Gauging total cost requires a fully developed sense of strategy and the bottom line. An advisor’s view.
By Erica Volini
While taking a full, end-to-end view of the costs associated with procuring HR services is important, creating that total cost of ownership (TCO) view can also create unforeseen challenges if not managed appropriately. Once an organization goes beyond the traditional direct costs associated with procuring new talent and includes items such as time spent on hiring activities, loss in productivity during the hiring period and the cost of knowledge transfer, TCO can look disproportionately high as compared to other procurements across the organization.
This imbalance can quickly become a barrier for HR to move forward with procuring the talent that is needed. Given the criticality of talent to an organization’s business strategy, this barrier can often and quickly become an issue that extends beyond HR and can end up at the C-Suite if not resolved.
That is why TCO cannot stand alone. To truly put the cost of procuring talent in the applicable context, it is of equal importance to understand the value received as well. This “ROI view” is often a missing piece of the HR services procurement process. To create this view requires an understanding of the overall talent strategy and an in-depth look at how talent directly contributes to the organization’s bottom line.
When working to determine ROI for a HR services procurement, there are several critical factors to consider:
• Understand the role that needs to be filled and how it links to the organization’s business strategy—both in the short-term and long-term.
• Identify and document the productivity impacts of not filling the role now (time boxing the requirements when the hire is needed).
• Quantify the critical skills gained and how those can be embedded into the organization’s knowledge base in the long term.
Beyond helping to calculate ROI, understanding these factors can also help to effectively quantify TCO upfront in the process. The upfront visibility to this cost statistic could help to modify the overall strategy or evaluate staffing alternatives before procurement goes too far down the path. While procurement can certainly assist in identifying the factors that need to be considered in calculating TCO, it is typically up to the HR organization to provide the details behind those factors.
The table here highlights some of the questions which are essential to quantifying the critical TCO factors.
The answers to each of these questions should be a direct input into the procurement strategy and can serve as a baseline for measuring effectiveness of the overall procurement process and the business case for the talent need.
Determining TCO and the associated ROI from a HR services procurement requires not only the right inputs, but also the appropriate level of partnership between HR and procurement. It is up to both parties to come together and understand the full equation—the TCO, so there is a perspective on the end-to-end cost, and the ROI, so that there is justified value on the other end. It is when this end-to-end view is created that the desired outcome of getting the required talent at the right cost is achieved.