Any strategic conversation about value creation would be remiss if it did not include some considerations for the dreaded F-word… Finances. After all, there is a cost in pursuing value creation that even not-for-profit organisations must face.

Osterwalder’s Business Model Canvas saves the best for last by addressing the financial aspects of strategy formulation after everything else. This ensures focus in two forms. Firstly, creative thinking and discussion in the prior phases centered around customers, the value proposition, and operations, are free from the constraints of budgets, or lack thereof. Unstifled imagination and ingenuity allow us to dream about all the facets and possibilities of the ideal future state. Secondly, a dedicated focus on financial considerations enables us to record the parts of the ideal future state that we must sacrifice due to the limited means. Therefore, a clearer and more direct conversation about opportunity cost.

Cost Structure

This section of Osterwalder’s model aims to define the cost of producing and delivering the value proposition to the targeted customers by leveraging key activities, resources, and partners.  This organically summarises all the strategic decisions in the previous steps of the model since there will naturally be a cost associated with each, and we all know that money doesn’t grow on trees. We should consequently categorise, track and report on every activity of payroll’s value creation process. This is to ensure that the payroll department’s cost structure is aligned with the strategic goals of the organisation.

It is not uncommon for key payroll metrics to include indicators of operational costs. These are usually expressed as a cost per payslip (CPP) or a price per employee (PPE) when compared to headcount. Given that some payroll vendors also use these indicators to set a price for their services, it might not be all that difficult to calculate the internal costs to be added to arrive at the total processing cost per payslip. And yes, there is an equation. This is after all the numbers part of the model. Processing cost + technology cost + ad hoc cost = total cost per payslip.

Processing costs include all reoccurring costs excluding technology costs. Processing costs will include staff salaries and wages, including company contributions to social security and retirement savings, and costs from outsourced payroll bureaus. If you still pay postage to send paper payslips to employees, include that cost here. This covers the entire payroll process from time sheets to payslips. Now on to the technology that we use to execute the payroll process.

Treating technology costs separately makes it easier to classify direct and indirect costs, especially when it comes to GBS/ SSO operating business models. Therefore, include payroll, time and attendance, employee self-service software and service costs with license and hosting fees, in this category. Technology costs will also include the general tech costs related to running the office, like telephony and printing. This helps to ensure that investment in technology is front of mind come budget season since payroll is so heavily reliant on technology to perform optimally (and to work remotely!). We used to submit tax reports on paper, but now we submit them online directly into the government’s database. These two scenarios require distinctly different tech to function.   

Ad hoc costs typically include costs that occur less frequently than processing costs and are also more indirect, like staff training, external consultants, professional memberships, guidance and advisory services, etc. 

Add all of these up for a specific period and divide it by the number of payslips produced in that same period and you’ll have a total cost per payslip. 

Cost Saving or Revenue Streams 

Not many payroll functions are expected to deliver a profit, but that doesn’t mean that they don’t exist. So, we will ask the last question of Osterwalder’s model from two perspectives. First, how are we going to show a profit? How do we charge our customers and make sure they pay when the bill is due? So, slightly more than just pricing strategies. 

Second, if we don’t have to show a profit, how are we going to optimize the budget that we have been allocated to not only provide a higher quality service, but also to leverage the latest tech and practice growth to make the job easier for ourselves? As Steve Jobs said “Innovation is the ability to see change as an opportunity, not a threat.” A real conversation about automation and digitalization. And if you’re feeling cheeky, include considerations for training expenses that will enable payroll to learn how to improve their usage of the technology that we do have, like Excel. As a professional payroller I can say “one can never do enough Excel training!”

In the next and final edition of this series, we will briefly recap what we’ve done so far and make it practical by working through an example.

References 
1. Osterwalder, Alexander; Pigneur, Yves; Clark, Tim (2010). Business Model Generation: A Handbook For Visionaries, Game Changers, and Challengers. Strategyzer series. Hoboken, NJ: John Wiley & Sons. ISBN 9780470876411. OCLC 648031756. With contributions from 470 practitioners from 45 countries.