True vs. false cost savings

10/05/2011 at 22:39 Leave a comment

When an HR executive is making a business proposal and includes a ROI calculation,  it is important to highlight which cost savings are true (real) and which are – lets call them – false cost savings. A potential cost saving must be realised and the released resources put to better use before it can be considered a real cost saving. Otherwise it is a false saving. Put in another way, a false saving is an unrealized potential cost saving.

Let me give an example. Lets say that HR wants to outsource its payroll processing. An external provider has been identified and an internal audit shows that previously HR spent the equivalent of 1.5 FTE on payrolls.  A true saving would occur if this 1.5 FTE was used to add value (i.e. earn a return above the cost of capital) in another part of the company or if HR laid off 1.5 people . A false saving would instead occur if the resources just ‘disappeared’ into the existing services with no extra value being added.

The first step for HR is to start making business plans, ROI calculations and credible assumptions. However the next step will be to assure that the assumption cover real tangible numbers and not soft and unrealizable numbers. The cost of the payroll provider is real. It requires real cash to pay for this service. If the assumed savings are false and therefore not as high and not tangible it cannot be compared with the cost and the ROI will end up being negative.

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