A joint initiative of

Creating a Cost
Conscious Culture
The NZ Edition April 2012
FOREWORD
Page i
Published by:
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2012 CIPFA
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Page 1
Creating a cost conscious culture
STATEMENT OF PURPOSE
This briefing note is written for managers and leaders in the public sector to promote better
understanding of costs by public sector organisations and better use of cost information to support
decision 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 of
the Audit Commission (UK) to give practical examples of ways public sector managers can improve
the use of costing information. Case studies from New Zealand, Australia and the UK offer valuable
learning 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 have
set challenging budgets and financial plans. Having a cost conscious culture will be fundamental to
achieving fiscal strategy targets and demonstrating efficient, effective, economical and ethical use of
public 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 that
they think frequently about cost and talk about cost; it crops up in formal and informal conversations
around the organisation, as well as in management meetings and operational and service reviews
Build good working relationships: senior operational managers and finance professionals
recognise the contribution and expertise each brings to decision-taking processes. Finance staff
work closely with other senior managers, to produce timely and accurate cost management
information 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 the
authority, to promote value for money vertically within departments and agencies and horizontally
against their deliverable or output category, and across programme and service lines or
departments and agencies
Use comparative data: senior managers use key performance indicators to benchmark costs
internally (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 the
capacity 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, and
providing specialist software (including spreadsheet and other analysis tools) and appropriate training.
BRIEFING NOTE
Page 2
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 the
responsibility of finance staff
Failure to integrate finance and performance data and to share it across department and agency
boundaries, 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 operational
and 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 support
decision 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 economical
use of resources. For public sector managers too, whether they work in front-line operational and service
delivery areas or the back-office support activities, understanding and managing down cost is essential to
ensure 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 all
public organisations; the next section of this guide suggests some steps they can take.
CREATING A COST CONSCIOUS CULTURE
There 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 four
important 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 their
most important priorities and that their performance appraisal will include an evaluation of their
performance 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 managers
that managing cost is difficult. Many managers lack confidence and are wary of involvement in what
they see as a specialist area. Some managers express the belief that cost management is solely the
province 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 analysing
and explaining variances from budget. Increasingly they have responsibility for actively managing their
current costs and forecasting future costs. Unless they understand their cost drivers they will be unable
to plan services, budget and forecasts costs or identify and lock-in savings.
Finance professionals roles often involve a combination of challenge and support to operational
managers. The precise divisions of responsibilities vary in different organisations; they need to be
clearly understood by both parties. Managers need to be clear about their own financial responsibilities
and 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 whose
task is to understand the drivers of cost in one cost category (eg IT, property or procurement), set
organisation-wide targets for cost reduction and implement those reductions by negotiating targets
with departmental and agency budget holders. They check progress in reducing spending across the
organisation 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 decision
takers 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 place
managers may need to promote better mutual understanding. Operational managers need to understand
how a finance department works and what assistance it can provide. Equally, finance professionals need
to 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 professionals
to perform, simply because they do not know what analysis tools are available to them. Managers
need to be able to explain to finance staff what cost information they need to help them weigh up the
issues and arrive at a well-founded decision. The finance professionals need to be able to understand
the issues faced by operational managers and then identify what analysis will yield the information the
managers want.
Managers need to make effective use of the analysis of cost information for decisions. The amount
of work required to produce the cost information will need to be balanced against its importance for
their decisions. There will be a trade-off between accuracy and speed of production for an urgent
decision. There will be some limitations on what it is possible to do, depending on the availability of
time, cost and data. There will be a point at which additional analysis will fail to improve decision taking
sufficiently to justify the incremental effort to improve costing, and the cost of so doing. All these issues
need 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 organisations
financial systems or within other management information systems. Where it does not exist in the form
BRIEFING NOTE
Page 4
required, analysts may need to conduct analyses or develop models to generate it; for example costing
models 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 DECISION
Leaders 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 or
are 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 outsource
or provide in-house
Deciding on activity levels, the mix and design of services or how to improve efficiency
and 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 in
the business
cycle
Review
Planning
Monitoring
Implementation
Budgeting
Decisions
on strategy
Decisions to
tackle over-spend
Decisions
to improve
efficiency
Make or buy
decisions
Investment
decisions
Decisions on
fees & charges
Decisions to
spend less
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CREATING A COST CONSCIOUS CULTURE
For any of these decisions to be well-founded, the information to support them has to be relevant,
of high quality and well presented:
Relevance: decision takers need cost information that covers all the significant cost factors that
might influence the decision. Relevant cost information will have the right level of aggregation
for the decision (for example location, time frame or type of cost information)
Quality: cost information needs to be transparent in its accuracy, validity, reliability, timeliness
and completeness
Presentation: managers should present information to decision takers clearly so they can
understand both the information itself and the story the information tells. They need to tailor
the presentation to the particular preferences of a decision taker.
