1 Measuring the Cost of Public Services Through Activity-Based Cost Management World Bank Institute May 25, 2000 Srikant Sastry, Principal Consultant.
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Measuring the Cost of Public Services ThroughMeasuring the Cost of Public Services ThroughActivity-Based Cost Management Activity-Based Cost Management
World Bank Institute
May 25, 2000
Srikant Sastry, Principal Consultant
2© Copyright 2000 PricewaterhouseCoopers LLP
Presentation OverviewPresentation Overview
The government has often been successful at leveraging new management practices from
the private sector and applying them in public sector settings. Techniques such as process
improvement, process reengineering and Activity-Based Cost Management (ABCM) are
rapidly gaining ground in Federal, State and Local government agencies. However,
success from these initiatives rests not in the mechanics of implementation but in the
ability of government managers to solve real problems and create tangible success. This
presentation will highlight the key drivers for success in the private sector and their
relevance for government agencies.
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Presentation TopicsPresentation Topics
ABCM: What and Why
Drivers of ABCM in the Private Sector
Private vs. Public: Similarities and Differences
Defining Success in ABCM
Lessons Learned
Government Experiences with ABCM -- Examples
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Best Practice
Worldclass companies know their profitability by
product, customer (market segment), and geography.
Professor Larry Seldon - Columbia University
Impetus for Change:Impetus for Change:From Traditional Costing to ABCMFrom Traditional Costing to ABCM
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Control 10%
Reporting 20%
DecisionSupport
50%
Control30%
Transaction Processing40%
Changing Role of Finance ManagersChanging Role of Finance Managers
Cost ReductionCost Reduction
Business PartneringBusiness Partnering
DecisionSupport
10%
Reporting20%
Transaction Processing 20%
Role Role TransformationTransformation
Role Role TransformationTransformation
Process RedesignProcess RedesignProcess RedesignProcess Redesign
Value Added Value Added ServicesServices
Value Added Value Added ServicesServices
Integrated Integrated SystemsSystems
Integrated Integrated SystemsSystems
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The Components of ABCMThe Components of ABCM
ABC - Product CostingABC - Product Costing• Accurate Product CostsAccurate Product Costs• Precise Cost EstimatingPrecise Cost Estimating• Product and Service PricingProduct and Service Pricing
ABC - Product CostingABC - Product Costing• Accurate Product CostsAccurate Product Costs• Precise Cost EstimatingPrecise Cost Estimating• Product and Service PricingProduct and Service Pricing
ABC - Profitability AnalysisABC - Profitability Analysis• Customer ProfitabilityCustomer Profitability• Channel ProfitabilityChannel Profitability• Product ProfitabilityProduct Profitability
ABC - Profitability AnalysisABC - Profitability Analysis• Customer ProfitabilityCustomer Profitability• Channel ProfitabilityChannel Profitability• Product ProfitabilityProduct Profitability
ABC - Event CostingABC - Event Costing• Custom ServicesCustom Services• Investment JustificationInvestment Justification• Distribution AlternativesDistribution Alternatives
ABC - Event CostingABC - Event Costing• Custom ServicesCustom Services• Investment JustificationInvestment Justification• Distribution AlternativesDistribution Alternatives
Process ImprovementProcess Improvement• Process Value AnalysisProcess Value Analysis• Streamlining OperationsStreamlining Operations• Costs of Total OperationsCosts of Total Operations• Reducing Waste andReducing Waste and
Non-Value Added CostNon-Value Added Cost• Cycle Time ImprovementCycle Time Improvement
Process ImprovementProcess Improvement• Process Value AnalysisProcess Value Analysis• Streamlining OperationsStreamlining Operations• Costs of Total OperationsCosts of Total Operations• Reducing Waste andReducing Waste and
Non-Value Added CostNon-Value Added Cost• Cycle Time ImprovementCycle Time Improvement
• Performance MeasurementPerformance Measurement• Balance and RationalizesBalance and Rationalizes
– EfficiencyEfficiency– EffectivenessEffectiveness– ProductivityProductivity– UtilizationUtilization– StrategyStrategy
• Performance MeasurementPerformance Measurement• Balance and RationalizesBalance and Rationalizes
– EfficiencyEfficiency– EffectivenessEffectiveness– ProductivityProductivity– UtilizationUtilization– StrategyStrategy
Activity-BasedCost Management
ABCM
Activity-BasedCost Management
ABCM
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Traditional Versus ABC CostingTraditional Versus ABC Costing
Allocates costs directly to products
Products
ADVANCED (ABC))
Traces costs based on their demand for
activities
Activities
Products
Resources
Consumedby
Consumedby
Consumedby
Resources
TRADITIONAL COSTING
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Cost Drivers
Resources
Activities
Cost ObjectsCost Objects
Cost Assignment View
Process View
Resource Driver: Measure of the frequency of demand placed upon resources
Performance
Measures
Activity Driver: Measure of the frequency of demand placed upon activities
Cost Driver: Any factor that causes a change in the cost of an activity.
