Total Cost of Ownership Pricewaterhouse Cooper

The hidden reality
of payroll & HR
administration costs

Exploring hidden cost
drivers and characteristics
of cost-effective
organizations

January 2011

Contents
Executive overview 1
Methodology 3
Key ﬁndings & recommended strategies
to reduce administration costs 5
Conclusion 15

Executive overview

Do you know how much your In this white paper, we’ll break down Past studies have focused exclusively
organization is really spending on the different cost drivers of payroll on large organizations (more than
and HR administration and lay out 1,000 employees). For the first time,
payroll and HR administration?
the strategies that are making some the inclusion of mid-size organizations
Chances are you may not be organizations more cost-effective at in our most recent study provides
considering major cost components these functions. additional insight into this issue, and
related to administering these has allowed us to also measure baseline
important functions and may As a general rule, we have found that TCO costs for organizations between
be spending more than you organizations tend to underestimate 100 and 1,000 employees.
the true expense (the “total cost of
think as a result.
ownership,” or TCO) of processing As with previous studies, our current
payroll, administering employee health TCO study analyzed the TCO of
and welfare benefits, and managing key payroll and HR administration
other key HR systems and functions. functions. The new data from this
year’s study, collected from 279
While most organizations consider costs participating organizations, shows
such as a payroll department’s staff that administration of payroll (PR),
or the acquisition costs of a new ERP workforce administration (WA), time &
solution, many fail to recognize certain attendance (TA), and health & welfare
“hidden” costs necessary for operating benefits (H&W) remains expensive for
and integrating these interdependent employers—and it has gotten costlier
processes. Additionally, organizations over the years, despite a number of
often apply separate technology and technological advances designed to
process solutions to these individual diminish costs.
administration functions without
considering how those solutions work
with each other. This fragmentation
drives up administration costs through
task overlap and other inefficiencies.

For nearly a decade, PwC, with
the sponsorship of Automatic Data
Processing (ADP), has studied these
TCO costs and how to mitigate them.

1 The hidden reality of payroll & HR administration costs

Although these functions are expensive, In addition to the above findings,
analysis of data collected in these which are discussed in detail in this
PwC studies has uncovered several white paper, analysis of the data
opportunities for increased cost collected for this study also confirmed
effectiveness. The top cost reduction that two of the key findings of the
strategies, measured by overall earlier TCO white papers continue
TCO, are: to present opportunities for increased
• Outsourcing—organizations cost effectiveness:
managing payroll, workforce • Providing payroll and HR self-service
administration, time & attendance, functionality to employees—this
and health & welfare benefits in- strategy results in a 50% lower TCO
house using premise-based or hosted of workforce administration for large
software solutions spend on average organizations compared with peers
18% more administering these managing the function without
functions than organizations that these features
outsource1 these functions • Integrating time & attendance
• Utilizing a common vendor with payroll—this leads to a cost
or solution—organizations efficiency of 14% over a manual
administering these functions in- approach or an approach that is
house using software solutions from not integrated
multiple vendors spend on average Furthermore, the current study
18% more than those organizations clearly suggests that cost effectiveness
administering them in-house using stems from comprehensive process
a common vendor. Organizations transformation, not just technology
outsourcing multiple functions to a innovations. The required change isn’t
single vendor see even stronger cost always easy, but significant financial
efficiency—on average 32%—versus benefits may await for organizations
organizations using a multiple ready to really embrace and implement
vendor or “best of breed” in-house these changes.
approach 1. The term “outsourcing” in this paper specifically refers to
outsourcing to ADP as this study used only ADP clients to
measure the TCO of organizations outsourcing payroll and
HR functions.

