A recent PricewaterhouseCoopers LLP study sheds some light on the "hidden costs" associated with in-house payroll and HRIS systems. Additionally, the study provides a platform, which financial executives can use to re-evaluate the true worth of their current systems. Two key results from the study follow.

1. Mitigate Risks While Reaping Rewards
Avoid the pitfalls of the "upgrade treadmill"

For most, in-house systems upgrades are a necessary evil. In the case of payroll and HR information systems, keeping current is critical to staying compliant with changing and new federal, state and city regulations. The potential consequences of non-compliance are far more expensive than having the latest capabilities in-house or partnering with a third-party service provider to administer and manage this process.

However, what many financial executives may not realize is that upgrading in-house payroll and HRIS systems is costly. According to the study, today's companies are upgrading their in-house payroll systems and HRIS every 18 months at the average cost of approximately $470,000 per upgrade.

Companies may be mitigating risk through upgrades or new system installation, but what else are they gaining? Has the system created efficiencies? Or, more importantly, is there a cost benefit?

In the case of payroll systems, the study found that over the last five years installed systems did not noticeably reduce the per paycheck processing costs. Regardless of the initial installation date of their systems, the Total Cost of Ownership (TCO) per check was roughly the same for all participant companies.

The study also found that when respondents were asked whether they expected to realize cost savings as a result of their next system upgrade or new installation, only 25 percent said "yes". Most (53 percent) did not expect the payroll system upgrade to change the cost of administering payroll in-house; 15 percent were unsure; and 7 percent expected costs to increase. Finally, a majority of survey respondents did not have a clear expectation of what they would gain from their next upgrade or new installation.

This suggests that the majority of in-house payroll system upgrades and installations are not resulting in a cost reduction or creating efficiencies. Additionally, the study found that a large portion of the functionality that is purchased with a HRIS goes unused, ending up as shelfware -- clearly not adding value.

In spite of these findings, 52 percent of respondent companies plan to upgrade their payroll system or install a new system within the next two years. Organizations need to take a hard look at the benefits they're receiving from a new in-house system or an upgrade. A robust payroll system and HRIS should not only help companies stay compliant, but create time and cost efficiencies, enabling financial executives to focus more on core business functions. Until these benefits are realized, organizations risk spending more and more with diminishing returns by staying on the "upgrade treadmill." Essentially, they are continually forced to upgrade in order to mitigate risk regardless of whether that upgrade contributes any economic benefit.

2. Learn to be Penny Wise and Dollar Smart
The useful life of your in-house systems may be decreasing

For years, financial executives have looked at the economic value of a new system over a 7-10 year period. The belief was that the company would install software once and then amortize the cost over the expected life of the system.

However, once the initial installation costs have been depreciated, the study findings suggest that companies are seriously considering system replacement rather than upgrades. This would imply a useful life of 4-7 years for an in-house system. It also implies that organizations may want to consider changing systems when a comparison is made against upgrade costs for the current system. When organizations are looking at nearly $500,000 per upgrade, those costs on their own are significant enough that many companies opt to start out fresh rather than continue to invest in their existing systems.

Not surprisingly, the study found there was a spike in participants' system implementations in 1999, most likely in preparation for Y2K compliance. However, the fact that 51 percent of participants are using systems installed in the past four years cannot be solely attributed to Y2K. Indeed, 34 percent of systems of study respondents were installed in 2000 or later. Along these same lines, only 15 percent of the participating companies are using systems installed more than 10 years ago. This suggests that companies do not stay with a system for a long period of time, even with the option for upgrades.

The increasing trend towards implementation of new systems also supports the assessment that the useful lifespan of an in-house system is realistically anywhere between 4-7 years, not the 7-10 year life expectancy that some might expect. Therefore, a strong probability exists that if a longer life expectancy is the basis for a company's initial decision, they will most likely not obtain the economic value originally anticipated. Likewise, when comparing the costs of a new in-house system against other alternatives such as outsourcing, a fair comparative time frame is 4-7 years.

Before making a decision about either installing a new system or upgrading a current one, financial executives need to have a realistic estimate of the number of years of system service. Companies may also want to consider partnering with a third-party service provider -- to manage administrative functions such as payroll and HRIS -- before implementing a new system or upgrading an existing one. An outsourcing provider not only helps ensure compliance and provides upgrades, but the vendor assumes many of the costs that are associated with an in-house system and offers best practices along with the most advanced technology.

The PwC study findings were based upon responses from 181 firms, each with more than 1,000 employees. Financial Executives International (FEI) worked with PwC by publicizing the study and encouraging participation by its membership.

GREG SECORD is Vice President, Marketing and Business Development, ADP National Account Services. He can be reached at Greg_Secord@adp.com. 

FEI's flagship publication, Financial Executive magazine, has won another award -- an Eastern Regional gold (first place) award from the American Society of Business Press Editors (ASBPE) in their annual competition. FE won in the editorial division for its March 2002 special section on "Best Practices." This is the fourth juried award FE has won in the past two years. The award was presented in Boston on Monday, June 9.