Easier to use, faster to deploy, more frequent upgrades -- at this point, the benefits of cloud-based HCM software are well-known to HR managers. But how do these perks affect an organization's financials, the purview of the CFO? To get the financial decision maker's approval on a project, it's crucial to provide hard evidence of savings.
At an HCM seminar hosted by software vendor Ceridian, speaker Rebecca Wettemann, research vice president at Boston-based consultancy Nucleus Research, gave tips on how HR leaders can sell the business case for a cloud HCM project to an organization's financial decision maker in his language. By quantifying the cloud's benefits, evaluating the credibility of the expected results and getting user buy-in, Wettemann said HR leaders can confidently pitch a positive ROI.
Cloud HCM delivers ROI through tax savings, faster payback
Wettemann started with a statistic from her research: Cloud applications deliver 1.7 times more ROI than their on-premises counterparts. While this figure encompasses various enterprise cloud applications, not just HCM systems, Wettemann stressed its significance. From there, she worked backward and listed how specific attributes of cloud HCM translate into greater ROI.
An obvious point is the lower initial cost of cloud HCM compared to on-premises applications, where investments in servers and consultants' fees can accumulate quickly. But Wettemann said cloud HCM's cost is also lower on an ongoing basis.
"A lot of time with cloud applications, it's about configuration, not customization," she said. "[Since] I'm configuring up front, I also have lower ongoing costs to manage and support the application, because I can make changes with less expensive resources. I don't have to bring consultants in every time I need to change a rule."
Cloud HCM's shorter implementation time -- four to five months on average, according to Wettemann -- serves productivity and keeps morale high by reducing the time workers spend overseeing technology projects on top of performing their regular duties. However, faster deployments also have a material impact on an organization's financial strategy. "For the financial decision maker, faster time to value means faster payback, which means lower risk because I can then afford to reinvest that money somewhere else," she said.
In addition, Wettemann said cloud HCM systems can help companies take advantage of new technologies like social and mobile, and for end users, they offer greater flexibility and accessibility.
Her final point packed a punch: "The cloud is a legal, completely appropriate way to help your company stick it to the Man," she said.
By "playing IRS" with two audience members, Wettemann showed that a company investing in an on-premises server will pay more in taxes than a company investing an equal amount in cloud HCM software, assuming the same corporate tax rate. She explained that this is due to the former investment's classification as a capital expenditure and the latter's as an operational one. "It's something that CFOs are looking at more and more often as a way to manage Capex vs. Opex and take advantage of the tax benefits of using cloud," she said.
Assess expected outcomes to gauge business case credibility
Besides calculating financial benefits, Wettemann said it's also important to figure out how to prioritize technology projects and gauge the attainability of expected returns before presenting a business case. She named two factors that can help HR leaders evaluate a project's ROI and prioritize accordingly: breadth and repeatability.
"'Breadth' is how many people, applications or processes a project will touch," she said. "'Repeatability' is how often people will use the application." The greater the breadth and repeatability, she explained, the greater the potential returns.
After determining which project has the highest potential ROI, Wettemann advised the audience to next evaluate expected outcomes from the CFO's perspective. While so-called "first-order benefits" are typically concrete statements like "we will reduce payroll error and overtime," second-, third- and fourth-order benefits are often murkier. She emphasized that the more removed benefits are from being first-order, the more difficult it will be to present a "credible and believable" business case to the financial decision maker.
According to Wettemann, second-order benefits are similar to first-order, but they include modifiers such as "hope," "expect," or "wish." One rung lower on the ladder, third-order benefits hinge on a project's impact on individual employees, and are therefore highly variable.
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Fourth-order benefits are on the bottom rung. "If you have more than two conjunctions in your sentence, you have a fourth-order benefit: 'I train managers better, so managers are better managers and their employees are more productive and we make more money,'" she said. "That doesn't mean [the benefit] doesn't exist. It just means you're going to have a bigger challenge building a credible business case."
And although HR leaders should allot time and effort to create a strong business case to pitch to the CFO, Wettemann advised the audience not to forget to "pitch down" to employees as well. "We often forget that pitching to the financial decision maker is just one direction -- you really have to pitch in both directions," she said. "Particularly when you're dealing with a broad employee population, you're going to have a lot of variability in adoption. If people won't use the application, you don't get breadth [or] repeatability, and the return on investment is always negative."
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