2

Methodology

This primary research study includes PwC also conducted multiple follow- • Time & attendance (TA):
data collected from 279 participating up calls with respondents to verify, The process of collecting, reviewing,
organizations, ranging in size from clean and complete data. In total, PwC submitting and approving time
100 employees to more than 100,000 performed more than 500 phone and reporting data, including employee
employees. This study marks the fourth email follow-ups to clarify completed hours worked, paid time off
installment in a series during which participant data. This approach enabled (vacation, sick, holiday) and
PwC has surveyed more than 600 respondents to provide total costs,
leave balances.
organizations. Previous studies occurred rather than just labor or system costs.
in 2003, 2004, and 2006. • Health & welfare
administration (H&W):
The current study set out to measure the The data The administration of employee
Total Cost of Ownership (TCO) of four PwC defined TCO in a manner H&W benefits and programs
core business functions—payroll (PR), that broke down total cost into its including open enrollment and life
workforce administration (WA), time & component parts. For the purposes event status change maintenance.
attendance (TA) and health & welfare of this study, the four core functions
administration (H&W)—and to analyze are defined briefly, as follows: Collectively, these four components
factors impacting these costs. Because • Payroll (PR): The process of provide a comprehensive measure
this study focused only on TCO, areas collecting and entering data of TCO of payroll and HR
such as quality of administration were administration costs.
related to employee hours worked,
not addressed.
determining taxation, calculating
In addition to measuring the TCO of
gross and net pay, and distributing the four processes, and providing an
PwC conducted this TCO assessment
primarily through use of a confidential compensation. overall TCO, the current study sought to
web-based questionnaire administered • Workforce administration update the original studies conducted
from May to August of 2010. Senior (WA): The maintenance and in 2003, 2004, and 2006, especially in
financial and HR executives (i.e., CFOs, administration of the core HR light of significant market changes in
VPs of HR, VPs of Finance, Directors of the delivery, technology, and scope of
database (often referred to as the
Payroll and Controllers) were invited HR systems since 2003.
Human Resource Information
to participate, and in cases where an
Systems or HRIS) and the activities Respondents were asked to answer
organization had multiple respondents
provide input, we created a single associated with maintaining questions that quantified all one-time
consistent response. Many organizations employee information and various and ongoing costs for the areas of
also participated in phone interviews processing activities such as payroll, PR/WA/TA/H&W administration.
conducted by a PwC representative. health & welfare administration, and Detailed component descriptions were
other HR activities. provided in the survey itself as well as
via personal follow up from PwC where
necessary. PwC contacted participants
directly when data fell outside the
normal range of responses and
normalized data where necessary.


Profile of participants
279 organizations (consisting of 205 organizations that do not outsource these
functions and 74 organizations that outsource to ADP) participated in this study.
120 (43%) are classified as large organizations, with more than 1,000 employees;
159 (57%) are classified as mid-size organizations, with 100–1,000 employees.

Figure 1. Survey participants by organization size

12%

29%
12%

100–300 employees
18%
301–1,000 employees
1,001–2,500 employees
29% 2,501–5,000 employees
5,001 + employees

Note: Percents may differ slightly from other figures in the paper due to rounding.

The larger sample in the 100–1,000 Because of the economies of scale we
space is due to the larger number see in larger organizations (which are
of organizations operating in these discussed within this paper), when we
segments, and the need to augment compare the TCO of organizations that
the work completed in previous studies, outsource to organizations that use
which focused exclusively on large in-house solutions, it was important
organizations. to normalize the results for the effects
of size—in other words, we compared
The term “outsourcing” in this paper the results as if both groups had
specifically refers to outsourcing to organizations of similar size.
ADP as this study used only ADP clients
to measure the TCO of organizations All participating organizations are
This publication has been prepared for general outsourcing payroll and HR functions. U.S.-based companies or subsidiaries or
guidance on matters of interest only, and does The study did not evaluate, and thus business units of non-U.S. companies,
not constitute professional advice. You should
findings cannot be directly applied to, and come from more than 17 industries,
not act upon the information contained in
this publication without obtaining specific ADP’s HR business process outsourcing with the most prevalent industries
professional advice. PricewaterhouseCoopers LLP offerings. PwC makes no representation being manufacturing (15%), healthcare
(PwC) has exercised reasonable professional that the comparative key findings of (13%), and finance, insurance and
care and diligence in the collection, processing, this survey can be generalized to other real estate (10%). Federal and state
and reporting of this information. However,
payroll and HR outsourcing providers. governments were not specifically
data used from third-party sources has not
been independently verified or audited. No addressed in this study. This study,
representation or warranty (express or implied) Organizations surveyed used a wide like previous studies, is focused only
is given as to the accuracy or completeness of range of platforms and solutions, on costs.
the information contained in this publication, including approximately 65 platforms
and, to the extent permitted by law, PwC, its
in payroll alone. Payroll vendors This white paper has been researched
members, employees and agents do not accept
or assume any liability, responsibility or duty represented in the in-house analysis and prepared by PwC. ADP is the
of care for any consequences of reliance on include the market-leading software sponsor of this TCO study.
information contained in this publication. vendors.

