Creating a Cost Conscious Culture

8/12/2019 Creating a Cost Conscious Culture

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A joint initiative of

Creating a CostConscious CultureThe NZ Edition April 2012


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Creating a cost conscious culture

STATEMENT OF PURPOSEThis briefing note is written for managers and leaders in the public sector to promote betterunderstanding of costs by public sector organisations and better use of cost information to supportdecision taking. It is adapted from two CIPFA briefing notes Making Costing Count: Improvement

Actions for Council Managers and Creating a Cost Conscious Culture and draws on the research ofthe Audit Commission (UK) to give practical examples of ways public sector managers can improvethe use of costing information. Case studies from New Zealand, Australia and the UK offer valuablelearning points. Further copies of this briefing can be downloaded from the NZICA website:www.nzica.com/Resources-and-benefits.

INTRODUCTION As part of their contribution to returning the national budget to surplus, public sector organisations haveset challenging budgets and financial plans. Having a cost conscious culture will be fundamental toachieving fiscal strategy targets and demonstrating efficient, effective, economical and ethical use ofpublic resources.

Characteristics of a cost-conscious culture

Organisations that excel at cost management have common characteristics. They:

Demonstrate visible leadership: leaders and senior managers lead by example. This means thatthey think frequently about cost and talk about cost; it crops up in formal and informal conversationsaround the organisation, as well as in management meetings and operational and service reviews

Build good working relationships: senior operational managers and finance professionalsrecognise the contribution and expertise each brings to decision-taking processes. Finance staffwork closely with other senior managers, to produce timely and accurate cost managementinformation to support evidence-based decision taking

Know their baseline: organisations have established cost and performance baseline information,against which managers can check their progress in driving down costs and driving up efficiency

and productivity Develop ownership and expert knowledge: organisations create cost category owners or cost

champions who build detailed knowledge of categories of cost and have the responsibility, and theauthority, to promote value for money vertically within departments and agencies and horizontallyagainst their deliverable or output category, and across programme and service lines ordepartments and agencies

Use comparative data: senior managers use key performance indicators to benchmark costsinternally (and externally wherever possible) and to work out how to get costs down to the target level

Have the right tools in place: to manage cost information efficiently and effectively and thecapacity to use them for information, management and reporting. Having the right tools starts

with ensuring that all managers are trained to read and use cost centre reports competently, andproviding specialist software (including spreadsheet and other analysis tools) and appropriate training.


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What gets in the way of effective cost management?

Barriers to understanding costs and managing them effectively include:

Prevailing organisational culture that does not prioritise cost management

A lack of clarity on the respective roles and responsibilities of the finance, policy, operational and

service delivery departments and agencies, and a view that managing costs is difficult, or is theresponsibility of finance staff

Failure to integrate finance and performance data and to share it across department and agencyboundaries, or to take an enterprise-approach to finance and performance data

A lack of financial literacy, skills and competencies in the leadership team, and among operationaland service delivery managers

Poor communication skills and lack of business knowledge among finance professionals

Inflexible IT systems which make it difficult to bring together cost information in ways that supportdecision taking (for example, systems configured solely round traditional hierarchical structures)

A lack of leadership drive and ambition for transformational improvement in performance.High performing organisations are those that overcome these barriers and manage their costs effectively.Leaders in public sector organisations are increasingly addressing the barriers to efficient and economicaluse of resources. For public sector managers too, whether they work in front-line operational and servicedelivery areas or the back-office support activities, understanding and managing down cost is essential toensure that budgets can be met and that every dollar is allocated appropriately.

Initial responsibility for creating a cost conscious culture lies with leaders and senior managers in allpublic organisations; the next section of this guide suggests some steps they can take.

CREATING A COST CONSCIOUS CULTUREThere are four main steps to building a cost conscious culture:

Communicating the importance of costs

Making sure roles and responsibilities are clear to all

Creating the environment for dialogue between finance and operational managers

Ensuring decisions are based on sound costing information.

Getting started: communicating the message that understanding cost matters

Organisations with a cost conscious culture have communicated successfully the Chief Executives

or Secretarys message that managing down costs is every managers responsibility. There are fourimportant elements in communicating this message:

The consistency of the message

Using every opportunity to get the message across

Creating supportive organisational systems

Sharing good examples of how understanding cost has brought benefits.

When these elements are in place, managers are more likely to understand that cost is one of theirmost important priorities and that their performance appraisal will include an evaluation of theirperformance in this area. The key lever for organisational transformation is the middle manager level.

Staff at this level must understand the importance of understanding costs.


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CREATING A COST CONSCIOUS CULTURE

Being clear about roles and responsibilities in managing cost

There are several reasons for the common opinion among non-financial and operational managersthat managing cost is difficult. Many managers lack confidence and are wary of involvement in whatthey see as a specialist area. Some managers express the belief that cost management is solely theprovince of the finance staff and the Chief Financial Officer.

Misapprehensions and lack of confidence can be addressed by clarifying roles and responsibilities.Managers financial responsibility extends beyond reviewing monthly cost centre reports and analysingand explaining variances from budget. Increasingly they have responsibility for actively managing theircurrent costs and forecasting future costs. Unless they understand their cost drivers they will be unableto plan services, budget and forecasts costs or identify and lock-in savings.

Finance professionals roles often involve a combination of challenge and support to operationalmanagers. The precise divisions of responsibilities vary in different organisations; they need to beclearly understood by both parties. Managers need to be clear about their own financial responsibilitiesand on what the finance department can do to support them, for example by carrying out cost analysis,trend analysis and cost scenario modelling for service planning.

