A common question every person trying to purchase new technology in their organization gets asked is, “Where is the business case?” To answer this question or to prepare the business case, you will need to know a few things.
In this article, I’m going to talk about the two important aspects of financial analysis of the technology purchase decision path – costs and financial benefits.
In my years of experience implementing various technologies, including HR technologies, a common question that I get asked over and over again is, “What will it really cost?”. This is a very valid question.
So to put the Total Cost of Ownership (commonly referred to as “TCO”) in perspective, below is a breakdown of costs that are applicable to most technology purchases.
Legal And Procurement Cost
This may come as a surprise, but if you intend to purchase technology and do not have an internal procurement and legal department to support the process, you may need to spend money on getting legal and procurement help.
Although most vendors will have standard terms and conditions that you can choose to sign-up to, you may want to read these and negotiate them to favor your organization. But, if you’re happy to not delve into detail, be prepared to agree to the vendor’s terms and conditions.
This is the most common and well-known category of cost. If you want to purchase technology or the rights to use it, you have to pay a fee for it. Usually, this is an annual fee charged for every user, especially if you’re buying cloud software.
It is important to note that some vendors will also charge variable fees depending on the type of user. For example, if you’re purchasing end-user read-only type licenses, they might be cheaper than super administrator licenses.
Another important point to note is that vendors may give you a discounted price if you sign up for a 3 to 5 (or more) year term. It’s like a mobile phone plan, if you purchase a no-contract or pay as you go type plan, you will get charged a higher fee than if you sign up to a contract.
Third-Party Software Cost
If the software you intend to purchase requires “plugins” or additional third-party tools, you will need to pay a fee for that too. A great example of third-party software is job posting aggregators. When you purchase recruitment software, you may require another third-party tool to post your job advertisements to multiple sites at the same time.
Another example is you may want to integrate your new software with an existing internal system. To transport that data between the systems and perhaps do some calculations or format changes, you may need an integration tool, which is an additional fee over and above standard software.
Unlike the purchase of apps from iTunes or the Google Play Store, most office software (even cloud software) requires some amount of configuration. It is usually not as easy as turning it on and you’re ready. Although if you are using start-up tools that are a low-cost option, you may not require any configuration.
If your software provider only provides software and expects you to “turn it on yourself” or allows consulting companies to resell their products, you’re likely to be charged a fee for this service. This cost is associated with taking the software platform and designing your company’s required processes related to that functionality, configuring it, testing it, and implementing it.
This cost could comprise of a number of things like functional consultants, technical consultants, the business analysis of processes, project management, testers, data cleansing, standardizing, formatting, and so on. It is also important to note that any third-party software will most likely attract an implementation or set-up fee.
Internal Implementation Cost
Often, companies fail to calculate the cost of internal resources or back-fill resources required to implement the project. It is not uncommon for companies to require subject matter experts, testers, technical resources, project managers, or other roles depending on the size and scale of the project.
Don’t forget to set a budget for these resources especially if you are going to back-fill your internal resources while they work on the project.
I’ve previously mentioned the cost of integration tools, but you have to also factor in the cost of actually designing, configuring/building, testing, and deploying the integration. This is very similar to the costs of implementation, but this time you need IT-type resources.
The implementation partner will usually first conduct a scoping workshop with you to understand what integrations you want to build, what kind of data you want to connect, how (often) you want the integrated systems to talk. Based on this, they will estimate the cost of integration.
It is important to note that if you’re integrating two different vendor products you will likely be paying both vendors for investigating and facilitating the design, build, testing, and deployment of integration.
Support can be categorized into two simple parts:
Immediate post-go-live/warranty, and
Business as Usual (BAU).
Most software providers will include standard BAU support in the license fees. However, it is important to check what support is available to super users, functional users, and technical users immediately post-implementation. Once you start playing with your new toys, you will certainly have a few questions.
The post-go-live support is trickier. Some implementation partners will charge you consulting fees to provide additional TLC for your users immediately after go-live. It is also important to note that where you have integrations, you will need support for all vendor products that are integrated which will increase your operational cost.
In some instances, companies may choose to train someone internally to provide integration support. But upskilling will also cost dollars including updating those skills every time the software goes through an upgrade.
An incidental support cost is an increase in the number of licenses for any helpdesk/ ticketing system required to log support calls/emails internally. This will enable tracking and analysis of the kind of questions or issues experienced by users due to the introduction of change.
Change Management Cost
Hopefully, if you are implementing technology you are aware of the need for change management. This is not just the cost of training your users. Although that is an important part of it, it is not the full cost of change.
The cost of change should include costs of a change resource that is able to assess your organization’s people, process, and technology, and impacts of introducing change on all those areas. Not to mention costs related to identifying and preparing change champions for the role; rewards for adopting change; and of course preparation and delivery of training materials.
A sub-cost that is a very valuable change driver is a business analyst who will assist with identifying and creating/updating process documentation as necessary due to the introduction of technology and any changes to roles.
What Are The Benefits?
Most organizations have (presumably) gone through a journey to determine if purchasing technology is the best way to solve a problem. But hopefully, in most cases, they are analyzing their options to check if this is indeed the right answer. It is very common for investors to want to see an analysis of the options available to solve the business problem.