How Does ABCM Work: Cost AssignmentHow Does ABCM Work: Cost Assignment
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Cost DriversCost Drivers PerformanceMeasures
PerformanceMeasures
Resources
Activities
Cost ObjectsCost Objects
Cost Assignment View
Process View
Resource Driver: Measure of the frequency of demand placed upon resources
Activity Driver: Measure of the frequency of demand placed upon activities
Cost Driver: Any factor that causes a change in the cost of an activity.
How Does ABCM Work: Managing ProcessesHow Does ABCM Work: Managing Processes
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ABCM Helps OrganizationsABCM Helps Organizations
Understand the cost of doing business
Identify and manage processes, activities, and products
Identify and act upon improvement opportunities
Enable comparisons and benchmarking
Determine product and customer profitability
Succeed in a competitive environment
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Evolution of ABCM SystemsEvolution of ABCM Systems
Traditional
Experimentation
Integration
Most of TwentiethCentury
1990's
First Wave
Future
Second Wave
• Standard Costing• Material, Labor, and Overhead• Volume - Bias• Absorption Focus• Limited Decision Support
• Activity-Based Costing• Stand-Alone PC• Experimentation with ABC Principles• Focused on Better Product Costing• Significant Informational Value• Limited Cost & Risk
• Activity-Based Management• Enterprise-Wide Coverage• Legacy System Integration• Decision-Making Orientation• Performance Measurement Integration• Recurring Management Reporting
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Which customers and products are delivering the greatest / least profitability?
Which customers and products are delivering the greatest / least profitability?
$
ABCM - Provided Business Information:
Customer and Product Level Profitability Information
Business Issue:
How do the service demands of customers impact
profitability?
How do the service demands of customers impact
profitability?
What are the costs of shared services? How do I foster a spirit
of cost accountability for internal services?
What are the costs of shared services? How do I foster a spirit
of cost accountability for internal services?
How do factors such as volume and complexity impact the cost of my
products?
How do factors such as volume and complexity impact the cost of my
products?
What impact will a 20% increase in volume have on
next year’s costs?
What impact will a 20% increase in volume have on
next year’s costs?Activity Based BudgetingActivity Based Budgeting
Cost to Serve Information at a Customer LevelCost to Serve Information at a Customer Level
Product / Service Cost Model with “What If” Capabilities
Product / Service Cost Model with “What If” Capabilities
Service Level Agreementsbased on Shared Service Catalog
Service Level Agreementsbased on Shared Service Catalog
ABCM Must Focus on Real Business IssuesABCM Must Focus on Real Business Issues
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Need to Align ABCM with Five Strategic QuestionsNeed to Align ABCM with Five Strategic Questions
If... Then...
Customer Profitability / Cost to Serve
Which products are delivering profit?
Product Profitability
What are my highest/lowest delivery cost options?
Cost to ServeCost by Supply Chain Option
What is my pricing “floor” for product X?
Product Cost by Dimension (Sunk/Cash/Variable)
What are my costs of complexity And how do I manage them?
Cost by Major Business Process
Which customers are delivering profit?
