Over the past two to three decades, I’ve had the privilege of working with organizations across various industries, helping them navigate the complexities of HR technology. One common gap I frequently encounter is the underestimation of the Total Cost of Ownership (TCO) when it comes to HR tech solutions. Too often, HR professionals and business leaders focus on easily visible costs like per-employee-per-month (PEPM) pricing or annual subscription fees. These numbers are simple to compare, offering a clear snapshot of the short-term expenses.
However, what often gets overlooked are the hidden costs—those that, if ignored, can drastically affect the long-term return on investment (ROI). Focusing solely on upfront costs can prevent businesses from seeing the full picture.
In this blog, I’ll break down the key factors that contribute to the TCO of HR technology and share insights on how to make smarter, more cost-effective decisions when investing in these solutions. TCO offers a holistic view that goes beyond basic fees, giving you a comprehensive understanding of the true cost of owning, implementing, and maintaining your HR tech over its lifecycle.
Breaking Down Total Cost of Ownership (TCO)
TCO includes the annual subscription costs, of course but a lot more.
- Annual Subscription Costs (e.g., PEPM pricing)
- One-time Implementation Costs
- Ongoing Support and Maintenance Costs
- Opportunity Costs (e.g., software breakdowns, delays in adoption, HR productivity loss)
Let’s dive into each of these components to see how they contribute to the TCO of your HR tech.
1. Annual Subscription Costs: The Visible Expense
PEPM pricing is the most visible part of your HR tech investment. It gives you a clear cost per employee per month (or year), based on how many employees will use the system.
For example, if you’re paying $10 PEPM and have 500 employees, the annual cost would be:
10 (PEPM)×500 (employees)×12 (months)=60,000 (annual cost)
While PEPM pricing is a predictable, recurring cost, it’s just the tip of the iceberg. Many buyers stop at this point when evaluating pricing, but this is a mistake.
Your HR tool will have additional, less visible costs too.
2. One-time Implementation Cost: Getting Started
Most HR tech solutions require a one-time implementation cost, which can vary depending on the complexity of the system and your organization’s size.
This might include:
- System configuration to suit your HR processes and workflows
- Data migration from legacy systems to your new HR tool
- Integration costs to ensure your HR tool works with your payroll, accounting, or other enterprise systems
- Training for HR and IT staff, ensuring smooth user adoption
These are one-time fees and can be substantial.
These costs can often be 20-50% of your first-year costs.
Let’s assume the implementation costs are $40,000 for a mid-sized business. When added to the annual subscription cost, your total first-year cost becomes:
60,000 (annual cost)+40,000 (implementation cost)=100,000 (total first-year cost)
Implementation is critical to getting your HR software up and running efficiently, and inadequate planning or investment at this stage can lead to long-term challenges. For instance, poorly executed implementations often result in delayed rollouts, data errors, or misaligned features, all of which will inflate your long-term TCO.
3. Ongoing Support and Maintenance Costs: Staying Functional
Once your HR software is implemented, you’ll need ongoing support and maintenance. Some HR tech vendors include these services in their PEPM pricing, while others charge separately.
Key ongoing costs include:
- Technical support: Resolving system bugs, troubleshooting, and addressing user issues
- System updates and upgrades: Ensuring your HR tool stays up-to-date with new features, regulatory changes, and security patches
- Customization and new integrations: Over time, your HR tech needs may evolve, requiring new features or integrations.
These ongoing costs can range between 10-20% of the annual subscription fee, depending on the vendor.
Continuing with the $60,000 annual subscription cost from earlier, let’s assume ongoing support costs are 15% or $9,000 per year.
If you’re planning to use the system for 5 years, your support costs will add up, bringing your long-term support cost to:
9,000 (annual support cost)×5 (years)=$45,000.
Failing to consider these ongoing costs could lead to unpleasant surprises down the line, as your HR department may have to scramble for budget or work around system limitations due to a lack of timely updates or support.
4. Opportunity Costs: The Hidden Expenses
Opportunity costs are often overlooked when calculating TCO but are just as real as direct expenses. These costs arise from lost opportunities, delayed productivity, or disruptions in your HR processes.
Here are some examples:
- Software Breakdowns
If your HR software suffers from unexpected downtime or technical issues, your HR team can’t perform critical tasks like payroll processing, employee onboarding, or benefits administration. Every hour of downtime has a cost—both in lost productivity and in reputational damage.
- Delays in Implementation or Adoption
If your system takes longer than expected to implement or your team struggles to adopt the new software, productivity will suffer. These delays may also increase the burden on your IT department and require additional training, increasing costs.
- Manual Workarounds
If your HR tech lacks certain analytics features or reporting capabilities, your HR team might resort to manual workarounds or use separate systems to manage these tasks. This inefficiency not only wastes time but also introduces the risk of errors, ultimately increasing the burden on your HR department.
Let’s assume that opportunity costs (e.g., downtime, training, and inefficiencies) amount to 10% of your annual subscription fees. Over five years, this could add up to:
60,000 (annual cost)×10%×5 (years)=30,000
Calculating Your True TCO
Now that we’ve explored the various components of TCO, let’s calculate the total cost for a 5-year ownership period:
- Annual Subscription (5 years): $300,000
- One-Time Implementation: $40,000
- Ongoing Support (5 years): $45,000
- Opportunity Costs (5 years): $30,000
Total Cost of Ownership (TCO) = $300,000 + $40,000 + $45,000 + $30,000 = $415,000
In Short: Why Should the Total Cost of Ownership Guide Your HR Tech Decisions?
When choosing an HR technology, it’s essential to consider the long-term picture.
By calculating TCO, you can make better decisions based on all of the costs involved, not just the upfront or annual subscription fees. A system with lower PEPM costs may seem attractive, but if it comes with high implementation fees, poor support, or frequent disruptions, it could end up costing your business much more in the long run.
Instead, consider the Total Cost of Ownership. You can choose a solution that fits your budget not just today, but for the next 3 to 5 years, ensuring a successful HR technology investment.
Need help on this front? Ready to optimize the total cost of ownership for your HR tech?
At Nuest Consulting, we specialize in helping businesses maximize ROI by identifying hidden costs and streamlining their HR technology investments. Schedule a strategy call today to ensure you’re getting the most value from your HR systems.