4

Key findings & recommended
strategies to reduce
administration costs

Four key findings in connection 1. In-house administration of payroll, 4. Utilizing a common vendor or
with the cost of administering workforce administration, time solution to manage multiple
& attendance, and health & functions, rather than leveraging
payroll and HR in-house surfaced
welfare requires a surprisingly a “best of breed” approach or
during our analysis of the data large commitment of time and maintaining disparate legacy
collected in the study: resources—typically over $1,400 per systems, can deliver tangible
employee per year (PEPY) for large cost efficiencies—organizations
organizations and nearly $2,000 administering these functions using
PEPY for mid-size organizations. software solutions from multiple
• “Hidden costs,” as defined below, vendors spend on average 18%
continue to account for more than more than those organizations
50% of the TCO of administering administering them in-house using
these functions in-house. a common vendor. Organizations
outsourcing multiple functions to a
2. TCO for payroll is actually single vendor see even stronger cost
increasing—contrary to our efficiency—on average 32%—versus
expectation, and despite organizations using a multiple vendor
technological advances, or “best of breed” in-house approach.
administration costs have actually
increased rather than decreased In the remainder of this section, we will
since 2003 as organizations focus on explore each of these findings, and their
technology transformation rather implications for organizations.
than process transformation.

3. Outsourcing continues to deliver
overall TCO advantages—using
in-house payroll, workforce
administration, time & attendance,
and health & welfare solutions
increases TCO by 18% on average.


In-house administration of payroll, workforce administration, time
& attendance, and health & welfare requires a surprisingly large
commitment of time and resources

This study, like PwC’s previous benchmark analyses, showed that many organizations
may be unaware of the true expense of administering the PR, WA, TA and H&W
functions because not all costs are readily visible. Organizations may find that,
upon detailed examination, their actual costs far exceed their expectations, by
up to several hundred percent.

Visibility into the total costs, especially across functions, is low in part because
these related functions are often “owned” by different functional leaders (Finance,
HR, IT). Accordingly, many organizations make decisions about the technology
and sourcing that work best for the individual function without consideration of
the potential synergies across the enterprise.

A complete cost analysis should • Indirect labor costs—Cost of
consider the following types of labor for employees not directly
costs across all four functions: related to the payroll and HR
• System installation costs— departments supporting these
The one-time costs related functions in the field (i.e.,
to the initial acquisition and collecting, approving and
implementation of an organization’s preparing employee hours for
PR, WA, TA, and H&W systems payroll; distributing paychecks;
• System upgrade costs— answering employee questions
The periodic acquisition and about benefits, etc.)—where
implementation costs related to employees are typically spending
upgrading to a more current version only a fraction of their time on
of the PR, WA, TA, and H&W systems these activities

• Direct labor costs—The cost of • Outsourcing costs—The total
labor (salary plus benefits) of the annual costs of any outsourced
direct staff necessary to support the services related to processing of
PR, WA, TA, and H&W functions PR, WA, TA and H&W such as
tax filing, paycheck printing, etc.
• Direct non-labor costs—The
total costs of consultants, vendor
fees and facilities, G&A, and
corporate overhead related to the
PR, WA, TA, and H&W functions
• System maintenance costs—
The IT costs specifically related to
maintaining the current systems