Business cases traditionally include the costs, benefits, and disadvantages (if any) along with the risks associated with the three business (solution) options – Do Nothing, Do Minimum, Do Something.
The Do Minimum and Do Something options may sometimes be combined into one of the projects that are small. This section is usually followed by an Investment Appraisal of all the options to determine the best solution. As per the language, it is obvious that business cases are geared towards facts and figures.
Given that all solution options require the definition of benefits and disadvantages, this next bit focuses on highlighting the categories of benefits and providing some examples for each.
Most, if not all, organizations tend to have a strategy. It may not always be obvious to the employees (yes that is a whole different problem to discuss in another post!), but there is usually one that is reviewed every year and re-defined every 5 years or as appropriate.
This should always be the first set of benefits or alignment to consider before making any decision. This may not be obvious to a lot of people writing the business case BUT should be the most important factor to consider.
If a company’s strategic direction is to be a technology-driven business, then investing in technology may carry a heavier weight than any other solution. Another great example of a business strategy might be to aim to be a leader in innovation in XYZ industry. To be innovative in the industry, technology usually plays a big role.
However, if your business strategy is aimed at optimization, investing in new technology might not carry the same weight as perhaps re-engineering business processes or investing in upgrades or restructures, and so on. So the bottom line is, knowing the strategy and aligning your solution options to support the strategy is possibly the most important benefit to highlight in the business case.
This is definitely the most awaited section of every business case. A financial benefit is usually simply defined as one that either assists with increasing value or reducing cost, ultimately leading to a healthier balance sheet for the organization.
But determining these benefits can be difficult, especially if the organization has not measured its processes, people, technology, and relative performance in the past. Without having measured all those aspects, it is very difficult to get an accurate assessment of benefits that can translate to an estimated dollar value.
That said, it is possible to make assumptions about all these aspects in order to calculate the dollar savings. This is an acceptable option depending on the risk appetite in the organization and where it is in the lifecycle of solutions.
However, if your organization is not at a crisis, problem-solving point, then getting a measure on people, process, and technology can help in dollar savings calculations as well as understanding the problem better in order to solve it.
Here are some key considerations when measuring each of those components and related dollar saving calculations:
How many people does it take to do XYZ? How many hours does it take Mr. A to-do task XYZ? Depending on the new solution on offer i.e. technology, how does that either:
Reduce the number of people required? or
Reduce the number of hours required to do task XYZ? or
Both of the above, perhaps?
You must be able to indicate how any savings will be used. For example, are you going to reduce the headcount not required, redeploy them, or get them to do additional work that was previously not being achieved due to time constraints?
In some instances, there may be savings associated with replacing a higher-paid (highly-skilled) individual with a lesser-paid individual. However, in this scenario, it is important to account for the replacement recruitment costs and any training-related costs. Another people-related saving could be attributed to removing the need for manual tasks, hence the staff supporting those tasks.
This is usually an area that offers significant opportunities for savings. However, in order to realize those savings, a key pre-requisite is to have documented processes with baseline service performance measures. Without having the baseline, it is difficult to calculate the improvement in the execution of processes as well as improvement in performance, thereby reducing the number of errors or re-work required.
Process improvements can be measured by reducing the number of steps in the process by automation enabled by technology. It is also measured by the reduction in the amount of time spent end-to-end in delivering a particular service to the customer. This will enable an increased amount of transactions processed and help transfer or share process ownership.
This is another area that is usually not measured by HR departments. In some cases, IT departments do measure system performances but not usability performance and certainly not combined with the process. This is truly an area of immense learning and empowerment if measured and utilized.
So what does this look like? Start with measuring basics, how many ‘active’ users exist in the system; what is their completion rate for key tasks or transactions they are expected to perform? How long does it take the different types of users to conduct their tasks especially when you measure the end-to-end time taken including non-system process steps?; and so on.
This is an area of the business case that is usually done well by most organizations. Below are examples that I have seen over the years of technology implementations:
1. Improve Services To Business
While this is a very loosely defined, non-financial benefit, it is one that can be justified when combined with financial benefits. This is all about increased quality and perhaps quantity of services and transactions provided to the business i.e. end-users.
2. Improved HR capability
This is a commonly used benefit. I am not entirely convinced about this one, especially due to the fact that just replacing manual transactions with technology and giving HR more time to be ‘strategic’ does not make HR strategic.
However, what does improve HR’s capability is the process of implementing technology and the skills they (un)learn. Learning or improving project management, negotiation, vendor management, data management, configuration management, planning, testing, and so on are excellent ways to lift HR capability. I would even go as far as saying that these can be associated with cost avoidance benefits in future projects, hence aiding in financial benefits realization.
3. Reduced Errors And Re-work
This is a borderline financial benefit. It reduces the cost of unhappy customers or end-users as well as the re-work, hence the hours required to process transactions. This is again a cost reduction and avoidance benefit and may be valuable for financial benefits realization planning.
4. Improved Data Integrity
This is another borderline financial benefit. By implementing one single source of truth system, it is much easier to improve the quality of data available. But, it is only true when business rules are put in place for what can be entered into the system. When going from multiple systems to one single system or integrated systems, this is a commonly touted benefit.
There are many areas and methods of defining benefits and measuring them. However, ensuring that you consider all the appropriate categories of benefits will yield a stronger business case.
If you think your organization is ready, check these lists of software for some common HR needs: