1 Measuring the Cost of Public Services Through Activity-Based Cost Management World Bank Institute May 25, 2000 Srikant Sastry, Principal Consultant.

1

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.


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


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


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


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


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


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


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


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


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


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


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?


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


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


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

-$

-$

$

$$


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?


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:


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


Stages to Process-Centered ManagementStages to Process-Centered Management

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

















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


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


Federal Agency ExperiencesFederal Agency Experiences

Compliance with Federal regulations

Fee-setting

Shared services

Resource allocation

Process improvement

© Copyright 2000 PricewaterhouseCoopers LLP

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


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



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



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


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



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.




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



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




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”


© Copyright 2000 PricewaterhouseCoopers LLP 33

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



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



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



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



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



SummarySummary

Need compelling business reasons to drive ABCM

Clearly communicate the compelling need for change

Several similarities between public and private sector drivers

Bottom line is the same: Need to demonstrate tangible value!

1 Measuring the Cost of Public Services Through Activity-Based Cost Management World Bank Institute May 25, 2000 Srikant Sastry, Principal Consultant.

Documents

service pricing product

cost of public services

abcm slide

u drivers of abcm

pricewaterhousecoopers

abcm u lessons

private sector u private

presentation topics