6

When all of these costs are included, large Economies of scale lead to a gradual
organizations (more than 1,000 employees) shift in TCO
spend $1,403 combined PEPY on the four key
functions surveyed and mid-size organizations While we show two segments for organization size
(100–1,000 employees) spend $1,953 PEPY as throughout this study, and the difference in results by
shown in Figure 2. segment can appear quite dramatic, we find that economies
of scale within segments are generally more gradual. In
centralized processes like PR and WA, we find that these
economies occur quite smoothly. In more distributed
Figure 2. Average TCO per employee per processes like TA, however, they are not always as apparent.
year by function for organizations managing
the process in-house Figure 3. In-house payroll TCO per paycheck by
$1,953
organization size

$34

$348

$1,403 $22
$312 $21

$18
$221 $17

$484
$321

$354
100–300 301–1,000 1,001–2,500 2,501–5,000 5,001–15,000
Employees

$809
Note: The trend line depicts the gradual decline of TCO per paycheck as organization size increases.

$507
It is no surprise that large organizations achieve greater
economies of scale, and have lower TCOs per employee.
With the amount of centralized labor required for these
Mid-size Large functions, larger organizations are better able to a) have
organizations organizations an individual staff role support more employees; and b)
develop specialization among staff roles to further drive
Health & Welfare (H&W) Workforce Administration (WA) efficiency. Systems spending results also demonstrate the
Time & Attendance (TA) Payroll (PR) impact of size, as systems costs can be spread over a greater
number of employees.


Hidden costs account for more than Hidden costs drive up the total TCO of these functions beyond
50% of the payroll TCO what conventional wisdom generally suggests. The largest
driver of TCO for PR, for instance, is labor costs, specifically
When evaluating their current or potential future systems, indirect labor costs. The indirect time of employees to
most organizations fail to consider the significant costs perform such tasks as approve and assemble submitted time
beyond the direct labor needed to use the systems and the for processing, distribute paychecks, and maintain the core
cost of the systems themselves. Overlooking these “hidden” PR system represents a substantial cost—nearly $10 per
costs could result in an underestimate of 50% or more as paycheck for both large and mid-size organizations.
shown in Figure 4.
Analogous sets of hidden costs apply to the other processes
Figure 4. Breakdown of TCO by cost type we examined, including H&W, where business managers,
HR professionals, plant managers, supervisors, and others
are involved with activities such as enrollments, life event
changes and plan support.

“Visible” costs
“Seams” costs
49%
When viewed individually, each of the four processes
35% contains unrecognized expense. But there is a bigger picture
here, too, as the inefficient interaction between processes
creates additional costs at the “seams.” The administration
functions covered in this study are interdependent and rely
on one another to work. Seams costs refer to the activities
organizations must undertake to provide integration between
and among various processes, and occur when there is a
need to implement a new interface or manually support
or otherwise maintain the interaction between processes.
51% We have differentiated these “seams” costs from “hidden”
“Hidden” costs
costs because seams costs refer to costs incurred from
65%
operating separate processes and systems within a single,
interdependent business environment—and both have
been captured in TCO.

Mid-size The 2006 PwC study identified these “seams” and quantified
organizations their costs and found that, among the four processes we
have studied, the average organization was spending
Large approximately $100 per employee per year. The current
organizations study, which evaluated PR, WA, TA, and H&W functions
simultaneously, suggested that organizations with seams
experience higher costs—$200 per employee per year or
more—to, among other things, get disparate systems
working together.

