A new study released today by the ADP Research Institute® reveals a gap when it comes to midsized companies’ ability to estimate and understand their business’ true Total Cost of Ownership (TCO) related to managing their workforce. TCO is a measurement that enables an organization to understand what it is actually spending on its employees and the cost of managing them. One of the key findings the study revealed is that it appears midsized businesses tend to underestimate the all-in costs of managing a workforce. The 2014 Total Cost of Ownership Study was conducted by Harris Poll (on ADP’s behalf) and includes insights from over 1,000 U.S. employees working full-time, part-time or self-employed in a midsized company (50 to 999 employees).
The study found that while six in 10 midsized businesses indicate familiarity with the concept of TCO and two-thirds believe it is important, nearly three-quarters are not able to calculate TCO correctly. TCO is a “Big Number” that consists of five key areas of Human Capital Management (HCM): payroll, employee benefits administration, talent management, human resources administration, and time and labor management. It is the total amount that companies spend on all direct and indirect costs for managing their employees.
In today’s highly competitive world, businesses must continue to find ways to differentiate themselves while keeping a close eye on the bottom line. Companies that miscalculate important metrics such as TCO risk losing opportunities for a competitive advantage. This especially applies to midsized businesses, which represent nearly one-third of private sector U.S. gross domestic product (GDP) and contribute to more than a third of U.S. jobs.
“One of the most important metrics any organization needs to think about is TCO related to managing their employees. Their ‘Big Number’ is much more than salaries and benefits,” said Anish Rajparia, President of Major Account Services at ADP. “Understanding your all-in TCO allows businesses to obtain a realistic picture of what they spend on their employees and what it takes to manage them.”
On average, just over one in three midsized businesses have done a formal cost analysis on any one HCM area to get their “Big Number” in the past year and fewer, one-fifth, have done it for all five pillars of HCM. Additionally on average, only one in six have done any kind of analysis in three years or longer.
However, the study found that there is no one trusted advisor that dominates this space. There are at least a dozen or more credible sources for assistance in analyzing TCO costs within any one of the HCM functions. Typically these include accountants, HR and payroll vendors, banks, HR and benefits consultants, lawyers, and financial advisors.
Regardless of how well midsized companies think they are managing TCO, many of those working in or responsible for at least one pillar still have daily concerns. About two-thirds worry about better ways to lower their company’s overhead costs while more than half think about the total cost of managing their company’s employees.
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