There are other models. Some organisations have appointed cost champions; senior managers whosetask is to understand the drivers of cost in one cost category (eg IT, property or procurement), setorganisation-wide targets for cost reduction and implement those reductions by negotiating targetswith departmental and agency budget holders. They check progress in reducing spending across theorganisation and lead by example in driving down costs.

Getting operational and finance teams working well together

Finance teams and operational and service-delivery teams can work together to support decisiontakers with relevant, high-quality cost information. These relationships are effective when characterised

by openness and mutual respect for each others professional expertise. Where that is not in placemanagers may need to promote better mutual understanding. Operational managers need to understandhow a finance department works and what assistance it can provide. Equally, finance professionals needto understand the operational and service delivery teams needs for financial information and analysis,and identify the best way of communicating financial and performance information.

Many senior managers are unable to specify what analysis they would like the finance professionalsto perform, simply because they do not know what analysis tools are available to them. Managersneed to be able to explain to finance staff what cost information they need to help them weigh up theissues and arrive at a well-founded decision. The finance professionals need to be able to understandthe issues faced by operational managers and then identify what analysis will yield the information themanagers want.

Managers need to make effective use of the analysis of cost information for decisions. The amountof work required to produce the cost information will need to be balanced against its importance fortheir decisions. There will be a trade-off between accuracy and speed of production for an urgentdecision. There will be some limitations on what it is possible to do, depending on the availability oftime, cost and data. There will be a point at which additional analysis will fail to improve decision takingsufficiently to justify the incremental effort to improve costing, and the cost of so doing. All these issuesneed to be discussed between managers and finance professionals.

Basing decisions on sound costing information

Most of the information needed for operational decisions will exist either within an organisationsfinancial systems or within other management information systems. Where it does not exist in the form


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required, analysts may need to conduct analyses or develop models to generate it; for example costingmodels that help managers understand their costs, what drives those costs and how they behave.

Identifying the right cost information for the right decision is addressed in the next section.

THE RIGHT COST INFORMATION FOR THE RIGHT DECISIONLeaders and senior managers make different kinds of decisions at different points in the business cycle.Some decisions are made regularly in the business cycle; others fall within no particular time horizon orare ongoing. Common decisions that should be supported by a good understanding of costs include:

Planning the future, for example strategic budget-planning decisions

Deciding whether to proceed with strategic projects, for example investments in public assets

Deciding whether to implement new policies and services or withdraw from activities

Monitoring and control of activity and budgets in year

Choosing between alternative ways of providing services, including whether to outsourceor provide in-house

Deciding on activity levels, the mix and design of services or how to improve efficiencyand productivity

Reviewing and setting charges for services to users and beneficiaries

Responding to unexpected events, for example natural disasters.

Figure 1: Decision points in the business management cycle

Decisions inthe business

cycle

Review

Planning

Monitoring

Implementation

Budgeting

Decisionson strategy

Decisions totackle over-spend

Decisionsto improve

efficiency

Make or buydecisions

Investmentdecisions

Decisions onfees & charges

Decisions tospend less


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Operational Efficiencyimprovements

Seniormanagers

Where and how should we seek to reduce costs? How do our cost profiles compare with other

organisations?

What are the cost drivers in our high cost areas? What costs do we incur on each activity and

how do they break down by category (staffing,contracted services, property, ICT etc)?

How do costs in different areas of the organisationrelate to one another?

Managingbudgets

Seniormanagers

How can we react to unexpected overspends? What drives cost in relevant areas?

What external changes might be giving rise tooverspends? Are they likely to continue?

Will reductions in activity in one area increase costsin another?

Procurement Seniormanagers

What can we do to reduce our spend on procuredgoods and services?

How does what we pay compare with what othersimilar organisations pay for these services?

Is there a range of prices paid for similar goods orservices across our organisation?

Do we have good market intelligence on supplierinput prices?

Are we gold-plating our requirements?

Are we smart negotiators?

Are we getting volume or other discounts? What does our procurement function cost? Can better procurement and contract management

processes reduce costs?

Would joint buying arrangements increase ourbuying power and reduce our unit costs?

When did we last test the market?

WHAT COST INFORMATION CAN TELL MANAGERSHigh performing organisations have identified two key aspects of providing cost information to managers:

That the cost information and analysis conducted needs to be tailored to the decision it is designedto support

That the cost information required for the right cost analysis does not necessarily need to belaboriously or expensively collected; it is often available to decision takers or analysts.

Specifying and using the right information for a decision is not always straightforward. Costs can beanalysed in a variety of ways. Table 2 ( see page 53) shows examples of how different questions aboutcost can lead to different insights into cost and different supporting analyses.

Leaders and senior managers will require more than basic financial information to conduct effective costanalysis. While the financial management information system and general ledger is the basic source ofdata on costs, other corporate information systems and resources will need to be called upon. Dependingupon the decision to be made, these information systems and resources may include:


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User and beneficiary databases: these can provide information on different user and beneficiarygroups, often by age, gender, disability, ethnicity, services and location. Where smartcards orsimilar systems are used, the information gathered from them can be useful for cost or marketanalysis, or to understand the cost implications of providing grants, benefits and subsidies toselected groups

Human Resource databases with information on staff numbers, grades, entitlements, staff turnoverand absence. This information can help cost operations, service delivery and support activities

Land and property databases, which hold information on the age and condition of properties, therunning costs, market value, and opportunities to share under-occupied premises. Comparativebenchmarking data on property costs may also be available.