8

Figure 5. Average cost of integrating core HR systems

Organizations with software integration “seams” face an increased TCO of $200
per employee per year

Time & Health &
Payroll HRIS
attendance welfare

Denotes integration and data flow required between different HR systems

The TCO for payroll is actually increasing

Most would expect PR TCO to have dropped since 2003, the year of PwC’s
initial benchmark study. A focus on improved technology, new delivery models,
department cutbacks, and other factors should have reduced PR TCO over the
years.

But that has not happened. In fact, the TCO for PR has actually risen a full $1
per paycheck since 2003 for large organizations that use in-house solutions.
The increases are primarily driven by the hidden costs described in the section
above. TCO for mid-size organizations and functions beyond payroll was not
measured in the initial 2003 study, so TCO trending for those segments cannot
be included in this study.

Figure 6. Average TCO per paycheck in 2003 compared to 2010 for
large organizations managing payroll in-house
al
Actu
+6%

Ex
pe M
ct ark
at e
io t $17
n
$16

2003 Study 2010 Study


Additional costs lurk in the mismatch Findings on Software-as-a-Service
of technology and business process delivery models
Because organizations have tight budgets and timeframes, Software-as-a-Service (SaaS) is a prominent delivery
they often implement technology improvements without model that has gained momentum since we published our
taking into account the impact of technology on business initial TCO study in 2003. This deployment model enables
process. Technology alone is viewed by many as the sole organizations to host applications as well as store and manage
solution to cutting costs. However, by implementing or their data on remote, virtual servers, rather than on their
upgrading technology, whether in traditional or new in-house computers (premised-based model). Some software
technology models (such as Software-as-a-Service or SaaS), vendors now offer their solutions exclusively through a SaaS
organizations will likely incur additional, unintended costs— or on-demand model accessed via any Internet connection,
such as manual activities to conform technology to existing while other vendors provide customers a choice of a SaaS or
processes, to accept customization within the organization, or premise-based delivery model.
to link the SaaS technology to existing technology within the
enterprise. This study found that SaaS helps reduce costs for many
organizations—but only to a point. It is clear that while SaaS
It seems self-evident that organizations would seek to can reduce a mid-size organization’s total administration
employ technology solutions that best support their business costs over a premise-based or traditional software model,
processes. But in reality it often does not work this way. organizations outsourcing process functions such as PR
and H&W administration still demonstrate additional cost
Many organizations have not matched their business savings over organizations leveraging a SaaS model. Our
processes with technology and thus cannot take full analysis also showed that the benefits of SaaS models, when
advantage of the applications available to them. The results deployed without the added benefit of process outsourcing,
of the study suggest that many organizations need to focus taper off as organizations get larger and actually provided no
on process redesign when they decide to change software. TCO savings, on average, over on-premise software solutions
Failure to do so drives both the hidden and seams costs for large organizations with more than 1,000 employees.
described above. These findings reinforce the discussion above regarding the
importance of process transformation in conjunction with
technology investment to reduce administration costs.

10

Outsourcing continues to deliver overall TCO advantages—using in-house payroll, workforce
administration, time & attendance, and health & welfare solutions increases combined TCO
by 18% on average

Consistent with the findings of our prior Mid-size organizations that use outsourced solutions demonstrate a lower TCO
studies, the current study shows that across the comprehensive bundle of the four processes—PR/WA/TA/H&W—
outsourcing is a cost-effective way to than organizations that use in-house solutions. Given the extensive bundling
administer these four functions. It is of solutions in this segment of the market, this comprehensive approach is the
more cost effective than the various in- most accurate approach for cost analysis.
house solutions we reviewed. This study
shows that organizations using in-house Figure 7. TCO (PEPY) comparison by method across all four functions
solutions for PR, WA, TA and H&W
spend on average 9% more (for mid-size
organizations 100–1,000 employees) 18% Higher TCO
and 27% more (for large organizations
over 1,000 employees) than those that
use outsourced solutions. Of course,
costs for any individual organization
depend on the specific circumstances
of the functions outsourced and the
$1,634
organization’s needs.
$1,388
In our analysis, organizations that
outsource experience lower direct non-
labor costs, indirect labor costs, and
system maintenance costs (“hidden”
costs). These efficiencies are likely
due to the strong process governance
framework and increased process Organizations Outsourcing Organizations Managing
HR & Payroll HR & Payroll In-House
standardization that is typical in the
outsourcing model.