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ABCM Business Drivers: More Similar Than NotABCM Business Drivers: More Similar Than Not
Private Sector
Product Pricing
Reduce costs
Reduce overhead
Outsource work
Cost of compliance
Business case analysis
Reorganization/new mission
Performance Measurement
Budgeting
Comply with SEC
Goal Setting
Resources Utilization
Shared services
Public Sector
Fee Setting
Survive a budget cut
Reduce overhead
A-76 Study
Cost of compliance
Transition to fee-for-service
Reorganization/new mission
Performance Measurement
Budgeting
Comply with CFO/GPRA
Goal Setting
Resources Utilization
Cross-Svc/Franchise Svcs
Similar
Similar
Similar
Similar
Same
Same
Same
Same
Same
Same
Same
Similar
Same
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Milestones of Success in ABCMMilestones of Success in ABCM
Milestone
Completed Model
“Accurate” Model
Sustained ABC
Opportunities Identified
Decisions Made
Actions Taken
Improvements Initiated
Measurable Improvements
Measurable Success
Benefit
Cost Awareness
Improved Management
Improved Processes
Competitive Advantage
You understand more than you
did before
You make better decisions than you
did before
You accomplish work better than you
did before
You own more business
Source: CAM-I Interest Group on ABM Design Framework
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When Is Value Created in ABCM?When Is Value Created in ABCM?
Milestone
Completed Model
“Accurate” Model
Sustained ABC
Opportunities Identified
Decisions Made
Actions Taken
Improvements Initiated
Measurable Improvements
Measurable Success
Benefit
Cost Awareness
Improved Management
Improved Processes
Competitive Advantage
ROI
-$
-$
$
$$
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What decisions need to be made using cost data?
ABCM is most meaningful with a clearly defined objective.
Business Need
What is the consequence of doing nothing?
A burning platform clarifies purpose and helps gain
commitment
Compelling Need
What Triggers ABCM?What Triggers ABCM?
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Common challenges
Public sector can safely emulate private sector practices
Business Need
Very different motivators
Compliance is not a compelling need
Compelling Need
The Compelling DifferenceThe Compelling Difference
Between Public and Private Sectors:
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Activity Cost
Activity Cost
Activity Cost
Activity Cost
Division Cost
Activity Cost
Activity Cost
Activity Cost
Activity Cost
Division Cost
Activity Cost
Activity Cost
Activity Cost
Activity Cost
Division Cost
Division A
HQ
Division B Division C
New Capability Development
In-Service Support
EmergencyResponse
Process-Centered Management: Uncommon OpportunityProcess-Centered Management: Uncommon Opportunity
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Stages to Process-Centered ManagementStages to Process-Centered Management
Function orDepartment
Function orDepartment
Function orDepartment
Function orDepartment
Function orDepartmentStage 0
(Invisible)
Stage 1 (Recognition)
Stage 2 (Overlay)
Stage 3 (Process-Centered)
Dominant Functions No Documented
Processes
Dominant Functions Weak Processes
Strong Functions Strong Processes
Weak Functions Dominant Processes
Function orDepartment
Function orDepartment
Function orDepartment
Function orDepartment
Function orDepartment
Function orDepartment
Function orDepartment
Function orDepartment
Function orDepartment
Function orDepartment
Function orDepartment
Function orDepartment
Function orDepartment
Function orDepartment
Function orDepartment
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Key Success Factors for ABCMKey Success Factors for ABCM
Plan long-term, but implement in stages
Integrate with other business processes, not stand-alone
Understand why, how, and by whom cost information will be used
Identify “champions” who will visibly lead the effort
Develop early “pull” or demand through a successful pilot
Strive for relevance, not necessarily precision
Don’t lead with technology; prove value first
Develop working consensus between key internal stakeholders: finance, programs, and IT
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Company Strategy - “Five Questions”
Scope of Eventual Cost Management System
Requirements/Design of Eventual Cost
Management System
Pilot A Pilot B Pilot C Pilot D Pilot E
Organization, Processes, Performance Metrics
Enterprise ABM
Staged Implementation
Enterprise Infrastructure
ABCM Implementation Model:ABCM Implementation Model:Plan Globally / Implement LocallyPlan Globally / Implement Locally
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Federal Agency ExperiencesFederal Agency Experiences
Compliance with Federal regulations
Fee-setting
Shared services
Resource allocation
Process improvement
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The National Science Foundation Assessed Managerial Cost Accounting capabilities for compliance with federal accounting standards,
reporting requirements and GPRA initiatives
Evaluated data collection methods to support linkages between strategic planning, budget formulation, financial reporting and managerial accountability
Social Security Administration (SSA) Reviewed the SSA’s cost allocation methodology and made recommendations for improving the process.