Many organisations and their management teams do not exploit fully all the cost and other datathey already hold. Although the necessary data exists, managers do not always know what analysisto do on the data and they may be unable to do it themselves. Finance professionals with a goodunderstanding of cost centres and cost categories can advise on how to manipulate the data indifferent ways to answer specific questions. Discussion between service managers and finance

professionals should tease out what would be the right analysis for the particular decision.

Table 2: Questions for management about cost, the insights gained and possiblesupporting analyses

Questions formanagement

Insights gained into cost Supporting analyses

What is thecomposition of thecost of the service?

What is the service to be costed? What cost categories are incurred

to deliver the service?

Are the costs direct or indirect? What is the key cost driver for the service?

Cost per unit of service analysis Actual to budget and variance analysis Common size (relative proportion)

analysis by cost centre or service type,against budget or by geographic region

Can we change thebalance of fixed andvariable costs of theservice?

What is the time frame for fixed costs?

What is driving the variable costs? How does the balance of fixed and

variable costs change with differentpatterns of in-house or contracteddelivery?

Procurement options for facilities andequipment; whether to lease or buy,capacity, reliability, energy efficiency

Identify the events that drive the variablecosts, eg service demand, frequency

of service interactions, projections ofservice demand growth from changingeconomic conditions, promotionand take-up

Can we reduce costsby changing themethod or timing ofservice delivery?

How do service delivery methods(eg face-to-face, telephone, internet)affect costs?

How does the timing or frequencyof service affect costs?

What are the key processes thataffect costs?

How do governance and compliancearrangements affect costs?

Identifying and understanding thedrivers of cost

Modelling of costs associated withdifferent service delivery methodsand frequencies

Process and workflow mappingand analysis

Addressing the cost of red-tape

Control risk analysis

Continued on next page


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Can we reduce thecosts of components(people, property,facilities, equipment,IT and support) or

change the balanceof them to reduceoverall costs?

What can we do to reduce the costs ofeach component, eg increasing labourefficiency, transferring contractors tostaff, buying contracted services moreeconomically, changing maintenanceschedules, using shared services,applying market testing?

Can spending more in one area giverise to greater savings in another?

Analysis of drivers of staff costs staffing levels and structures, absence,shift patterns

Analysis of managers spans of control(ratio of managers to staff)

Examination of contract positions Analysis of property, facilities, equipment

and IT buying options

Analysis of property maintenance,energy efficiency and repair costsand the links between them

Analysis of additional staff trainingand impacts on turnover, IT help deskand support costs, process efficiencyimprovements and enhanced compliance

What is the mostcost effective wayof deliveringservices to usersand beneficiaries?

What do different approaches toservice delivery cost in differentgeographic areas?

What if we partnered with otherorganisations delivering to thesame users?

How do different approaches toservice delivery affect objectivesand outcomes?

How do take-up volumes affectservice delivery costs?

Is there over-utilised or under-utilisedcapacity for service delivery?

Analysis of costs of service deliveryby service type, location and useror beneficiary

Examination of connected servicedelivery for common users andbeneficiaries

Evaluation of impact of different servicedelivery methods on objectives andoutcomes

Analysis of capacity constraints andutilisation by service type, locationand user or beneficiary

Do service delivery processes needto be redesigned in order to be morecost effective?

What is the costof delivering anadditional service?

Is there a standard cost, average costor acceptable cost range for differentservice delivery methods?

What is the marginal cost ofservice delivery?

What is the cost per unit or cost perhour of service delivery? How doesthis compare to benchmark of betterpractice? If we are not comparable,what actions would be needed tochieve better practice costs?

What proportion of cost is administrativesupport? Is that percentage appropriateor reasonable?

Standard costs, average cost andtime-based activity cost analysis

Analysis of what drives variation in eachcomponent of cost (case mix, complexity,service standards, quality standards,timeliness, staff skills, location)

Analysis of past changes in workloadand capacity

Analysis of the cost of differentoptions for managing workloadpeaks and growth

Process mapping and analysisand costs to identify the cost ofadministrative support

Benchmarking of costs and performancestandards (quality, safety, timeliness)



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How and why havecosts changed overtime? What have wedone or can we doabout it?

How has the average or unit costof delivering service changed inrecent years?

What costs are incurred for processesand activities that do not enhance

service delivery? Which components of costs have

changed and why (increased demandand volume of service, increasedunit costs)?

What options have we for reducing costsor avoiding cost increases?

Analysis of the historic financial recordsto identify trends in costs (by servicetype, location and user or beneficiarygroup)

Analysis of the components of cost to

identify the causes of those trends Analysis of non-financial data on trends

and resource requirements (demandlevels, staffing requirements, locations)

Analysis of the links between the costsof different processes

Modelling the cost implications ofdifferent approaches to staffing andservice delivery

BEGIN WITH THE END IN MINDCost analysis is not an end in itself; it simply serves a purpose, in providing information to influencedecision taking. Taking time to study and understand cost allows people to make better decisions.Finance professionals need to bring relevant, high-quality cost and performance information togetherfor decision takers and present this in an easy to understand form.

Leaders and senior managers should begin by being clear about what decision they want to take,identify the cost information they will need to know for this decision, and then take steps to secureit through an appropriate analysis.

