{"id":553,"date":"2006-08-15T00:05:07","date_gmt":"2006-08-15T08:05:07","guid":{"rendered":"https:\/\/systematichr.com\/?p=553"},"modified":"2006-08-15T17:28:55","modified_gmt":"2006-08-16T01:28:55","slug":"tco-in-the-context-of-risk","status":"publish","type":"post","link":"https:\/\/systematichr.com\/?p=553","title":{"rendered":"TCO in the Context of Risk"},"content":{"rendered":"

Many regular readers of SystematicHR know that I conducted a Total Cost of Ownership study to determine the cost of benefits administration. The results were released<\/a> last December. Double Dubs commented on it here<\/a>, and it is how I originally came to find his great blog.<\/p>\n

Generally, TCO is a means at getting at hidden costs. It is a way to determine the full and total cost of manufacturing, maintaining, administering, etc. a widget or function. Unfortunately, there is something TCO can\u2019t do: measure and calculate risk or factor in quality.<\/p>\n

The TCO studies I have conducted demonstrate that within the study groups, there is considerable variance in the bottom line cost for administration. In the case of the benefits administration and payroll studies I conducted, cost variance is consistently greater among the in-house administration group.<\/p>\n

I would contend that the reason for this is that quality and service level is much more likely to differ widely among companies administering in-house. When a function is outsourced, the outsource provider will generally offer the same level of service and quality to all clients. Cost variance among the outsourced group comes as a result of the combination of the costs associated with the retained organization and the deal that a client cut with the outsourcer during contracting.<\/p>\n

What does this mean, then, for a company that benchmarks costs against a peer group of companies who insource, and finds they are an outlier in that its costs are TOO LOW<\/strong><\/em>? Anecdotally, when I have seen this exact situation, I find that there comes a point in which cost containment and reduction clearly increases the risks associated with administration. We will more likely see fines or penalties related to non-compliance or, in the case of benefits administration, see errors in claims payments due to eligibility problems.<\/p>\n

I wonder if the line managers<\/a> that try to understate cost ever thought about how costs that are too low might be interpreted.<\/p>\n

As companies evaluate their sourcing options for payroll, HR and benefits, this should be carefully considered. A financial business case that does not consider risk mitigation is not a complete business case. Some would counter that risk mitigation is a non-financial benefit of outsourcing. I believe it is integral to the financial case.<\/p>\n

To begin, one can add up the total cost of error experienced over the past 3-5 years. How much in penalties has been paid for tax reporting errors, for example? In an in-house versus outsourced business case, how could assumptions be made that future in-house administration would experience greater quality so as to avoid future penalties?<\/p>\n

Ultimately, companies will behave much as individuals do. Some will be willing to take on more risk than others. The risk of speeding is a speeding ticket and financial loss. Certainly, I wouldn\u2019t expect continued speeding to cost me less in the future, but I will consider it when determining how fast I drive. The past experience of getting caught will impact the likelihood of speeding in the future. Get enough speeding tickets, and eventually I will outsource the driving (talk to David Letterman about that).<\/p>\n

If I run afoul of the IRS often enough for a big enough price, eventually I will outsource payroll. Small business owners probably know that lesson better than anyone else. They also are probably more risk adverse as life savings are tied up in the business.<\/p>\n

Next week I will write more specifically about measuring risk related to group benefit plans and techniques on evidence based cost avoidance.<\/p>\n

<\/font><\/font><\/font><\/font><\/font><\/font>About the author \u2013 Donald Glade is President and Founder of Sourcing Analytics, Inc. <\/font><\/a>, an independent consulting firm specializing in helping companies optimize their HR<\/acronym> \/ benefits \/ payroll service partnerships through relationship management, financial analysis, and process improvement.<\/font><\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

Many regular readers of SystematicHR know that I conducted a Total Cost of Ownership study to determine the cost of benefits administration. The results were released last December. Double Dubs commented on it here, and it is how I originally…<\/p>\n","protected":false},"author":5,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_coblocks_attr":"","_coblocks_dimensions":"","_coblocks_responsive_height":"","_coblocks_accordion_ie_support":"","footnotes":""},"categories":[24,33,31,11,35,3],"tags":[],"class_list":["post-553","post","type-post","status-publish","format-standard","hentry","category-benefits-management","category-finance","category-outsourcing","category-service-delivery","category-tco","category-vendors"],"_links":{"self":[{"href":"https:\/\/systematichr.com\/index.php?rest_route=\/wp\/v2\/posts\/553","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/systematichr.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/systematichr.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/systematichr.com\/index.php?rest_route=\/wp\/v2\/users\/5"}],"replies":[{"embeddable":true,"href":"https:\/\/systematichr.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=553"}],"version-history":[{"count":0,"href":"https:\/\/systematichr.com\/index.php?rest_route=\/wp\/v2\/posts\/553\/revisions"}],"wp:attachment":[{"href":"https:\/\/systematichr.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=553"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/systematichr.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=553"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/systematichr.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=553"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}