The Importance of Total Cost of Ownership (TCO): How Companies Can Find Competitive Advantage

When making strategic decisions, organizations need to consider the total cost of their workforces. Referred to as Total Cost of Ownership (TCO), this measure combines actual spending on employees plus the management of those employees. However, many organizations lack a comprehensive understanding of TCO, and how it relates to their workforce.

Total cost of ownership goes beyond salary and benefits

When measuring TCO, focusing solely on the cost of salaries and benefits can be misleading and result in poor strategic and tactical business decisions. However, many companies continue to make this mistake. Of companies surveyed in ADP’s Total Cost of Ownership (TCO) Awareness study:

  • 58% say they’re familiar with the total cost of managing their workforce
  • 66% say their company spends the right amount managing their workforce
  • BUT Only 27% actually understand all that goes into managing their workforce

Companies with only a limited understanding of TCO risk missing opportunities for competitive advantage. A more comprehensive view of TCO includes costs associated with:

  • managing salaries and benefits
  • talent management and time and attendance
  • the systems and processes to support all of this activity

The financial impact of your most valuable asset: employees

How are top organizations managing their TCO? Many are increasingly thinking of their employees in terms of “human capital,” and carefully managing them like any business asset. Surprisingly, most companies do a poor job of Human Capital Management (HCM) from this perspective, and face the extremely costly challenges of:

  • high employee attrition
  • increased need to recruit replacements
  • inefficient HR systems and processes

But the companies that succeed may enjoy significant benefits: A 2014 study by NelsonHall revealed that North American firms that implement a human capital management strategy are able to reduce their TCO by 26%.

Learn what this means for midsized businesses in ADP’s Total Cost of Ownership Study

In 2014, the ADP Research Institute® (ADPRI) commissioned the Total Cost of Ownership (TCO) Awareness study among midsized businesses (50-999 employees). The study found a false sense of confidence with respect to what companies know about Human Capital Management, its costs, and their own HCM performance. The study also provides insights into the degree to which midsized companies understand and manage their Human Capital Management TCO.

* NelsonHall, Targeting Payroll Outsourcing, May 29, 2014.

Tags: Benefits Administration Talent Management Human Resources