Figure 2: Begin with the end in mind

Know what decisionyou need to take

Identify the rightcost information

Secure the rightcost analysis

Organisations that invest time and effort to understand their costs fully can achieve tighter financialcontrol, secure greater choice in allocating resources and make better decisions. Every manager in thepublic service should recognise that understanding and controlling costs is part of their responsibility.Changing organisational culture such that cost considerations automatically feature in everyones actionsis an urgent priority for public sector departments and agencies needing to better manage costs orachieve savings. The actions described in this briefing are not complicated, but are not easy either.

The challenge for leaders and senior managers within public sector organisations is to create theconditions in which cost information is afforded a high priority and is seen as an integral part of drivingperformance and operational management.

Appendix C, page 71, summarises the broad themes leaders and senior managers will need toaddress. Appendix D, page 73, provides one example of a short-term programme designed to have animmediate impact on an organisations costs and change its culture at the same time.


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Case Studies

COSTING ANALYSIS IN PRACTICEThe following case studies illustrate how senior managers in Central Government, local authorities andthe private sector looked at cost from different angles and used different costing techniques to improvetheir understanding and inform decisions.

Central government

The first three case studies look at costing reviews in Central Government. One looks at how the Australian Government Department of Defence initiated reform. Another outlines a major review of

costs within the New Zealand Inland Revenue. The third describes how a performance review appliedto a specific programme in this case the Australian Governments Strategic Indigenous Housing andInfrastructure Programme resulted in more effective allocation of resources.

Local government

When Londons Hammersmith and Fulham Council undertook cost analysis to measure the benefits ofa shared services arrangement, they gained greater control over their spending.

Performance measurement frameworks

The next two case studies drill into the topic of performance measurement, summarising the guidanceavailable in New Zealand from The Treasury and the Office of the Auditor General. Following this is anexample of how New Zealands Inland Revenue revised their performance measurement framework tomore closely link front-line operations to desired outcomes.

Private sector approach

The approaches of private companies and how they tackle cost investigations can also offer usefullessons for public organisations. The final case study gives an account of how Virgin Media in the UKscrutinised their spending on procurement of goods and services.

CASE STUDY 1Australian Government Department of Defence:Recognising the need for reform and taking action

This case study demonstrates that the Australian Government Department of Defence (Defence) recognised theneed for reform to achieve greater efficiencies. It also identifies the strategy Defence put in place to realise theseefficiencies, which requires the involvement of every person within Defence and incorporates a focus on creatinga cost conscious culture within Defence.

During the 2009 Defence White Paper process Defence identified a range of areas where support structuresand processes were not working well. As part of that process, an independent audit of the Defence budget wasconducted. This very comprehensive audit identified a number of areas where Defence could initiate reforms andbe more efficient in the way it used its resources it assessed that Defence could reduce costs by around $20

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Among other things, the Audit identified the need to:

Provide greater budget transparency;

Understand the underlying drivers of the costs of Defence; and Achieve the required productivity and efficiency gains necessary to fund required capability.

The Strategic Reform Program (SRP) is the way that Defence will make those improvements. The SRP is oneof the largest and most complex reform programmes ever undertaken in Australia. It is a decade-long campaignof reform that requires the participation and support of every person in Defence. It is clearly identified withinDefence that SRP is not a passing fad and is not something that anyone can wait out it is identified by theDefence leadership group as being fundamental to the future of Defence.

Defence receives a substantial part of the Governments budget and Defence managers have a responsibilityto ensure that resources are used wisely. A key feature of SRP is to demonstrate that everything Defence doescounts every minute of time, every dollar spent and every round fired.

Defence leadership has recognised that the organisation has attempted significant reform in the past, but withmixed results. Some of its past reform efforts have not sufficiently recognised that in some cases money needsto be spent in order to make future savings. The Government has now recognised that without proper investment

it is very difficult to successfully implement some of the deeper changes that are required. As a result the SRPbudget includes around $2.4 billion to enable implementation of the reforms. ICT and Logistics are two examplesof areas where significant investment has been provided to allow the reforms to be properly implemented.

How will the SRP work? In the broadest sense the reforms are about:

Simplifying internal processes to reduce time and/or waste Consolidating where process work is conducted so it is not duplicated in other parts of the organisation Aligning more complex processes, like the acquisition of new capability, so there is a clear linkage between

the identified need and the final product

Ensuring policies reflect contemporary standards Improving decision making around expending resources

Reducing demand for goods and services Building a cost-conscious culture in Defence.

Sources: Department of Defence, The Strategic Reform Program: Making it happen , Commonwealth of Australia, Canberra, 2010 Pappas, G., Defence Budget Audit , Commonwealth of Australia, Canberra, 2009


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CASE STUDY 2

Inland Revenue, New Zealand:Delivering value for money in a fiscally constrained environment

This case study looks at how New Zealands Inland Revenue has been able to manage growing cost pressuresand deliver significant efficiency savings, while at the same time maintaining the effectiveness of its services.

Inland Revenues primary functions are the collection of revenue and the disbursement of social policyentitlements. It employs 5,600 people and has offices in 17 locations throughout New Zealand. In 201011,it had a total operating baseline of NZ$642.9 million.

By 2008, as a result of a combination of its expanded social policy business functions, growth in core businessvolumes and the macro economic outlook, it became clear to Inland Revenues senior management that thedepartment was facing a significant fiscal challenge over the next 35 years.

