeping employees happy and productive does have a direct effect on the company’s top line performance.

Think of your company like a pyramid:

Revenue Contributors

The red section 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 keeps operating. The green section represents company management. Their job is to determine the direction of the company—to decide where the pyramid is headed. The middle gold section represents the departments directly responsible for generating revenue—sales, marketing, attorneys, customer service, etc.. These departments touch customers and produce dollars. Keeping this gold area happy and productive is the responsibility of HR—and it has a direct effect on the company’s top line performance. 

For instance, think about the amount of revenue that is lost for each day a sales representative is not selling. If a sales rep has a quota of $2,000,000, then each non-productive day costs the company $7,692. While this may not play out in exact numbers for one sales rep, it is true across the entire sales force over time. So if it takes an extra 2 weeks to hire and onboard a sales person, that delay would cost the company $76,923.  You can further refine this analysis by taking the number of revenue producers and multiplying the turnover percentage by the group size. Then, 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) X (Daily Cost Per Employee) = Current Cost 

Once you know your daily cost per employee, you can use that number to project how much you could save by decreasing turnover, time to fill positions, and onboarding processes.

The savings formulas will vary widely from company to company, but the analysis itself is an important way to show potential to impact top line revenue. This is often overlooked in 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 is 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 you reduce workload and improve information delivery.

Calculating the Value of New HCM Software

There are numerous verticals you could analyze to demonstrate the value of HR, but we’ve put together a few examples to show you how you can show cost savings

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 your 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. 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 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.
  • 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.)
  • 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.
  • 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.

(# 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.


A 300-person 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 work 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 2016 was $4,129. 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 applicant tracking system (ATS) allows you to keep all resumes that are mailed in, emailed, 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. The ATS 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 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 would result 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: 

Cost Justification Table

Our sample company saved a whopping $62,004 in expenses during its first year of systems deployment.

Your numbers may differ, but the bottom line is that HR software isn’t just about HR. It’s about making the company as a whole more productive, identifying and eliminating areas of waste, and giving employees the tools and motivation they need to perform better on the job.

A holistic approach to HR functions 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 

And that’s the business case for a new HCMS.