What these characteristics of cost information mean in practice varies both by decision and by decision
taker. Clearly, the same cost information is not relevant to all decisions, nor is the same presentation
of cost data right for a financial analyst and a member of the organisations Executive. The first step in
providing the right cost information is to understand what decision it is to support.
Table 1, below, summarises relevant cost information managers are likely to need for some of these
decisions. The table shows that it is impossible to make a well-founded decision without understanding
some aspects of cost. It also illustrates how the cost information needed to support decisions can differ
at each point in the business management cycle.
Table 1: Relevant cost information for different types of decisions
Type of
decision
Taken by Example
decisions
Relevant cost information
Strategic Priority setting Leaders Should we
change
the level of
entitlement
for a
programme
or service?
What is the full cost of providing the current service?
How does it vary by service user?
What does each part of the current service cost?
What are the cost drivers for this service?
How would costs change if ?
Investment Leaders Should we invest to save?
What are the costs and benefits attributable to the
investment through its life?
Do we understand the impact on costs and benefits
of changes in the timeline?
Do we understand the forecasting assumptions
for the movement of cost elements and accuracy
limits on forecasts?
Are any residual costs clear?
Will there be cost impacts on other departments,
or partner organisations?
Alternative
service
provision
Leaders Should we outsource, use shared services or
deliver in-house?
What are the relevant stand-alone costs of
the service?
Which costs are saveable?
Which costs will remain with the organisation?
What are the contract management costs?
What is the impact on fixed asset/property costs?
BRIEFING NOTE
Page 6
Operational Efficiency
improvements
Senior
managers
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 organisation
relate to one another?
Managing
budgets
Senior
managers
How can we react to unexpected overspends?
What drives cost in relevant areas?
What external changes might be giving rise to
overspends? Are they likely to continue?
Will reductions in activity in one area increase costs
in another?
Procurement Senior
managers
What can we do to reduce our spend on procured
goods and services?
How does what we pay compare with what other
similar organisations pay for these services?
Is there a range of prices paid for similar goods or
services across our organisation?
Do we have good market intelligence on supplier
input 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 our
buying power and reduce our unit costs?
When did we last test the market?
WHAT COST INFORMATION CAN TELL MANAGERS
High 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 designed
to support
That the cost information required for the right cost analysis does not necessarily need to be
laboriously 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 be
analysed in a variety of ways. Table 2 (see page 53) shows examples of how different questions about
cost 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 cost
analysis. While the financial management information system and general ledger is the basic source of
data on costs, other corporate information systems and resources will need to be called upon. Depending
upon the decision to be made, these information systems and resources may include:
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CREATING A COST CONSCIOUS CULTURE
User and beneficiary databases: these can provide information on different user and beneficiary
groups, often by age, gender, disability, ethnicity, services and location. Where smartcards or
similar systems are used, the information gathered from them can be useful for cost or market
analysis, or to understand the cost implications of providing grants, benefits and subsidies to
selected groups
Human Resource databases with information on staff numbers, grades, entitlements, staff turnover
and 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, the
running costs, market value, and opportunities to share under-occupied premises. Comparative
benchmarking data on property costs may also be available.
Many organisations and their management teams do not exploit fully all the cost and other data
they already hold. Although the necessary data exists, managers do not always know what analysis
to do on the data and they may be unable to do it themselves. Finance professionals with a good
understanding of cost centres and cost categories can advise on how to manipulate the data in
different 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 possible
supporting analyses
Questions for
management
Insights gained into cost Supporting analyses
What is the
composition of the
cost 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 the
balance of fixed and
variable costs of the
service?
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 different
patterns of in-house or contracted
delivery?
Procurement options for facilities and
equipment; whether to lease or buy,
capacity, reliability, energy efficiency
Identify the events that drive the variable
costs, eg service demand, frequency
of service interactions, projections of
service demand growth from changing
economic conditions, promotion
and take-up
Can we reduce costs
by changing the
method or timing of
service delivery?
How do service delivery methods
(eg face-to-face, telephone, internet)
affect costs?
How does the timing or frequency
of service affect costs?
What are the key processes that
affect costs?
How do governance and compliance
arrangements affect costs?