Since 2008 Inland Revenue has delivered NZ$116 million of gross value-for-money savings and reduced baselevel staffing by 630 full-time equivalents (FTEs). 1 Far from suffering a slump in performance, the departmentmet 89% of its performance standards in 200809, 97% in 200910 and 84% in 201011 2.

How was Inland Revenue able to respond so quickly to its fiscal challenge? Key actions have included: Developing a multi-year organisational funding model to track fiscal pressures and opportunities. This model

is used to inform senior management decision making around strategic priorities, resource allocation andsavings options

Ensuring that senior managers are fully engaged and committed to meeting the fiscal challenges, and thattheir focus is maintained

Taking action early to identify a range of organisational savings initiatives Developing a culture of continuous improvement. The department has adopted, and continues to implement,

tools such as Lean Six Sigma and Kaizen to improve its processes and deliver efficiencies. In addition, anew process methodology has been implemented for bulk processing activities

Initiating a long-term programme to make compliance faster, easier and less costly for both customers andInland Revenue. Examples include: improved on-line services, enhancements to telephone technology (voicerecognition and virtual hold) and reviews to reduce customer paper outputs. In one example of in-depth analysis,a detailed review was undertaken to find out why customers were contacting Contact Centres and what wasdriving the length/type of calls. This analysis resulted in changes to standard forms and correspondence(eg tax statements with a nil amount are no longer issued) and ultimately improved performance.

Key to Inland Revenues value-for-money programme has been the ability to measure both the financial andbusiness performance impacts of the initiatives they have implemented.

Since 2008 Inland Revenue has

Developed a reporting framework that integrates financial and business performance reporting and istailored to specific user requirements. The new framework aims to measure the three core aspects of thedepartments value-for-money programme:

Effectiveness achieving the departments desired impacts and outcomes. A report that tracks impactindicators is produced quarterly for Inland Revenues senior managers. They also receive monthly reports onboth financial and non-financial performance, which include forecasts. Third-tier service delivery managersuse real-time weekly monitoring of operational delivery to reallocate resources where required.

Efficiency producing more for less or more for the same. Six-monthly reporting tracks the efficiency of boththe departments service delivery and support service functions. Key unit output costs are tracked monthly.

Economy acquiring resources (inputs) as economically as possible and/ or using as few as possible.Budget holders input costs are reviewed monthly and an additional Economy report tracks key input metrics.


1. This excludes FTEs employed from new funding received as part of Budget 2010 compliance initiatives.2. The 201011 years performance results were impacted by the Christchurch earthquakes.


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Introduced a product costing model to better understand administration costs allowing the department tocompare, for example, the cost of administering GST to that of administering Income Tax, or Child Support toStudent Loans.

Inland Revenues value for money programme is an ongoing journey, requiring continued commitment, carefulmanagement and monitoring and a constant forward looking focus.


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CASE STUDY 3

Review of Strategic Indigenous Housing and Infrastructure Programme, Australia:Applying analysis to a programme and achieving cost management improvements

This case study provides a useful example of the application of cost analysis and benchmarks to a programmeand the way in which managers can then redesign the programme and achieve cost management improvements.

A Review of Programme Performance of the Strategic Indigenous Housing and Infrastructure Programme (SIHIP)was published in August 2009. The Review was commissioned by the Commonwealth Minister for Families,Housing, Community Services and Indigenous Affairs, the Hon Jenny Macklin and the Chief Minister of theNorthern Territory, the Hon Paul Henderson, in order to assess how to improve the SIHIP.

The Review analysed the performance of the programme, particularly in response to Australian Government andpublic concerns that:

The programme had been slow to deliver housing (timing) The governance was overly bureaucratic (governance)

The programme was too costly (total cost), including that the costs of houses (unit cost) and administration

(administrative cost) were too high.While the Reviewers determined that the overall programme design was sound, they also found:

Delays were largely due to underestimates by the Integrated Programme Team of the time required todevelop the initial packages of works

That there have been unresolved leadership and capacity issues in the delivery of the programme That the layers of management should be reduced from six to three

That the estimated unit cost target set at the start of the programme was ambitious That the unit costs need to be reduced to a revised unit cost of $450,000 per new house while still ensuring

that all houses built under SIHIP comply with the Building Code of Australia and the National IndigenousHousing Guide

That administration costs were running at 11.4% of programme budget and needed to be reduced to 8%,largely by replacing some contractors with government staff, simplifying package development processes andstreamlining the governance of programme delivery

That, over the life of the programme, for every $11.50 spent on the delivery of capital works, only one dollarwill be spent on management.

In December 2009, a Post Review Assessment (PRA) was commissioned by the Australian Government toreport against the recommendations made in the Review and to advise on issues relevant to achieving theSIHIP targets.

The PRA found that all of the changes and recommendations arising from the Review have been or are beingimplemented and that immediate improvements are visible as a result. In particular, programme managementcosts have been reduced from 11.4% of total programme outlays to below 8% and are budgeted to remain at

that level.

Sources: Department of Families, Housing, Community Services and Indigenous Affairs and Northern Territory Government, StrategicIndigenous Housing and Infrastructure Programme Review of Programme Performance , Commonwealth of Australia,Canberra, 2009

Donald, O. & Canty-Waldron, J., Strategic Indigenous Housing Infrastructure Programme (SIHIP): Post Review Assessment ,Commonwealth of Australia, Canberra, 2010


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CASE STUDIES

CASE STUDY 4

Hammersmith and Fulham Council, UK:Unexpected benefits from improved understanding of unit costs

The council was concerned that the budget for childrens social care (around 35 million yearly) was volatile andhard to control. Members could see variations in actual spending compared to the original estimates and theyfound it hard to understand this or to challenge it.