Obtained buy-in of key stakeholders, including GAO and OMB
Department of Labor Identifying gaps between “as-is” cost accounting processes and best practices per FASAB and JFMIP Develop costing pilots with program offices to use as a benchmark and as a tool to evaluate their programs by connecting
cost data to program performance.
Compliance with Federal RegulationsCompliance with Federal Regulations
Case ExampleCase Example
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Immigration and Naturalization Service (INS), Executive Office of Immigration Review (EOIR)
Developed a fee schedule for Examination and User Fee applications and services using Activity-Based Costing principles
Identified the cost to process each immigration appeal and motion
Developed the total cost to perform each EOIR activity and the total unit cost to process each INS-funded appeal and motion
Drug Enforcement Agency Determined full cost of Diversion Control Program services
Recommended appropriate registrant fees
Fee-SettingFee-Setting
Case ExampleCase Example
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Shared ServicesShared Services
USPS Corporate Call Management Determined full cost of Call Center service offerings
Implementing internal charge-back fee-setting structure for call center services
US Department of Agriculture, National Finance Center Determining full cost of NFC processes, activities, and products
Seeking to improve customer service and accuracy of shared service fees
Defining customer products and services, soliciting customer perspectives of the delivery of those services, mapping high level processes used in accounting product delivery, and developing as-is process maps based on the evaluation of existing accounting systems and activities
Providing recommendations on the financial management model, optimal structure and organizational placement to improve accounting operations
Case ExampleCase Example
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US Customs Resource Allocation Model Developed a “service-wide” staffing allocation model to support staffing decision-making and budgeting
using ABC
Linked Customs performance measures to occupations performing specific activities
Developed what-if capability to analyze different workload scenarios
Praised by GAO before Congress
Federal Deposit Insurance Corporation Implementing ABC in Receivership Management Program
Objectives include accurate billings, benchmarking and cost management
Realigning FDIC budget along activities and processes to support better integration with planning and promote process ownership
Resource AllocationResource Allocation
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Department of Veterans Affairs Veterans Health Administration - Medical Care Cost Recovery
Board Of Veterans’ Appeals - Full Cost of Operations
Veterans Benefits Administration - Entity-wide ABC Implementation
Fleet Technical Support Center Atlantic (FTSCLANT)
Naval Station Norfolk has embarked on an ABC project to provide insight into the activities performed by both the Civilian and Military employees and the contractors who support them.
The Command has special interest in understanding the work performed by Headquarters back-office personnel, the numerous contractors employed, and the personnel at the four detachments
Project motivation is to better understand the cost and performance of the work that is due to many external forces which includes: pending Commercial Activity (A-76) studies, commercial contractor competition, and pressure from CINCLANTFLT (their parent command).
Ultimate goal is to identify "areas for improvement" and reengineer them so as to be able to better support the Fleet and warfighter.
Process ImprovementProcess Improvement
Case ExampleCase Example
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Process Improvement (con’t)Process Improvement (con’t)
Defense Finance and Accounting Service Service organization of 20,000 employees at 24 sites with separate divisions serving separate
customer groups and all doing work differently
Different “Stage II” systems, no common means of measuring cost performance other than budget variance
Objective: Determine the total cost of providing key services to different customers and identify process inefficiencies
Capture costs for a selected Division (5,000 employees) at all sites
Develop separate site costing models, all with the same structure -- easy to aggregate, compare across the organization
A Web-based survey application was developed to facilitate identifying the activities individuals perform (labor resource driver data). Specific features included the following:
Employees need only Internet access and a PC-based Web browser, thus avoiding problems associated with disparate IT infrastructures.
Employee time allocation information is passed directly to a centralized database.
Built-in data integrity and validation checks
Receipts are returned to each employee providing a record of their transaction.