Even allowing for economies of scale,
where TCO drops as organizations are
better able to spread labor and systems
investments, large organizations that
outsource core HR processes see an
additional cost benefit when compared
to in-house organizations.


Utilizing a common vendor or solution to manage multiple functions delivers tangible cost efficiencies

For many years, the HR community Figure 8. TCO (PEPY) comparison by platform type for payroll,
has suspected that integrated PR, workforce administration, and time & attendance
WA, TA and H&W functions cost less
to administer than separate point
solutions. The survey empirically 18% Higher TCO
confirmed that conventional wisdom. 32% Higher TCO

This applies both to in-house solutions,
and, to an even stronger degree, to
organizations that outsource multiple
functions.
$1,202
Unfortunately, for most organizations, $910
$1,020
common platforms remain a missed
cost-savings opportunity. In fact, our
analysis of the common platform
approach could not look across all
processes because there were simply
not enough organizations with a
common platform for all four processes. Outsourcing Solution—Common Platform
However, sufficient data is available In-House Solution—Common Platform
to evaluate the impact of a common In-House Solution—Multiple Platforms
platform for three of the processes (PR,
WA, and TA) as shown in Figure 8.

Additional cost efficiency from using a common
platform provided by an outsourcer
As shown above, organizations using multiple in-house platforms
experience a TCO that is 18% higher than organizations using a common
in-house solution and 32% higher than organizations outsourcing these
three functions to a single vendor.

In large organizations, the impact was even more dramatic. In-house users
on a common platform experience a 29% higher TCO compared to peers
outsourcing the same functions to a single vendor.

12

Looking down the road Figure 9. The lack of systems to manage key HR functions
The need for seamless integration of
payroll and HR administration functions
Succession
will become even more acute in the Planning
coming years. As organizations add
additional solutions to their mix for Compensation
managing automated payroll and HR Management

administration—such as recruiting, Performance
talent management, etc.—the lack of Management
a common platform, and the resulting
cost inefﬁciencies, is likely to increase. Learning Management
System (LMS)

Of the organizations participating Employee Self-Service
in this study, more than half had no
automated solution for performance Applicant Tracking/
management, compensation Recruitment
management, or learning management.
In addition, more than eight in 10 had Benefits Tracking/
Data Maintenance
no automated solution for succession
planning. Core HRIS

0% 20% 40% 60% 80% 100%

Percent of organizations without a system or solution to manage the HR function listed
Large organizations Mid-size organizations


If organizations
continue down the
path of pursuing best
of breed strategies,
they will continue to
invest in a philosophy
that produces hidden
and seams costs.

14

Conclusion

Whatever solution an organization chooses, organizational design and process
improvements—in conjunction with straight technology investments—will better
address the hidden costs of HR management. Additionally, a comprehensive
evaluation of the integration needs across payroll, workforce administration, time
& attendance, and health & welfare beneﬁts administration rather than individual
process assessments, will allow organizations to identify interdependencies that
can result in reduced costs for the overall solution. Better understanding of the
sources and size of the hidden and seams costs in an organization, and addressing
those process and technology options, will allow organizations to realize their
objective of reducing TCO.


This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information
contained in this publication without obtaining specific professional advice. PricewaterhouseCoopers LLP (PwC) has exercised reasonable professional care and diligence in
the collection, processing, and reporting of this information. However, data used from third-party sources has not been independently verified or audited. No representation
or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PwC, its
members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of reliance on information contained in this
publication.

© 2011 PwC. All rights reserved. “PwC” and “PwC US” refer to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a member firm of
PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. This document is for general information purposes only, and should not
be used as a substitute for consultation with professional advisors. MW-11-0206

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