The council was considering merging its childrens services department with that of Westminster City Council.1Leading members were concerned that they would not be able to identify where the merger would producesavings, or how to allocate the savings between the councils.

With the help of a small team from the Audit Commission, Hammersmith and Fulham Council matched thecosts of its childrens services department to the activities it undertook. The council then set those alongsidethe numbers of children involved, to produce an estimate of the unit cost of individual activities within childrenssocial care. This helped the council to understand not only the cost of one assessment, on foster careplacement, and one package of post care support, but also what it costs to support one child right through thesystem to age 25.

This process produced more benefits for financial management than the council had anticipated. Asexpected, understanding unit costs helped members to understand and challenge variations in spending. Thisunderstanding also informed the merger discussions. Members were able to start a process of questioningwhere the costs of high performance might be higher than the costs of comparable councils. Managers wereable to discuss with frontline staff the direct financial consequences of the decisions the staff had to take. Thefinancial data provided a basis for understanding the potential savings, if effective interventions could preventchildren entering the social care system in the first place.

1. This merger proposal was later overtaken by a proposal for a broader merger to include the Royal Borough of Kensingtonand Chelsea.


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CASE STUDY 5

New Zealand public sector:Better practice performance reporting

This case study identifies some of the better practice guidance available to New Zealand public sector managers

on performance reporting.In 2008, the State Services Commission and Treasury published Performance Measurement: Advice andexamples on how to develop effective frameworks .1 It provides guidance to public sector managers on howto develop robust performance measurement and reporting frameworks. It describes the benefits of robustperformance measurement as:

Understanding what impact your interventions are having, and how your outputs contribute to theachievement of the right outcomes for New Zealanders

Charting and reporting on the progress you are making towards outcomes, and making adjustmentswhen needed

Tracking the effectiveness of initiatives and programmes over time Making informed decisions on what services to deliver, what policy priorities to work on and what capability

to invest in.Since 2008, the Office of the Auditor-General has published a range of observations and guidance for improvingthe quality and usefulness of performance reporting. 2 These reports emphasise the importance of high qualityperformance reporting for public agencies as well as for public accountability purposes.

Any well-run organisation should understand and be able to set out a performance report that provides a clearpicture of what outcomes the public sector agency is trying to achieve and how it believes it contributes tothose outcomes a performance story. These matters are basic to an organisations management of its ownperformance, and should also be able to provide the basis for some meaningful accountability to Parliament.

According to the Auditor-General, a good performance story will provide information that allows a readerto understand:

the entitys purpose and what it is achieving

how well the entity is performing, and what improvements it needs to be aiming forthe cost effectiveness of the entitys service delivery and results.

1. Performance Measurement: Advice and examples on how to develop effective frameworks (State Services Commission, 2009)2. See for example the following reports from the Office of the Auditor-General: The Auditor-Generals observations on the quality

of performance reporting (2008); Local government: Improving the usefulness of annual reports (2011), Central government:Cost-effectiveness and improving annual reports (2011) and Local government: Examples of better practice in setting localauthorities performance measures (2010).


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CASE STUDIES

CASE STUDY 6

Inland Revenue, New Zealand:Measuring performance against outcomes

By reviewing its performance framework, the Inland Revenue was able to clearly link its daily operationalperformance to desired outcomes and impacts, allowing for more informed decision making about where to focuseffort and resources.

Inland Revenue has an operating budget of NZ$642.9 million, and the careful management of these publicfunds is extremely important. The department also has the responsibility for the collection of NZ$46.9 billionin tax revenue, the disbursement of NZ$2.7 billion in Working for Families tax credit payments, the collectionand transfer of NZ$2.9 billion of KiwiSaver payments to superannuation fund providers, and collection anddisbursement of child support payments totalling NZ$412 million. It manages a student loan portfolio of morethan NZ$10 billion and outstanding tax collectables of more than NZ$5 billion 1, among other responsibilities.

It is critical that the department is able to ensure that the services it delivers are best serving the outcomes it isseeking, especially in the current fiscal environment. A very small increase in the departments effectiveness canmean a very large gain for the Crown, given the size of the Crown revenue and the assets being managed.

The departments success is reflected in two outcomes:

Revenue is available to fund government programmes through people meeting payment obligations oftheir own accord

People receive payments they are entitled to, enabling them to participate in society.

The department has taken a multi-pronged approach to ensuring it is able to measure its progress towardsachieving these outcomes.

Operational performance measuresInland Revenue has a comprehensive set of more than 50 operational business performance measures that look atall aspects of its daily operation, and enable it to assess the quality, timeliness, quantity, productivity and efficiencyof these activities. Some of the more key operational measures (eg Contact Centre performance) are reported

weekly to senior operational managers, to enable resources to be shifted quickly where and when required.Performance measurement frameworkWhile the department had articulated a large number of operational measures and high level outcomes, a reviewof its existing performance measurement framework revealed that a crucial middle layer of measurement wasmissing: impacts the difference an organisation wants to make ( see Figure 3, page 65).