Case ExampleCase Example
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Process Improvement (con’t)Process Improvement (con’t)
U.S. Coast Guard Approximately 450 employees deployed across 40 field sites with all sites perform similar work,
although certain mission specific activities performed at selected site
Objective: Develop cost information to assist HQ in budgeting and fee setting; Integrate with GPRA/performance measurement efforts; and, Provide visibility to field units over work activities on a frequent (daily) basis
Cost Model Design: Prototype cost models, aggregate labor and costs from all sites
Capture workload data daily -- report cost results quarterly
A Web-based survey application was developed to facilitate identifying the activities individuals perform (labor resource driver data). Specific features included the following:
Employees need only Internet access and a PC-based Web browser, thus avoiding problems associated with disparate IT infrastructures.
Employee time allocation information is passed directly to a centralized database.
Built-in data integrity and validation checks
Receipts are returned to each employee providing a record of their transaction.
The project team can perform administrative adjustments to the application from any site location
Case ExampleCase Example
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U.S. Postal Service Mail Processing and Distribution Center - developing and implementing cost management and
standard costing system
Corporate Treasury - developed ABC model to determine cost of various means of receiving payment for domestic Postal products and services
Process Improvement (con’t)Process Improvement (con’t)
Case ExampleCase Example
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USPS - Business EnvironmentUSPS - Business Environment
Uncertainty of regulatory environment
Preparation for competition
Pressure to cut costs
The need for a “lifestyle change”
Process Standardization and Control
The Information Platform
Transition of Finance to role of “Business Enabler”
Case ExampleCase Example
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USPS - Focus on High Cost ProcessesUSPS - Focus on High Cost Processes
Sell/Sell/MarketMarketSell/Sell/
MarketMarketCollect/Collect/InductInduct
Collect/Collect/InductInduct
Sort/Sort/DistributeDistribute
Sort/Sort/DistributeDistribute
TransportTransportMailMail
TransportTransportMailMail
DeliverDeliverMailMail
DeliverDeliverMailMail
P&DCP&DC22
P&DCP&DC22
P&DCP&DC33
P&DCP&DC33
P&DCP&DC44
P&DCP&DC44
P&DCP&DC11
P&DCP&DC11
P&DCP&DC55
P&DCP&DC55
ReceiveReceiveMailMail
ReceiveReceiveMailMail
PreparePrepareMailMail
PreparePrepareMailMail
SortSortMailMailSortSortMailMail
DistributeDistributeMailMail
DistributeDistributeMailMail
DispatchDispatchMailMail
DispatchDispatchMailMail
LoadLoadMailMail
LoadLoadMailMail
PostalNetwork
Individual Plants
ComparablePlant Process
Case ExampleCase Example
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USPS - ABM in Mail Processing - ObjectivesUSPS - ABM in Mail Processing - Objectives
To realize ongoing and measurable benefits through implementation of automated ABM system prototype
To focus on process improvement in operations
To develop improved workload measures for automated and manual activities
To identify improvement opportunities and take action
Case ExampleCase Example
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USPS - Traditional Plant Information not Integrated for USPS - Traditional Plant Information not Integrated for Decision-makingDecision-making
Sup. WorkHour
FMLA
DMCR
PSFR
PPAS
PlantManager
CasualTime & Exp.
BusinessReview
AdminWork Hour
VOB
MODSPenaltyOT Rpt.
OTReport
SPSEORVMARSETC
EVA
NWRS
Higher Earning
VOC
OtherInitiatives
Case ExampleCase Example
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ABM System Provides Integrated Decision Support ABM System Provides Integrated Decision Support InformationInformation
Product Costs• 9 plant products
Activity Costs• 58 activities
Activity Rates• cost per unit of activity workload
ABM System
ABM System
Financial Data
• Labor costs• Facility costs• Supply costs• Contractual costs• Maintenance costs
Human Resources Data
• Regular time• Overtime• ETC • Headcount
Operations Data
• End of Run• Sort Plan System• Dispatch flows • Product volumes
Case ExampleCase Example
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USPS - Accomplishments To DateUSPS - Accomplishments To Date
Developed AP-based activity costs, product costs, and activity rates
Developed more accurate, cost-effective approach to measuring workload
Ensuring knowledge transfer to HQ, District and Plant management
Taking action through series of process improvement workshops
Identified significant cost reduction opportunities
Rolling out system to additional Plants
Case ExampleCase Example
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