As a result, the department set about developing a set of impact statements. They are largely based on broadcategories of taxpayer obligation defined by the OECD, while also incorporating Inland Revenues social policyfunctions. The statements centre around Inland Revenue improving customers ability to:

Self-manage their obligations and entitlements

Claim their correct entitlements

Register and report accurate information when required File information and pay on time Positively change their non-compliant behaviour.

These impacts have been integrated into a consolidated performance measurement framework, providing aclear link between the outcomes the department is seeking to achieve and the daily outputs it delivers. InlandRevenue has developed a number of indicators to measure its performance over the longer term ( see CaseStudy 2, page 59).


1. Inland Revenue Annual Report 20102011. The Student Loan value is based on the nominal value of loans with Inland Revenueas at 30 June 2011.


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BRIEFING NOTE

Page 18

Figure 3: Inland Revenue performance framework

Our inputs the way we use our resources

People Systems Assets

Our MissionWe contribute to the economic and social wellbeingof New Zealand by collecting and distributing money

Our Vision A world-class revenue organisation

recognised for service and excellence

Our outcomes the goals we are aiming to achieve

Revenue is available to fund government programmes throughpeople meeting payment obligations of their own accord

People receive payments they are entitled to,enabling them to participate in society

Our impacts the difference we want to make

Most customers are

able to self-manage

The behaviour ofnon-compliant

customers improves

More customersclaim their correct

entitlements

More customerspay and file

information on time

More customersregister and report

accurate informationwhen required

We improvecompliance by ensuring: Compliance includes when:

We addressnon-compliance so that:

Our outputs the activities we do

Services to inform the publicabout entitlements and

meeting obligationsTaxpayer audit

Services to processobligations and entitlements

Management of debt andoutstanding returns

Policy advice

Our priorities the key areas we will direct our effort and resource to

We retain, developand attract

high-calibre peoplewith skills required

in the future

We proactivelyinfluence compliance

and address thecauses of the

compliance riskand threats

through a range ofinterventions

We move customersto cost-effectivechannels while

creating anenvironment to

make it easyfor customers

to self-manage

We improve theefficiency and

effectiveness ofgovt through

working with otheragencies and

private providers

We use ourinformation tomake timely

decisions and buildan intelligence-led

organisation

Our systems meetour current and

future needs

Value formoney

E f f e c t i v en e s s

E f f i c i en c y

E c on om

y

Source: Inland Revenue


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CASE STUDIES

CASE STUDY 7

Virgin Media, UK: Reviewing procurement of goods and services

Virgin Media ran an 18-month project to identify savings across different cost categories. This case study looksat how improving the understanding of costs helped Virgin Media to identify savings in procurement.

Spending on procurement: categories and prioritiesSenior managers first step was to identify levels of expenditure across the organisation. They categorisedcosts into consistent groups, based on current information. This provided a baseline against which to measurecost reduction.

In the second phase, the company carried out further analysis, categorising costs according to significance,risk to supply, quality and strategy, to identify areas in which to focus on cost reduction.

Under the first category: significance, senior managers considered the proportion of expenditure in each costcategory and focused on the largest areas of expenditure where cost reduction would have the greatest impact;for example, the cost of IT equipment rather than office cleaning costs.

Under the second category: risk to supply, they asked themselves whether they needed a guaranteed supply.

The company might decide to pay more for a given item to guarantee supply, rather than procure at a lower pricefrom a less reliable source; for example, when procuring specialist components for cable-based television services.

Under the third category: quality, senior managers considered the extent to which the tolerance on quality canvary and how critical this is to the business. Some components may be relatively expensive to replace and becritical to the business; for example, specialised computer server technology, where paying a higher price mayensure robustness and reduce the risk of failure.

Under the final category: strategy, the senior managers considered whether the cost category was strategicallyimportant to the business, ie whether it influenced the final product to the customer.

As an example, the transportation cost category would be of less strategic importance than business criticalcomputer systems such as customer account management systems. This would suggest that senior managersshould direct the focus of cost reduction onto transportation costs rather than the business critical systems.

Elements of cost: acquiring, paying for, handling and using goodsNext, the senior managers analysed the three elements that comprise the total cost of ownership for each costcategory: price, how the company uses goods, and the cost of acquiring and handling them.

Understanding what drives price was critical to senior managers determination of how to reduce costs. Theyconsidered what volume discounts were available; whether there were incentive structures that offered a cheaperprice for buying a greater volume; and what determined the price for one item was it an agreed level of businesswith a particular supplier? For example, we will charge you 10% less for stationery if you spend over X,000 withus each year.

Understanding how Virgin Media uses the goods it buys provided senior managers with further insights intowhat materials offered the greatest value for money. Considerations included: what is the expected life of anitem and how did the company use it? Was there a scrap or sell-on value for the item at the end of its useful

life in the company?

The senior managers also examined the costs of buying and handling the goods:

Was it possible to purchase the goods electronically? Could they pay invoices electronically or were manual processes involved? Did they have to pay separate invoices for each item as they ordered it, or was it possible to pay on a single

invoice issued monthly or quarterly, etc?

Were they incurring storage costs because they needed to hold stocks?



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BRIEFING NOTE

Page 20

Understanding these four elements gave the company a clearer understanding of its true costs and gave it abetter basis for comparing goods of different quality or from different suppliers.

This full life costing approach was important in informing decisions on the best approach to source an item. Whensenior managers take into account the full life costs, a more expensive item may have lower overall costs to thecompany. For example, the cost of a computer system will include long-term maintenance and support costs andthe costs of obsolescence, as well as the initial outlay; decision-takers need to consider whether the computer willlast three or five years.

Cost category analysis enabled management to understand the importance of each cost category, and its realcost to the organisation. This understanding allowed senior managers to decide the most appropriate method ofsourcing goods; whether to buy locally, put out to tender or to develop items in-house.

The final phase of the project involved planning and implementing each of the purchasing approaches accordingto the priority and level of impact on Virgin Media and its customers. Virgin Media estimated that the purchasingsavings they secured through this approach would be over 60% of their original 250 million target.


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APPENDIX A

KEY STEPS TO CREATING A COST CONSCIOUS CULTURE

Communication

1. Get the message out that costs matter

2. Create a communications process on cost management

3. Use it to share good practice and success

Make sure roles and responsibilities are clear to all

4. Clarify each managers responsibility to manage costs

Create the environment for dialogue between finance and operational managers

5. Encourage each manager to challenge finance to provide the information they want

6. Get finance professionals involved in the operational and programme areas

7. Jointly find out what information exists

8. Identify knowledge gaps that will give new insights

9. Develop an understanding of cost drivers and cost behaviours

Ensure decisions are based on sound costing information

10. Know your baseline and benchmarks

11. Set cost targets

12. Know your early warning indicators and limits

13. Ensure all decision reports are based on sound costing information.


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APPENDIX B

SETTING UP A STRATEGIC APPROACH TO COST MANAGEMENT

Generate insights including quick win opportunities Generate insights into efficient use ofresources and sustainable savings

1 - 2 Weeks 4 8 Weeks 2 8 Weeks Open ended driven by budget cycle

Mobilise and Plan Gain Cost Visibility Gain CostUnderstanding

Negotiate Budgetsand KPIs

Monitor

Agree scope Examine financialsystems andaccounts

Review currentanalyses andapply additionalanalysis methodsto gain furtherunderstanding

Recalculatebudget based onnew baseline andcosts targets

Monitor costtargets alongsideKPIs

Establish projectteam and/orsteering group

Identify datagaps andinconsistencies

Benchmarkappropriate costlevels to set newbudget baseline

Consider phasedintroduction ofzero-based oractivity-basedbudget

Track variancebetween budgetbaseline andactuals

Confirmleadershipendorsement

Identify key costcategories Set top-down costcategory targets Analyse driversof cost to identifymore detailedsavings

Monitor andevaluate trends indrivers of cost andperformance

Analyse currentapproach to costmanagement

Map department,agency,programme,and servicecosts againstcost categories

define whospends how much

and on what

Agreeresponsibility andpolicies to supportcost targets

Identify earlywarning indicatorsand limits

Use early warningindicators totrigger earlyaction to addressareas of over- orunder-spend

Communicate start early, report successes widely, provide clarity on each step to employees and stakeholders

Keep it simple analysis for each step of the process can be done using simple spreadsheet tools such as Excel

Assess skills pinpoint skills gaps for both financial and non-financial staff, eg finance staff understanding ofprogrammes and services, or non-financial managers level of financial literacy


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Acknowledgements

CIPFA is grateful to the members of its Financial Management Panel and in particular the editorialgroup of Nigel Hiller, Sue Beauchamp, Rachel Johnson, Chris Lambert, Peter Steed and Roger Tabor,who provided invaluable guidance to the author of the publication, Carole Hicks.

In New Zealand, NZICA would like to thank Scott Scoullar and David Toohey of Inland Revenue, Ann Webster of the Office of the Auditor General and Fergus Welsh of The Treasury for theircontributions.


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About us: CIPFA, ICAA and NZICA

Chartered Institute of Public Finance and Accountancy (CIPFA)

CIPFA is the professional body for people in public finance. Our 14,000 members work throughoutthe public services, in national audit agencies, in major accountancy firms, and in other bodieswhere public money needs to be effectively and efficiently managed.

Our portfolio of qualifications is the foundation for a career in public finance, and we championhigh performance in public services by translating our experience and insight into clear adviceand practical services.

As the worlds only professional accountancy body to specialise in public services, CIPFA standsup for sound public financial management and good governance around the world.

The Institute of Chartered Accountants in Australia (ICAA)

ICAA is the professional body representing Chartered Accountants in Australia. Our reach extendsto more than 67,000 of todays and tomorrows business leaders, representing more than 55,000Chartered Accountants and 12,000 of Australias best accounting graduates currently enrolled in ourworld-class Chartered Accountants postgraduate program.

We work in the public interest, aiming to lead the profession by delivering visionary leadership projects,

setting the benchmark for the highest ethical, professional and educational standards, and enhancingand promoting the Chartered Accountants brand. We draw on the experience of our members to workwith government, industry, academia and local and international bodies on public policy, governmentlegislation and regulatory issues.

New Zealand Institute of Chartered Accountants (NZICA)

NZICA is the membership body of choice for over 33,000 accounting and business professionals,working around New Zealand and across the globe. Our members hold one of three prestigiousprofessional accountancy designations: Chartered Accountant (CA), Associate Chartered Accountant(ACA) or Accounting Technician (AT) and work in public practice, the public sector, educationalinstitutions, and in corporate and not-for-profit organisations.

As an organisation NZICA is focused on championing the accounting profession and nurturing thenext generation of business leaders. We act in the public interest by advocating sound public policy infinancial, regulatory and taxation areas, delivering training and continuing professional development,regulating the profession, and promoting quality, integrity and expertise.


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Documents

Creating a Cost Conscious Culture