Identifying and understanding the
drivers of cost
Modelling of costs associated with
different service delivery methods
and frequencies
Process and workflow mapping
and analysis
Addressing the cost of red-tape
Control risk analysis
Continued on next page
BRIEFING NOTE
Page 8
Can we reduce the
costs of components
(people, property,
facilities, equipment,
IT and support) or
change the balance
of them to reduce
overall costs?
What can we do to reduce the costs of
each component, eg increasing labour
efficiency, transferring contractors to
staff, buying contracted services more
economically, changing maintenance
schedules, using shared services,
applying market testing?
Can spending more in one area give
rise 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 costs
and the links between them
Analysis of additional staff training
and impacts on turnover, IT help desk
and support costs, process efficiency
improvements and enhanced compliance
What is the most
cost effective way
of delivering
services to users
and beneficiaries?
What do different approaches to
service delivery cost in different
geographic areas?
What if we partnered with other
organisations delivering to the
same users?
How do different approaches to
service delivery affect objectives
and outcomes?
How do take-up volumes affect
service delivery costs?
Is there over-utilised or under-utilised
capacity for service delivery?
Analysis of costs of service delivery
by service type, location and user
or beneficiary
Examination of connected service
delivery for common users and
beneficiaries
Evaluation of impact of different service
delivery methods on objectives and
outcomes
Analysis of capacity constraints and
utilisation by service type, location
and user or beneficiary
Do service delivery processes need
to be redesigned in order to be more
cost effective?
What is the cost
of delivering an
additional service?
Is there a standard cost, average cost
or acceptable cost range for different
service delivery methods?
What is the marginal cost of
service delivery?
What is the cost per unit or cost per
hour of service delivery? How does
this compare to benchmark of better
practice? If we are not comparable,
what actions would be needed to
chieve better practice costs?
What proportion of cost is administrative
support? Is that percentage appropriate
or reasonable?
Standard costs, average cost and
time-based activity cost analysis
Analysis of what drives variation in each
component of cost (case mix, complexity,
service standards, quality standards,
timeliness, staff skills, location)
Analysis of past changes in workload
and capacity
Analysis of the cost of different
options for managing workload
peaks and growth
Process mapping and analysis
and costs to identify the cost of
administrative support
Benchmarking of costs and performance
standards (quality, safety, timeliness)
Continued on next page
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CREATING A COST CONSCIOUS CULTURE
How and why have
costs changed over
time? What have we
done or can we do
about it?
How has the average or unit cost
of delivering service changed in
recent years?
What costs are incurred for processes
and activities that do not enhance
service delivery?
Which components of costs have
changed and why (increased demand
and volume of service, increased
unit costs)?
What options have we for reducing costs
or avoiding cost increases?
Analysis of the historic financial records
to identify trends in costs (by service
type, location and user or beneficiary
group)
Analysis of the components of cost to
identify the causes of those trends
Analysis of non-financial data on trends
and resource requirements (demand
levels, staffing requirements, locations)
Analysis of the links between the costs
of different processes
Modelling the cost implications of
different approaches to staffing and
service delivery
BEGIN WITH THE END IN MIND
Cost analysis is not an end in itself; it simply serves a purpose, in providing information to influence
decision 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 together
for 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 secure
it through an appropriate analysis.
Figure 2: Begin with the end in mind
Know what decision
you need to take
Identify the right
cost information
Secure the right
cost analysis
Organisations that invest time and effort to understand their costs fully can achieve tighter financial
control, secure greater choice in allocating resources and make better decisions. Every manager in the
public service should recognise that understanding and controlling costs is part of their responsibility.
Changing organisational culture such that cost considerations automatically feature in everyones actions
is an urgent priority for public sector departments and agencies needing to better manage costs or
achieve 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 the
conditions in which cost information is afforded a high priority and is seen as an integral part of driving
performance and operational management.
Appendix C, page 71, summarises the broad themes leaders and senior managers will need to
address. Appendix D, page 73, provides one example of a short-term programme designed to have an
immediate impact on an organisations costs and change its culture at the same time.
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Case Studies
COSTING ANALYSIS IN PRACTICE
The following case studies illustrate how senior managers in Central Government, local authorities and
the private sector looked at cost from different angles and used different costing techniques to improve
their 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 applied
to a specific programme in this case the Australian Governments Strategic Indigenous Housing and
Infrastructure Programme resulted in more effective allocation of resources.
Local government
When Londons Hammersmith and Fulham Council undertook cost analysis to measure the benefits of
a 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 guidance
available in New Zealand from The Treasury and the Office of the Auditor General. Following this is an
example of how New Zealands Inland Revenue revised their performance measurement framework to
more 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 useful
lessons for public organisations. The final case study gives an account of how Virgin Media in the UK
scrutinised their spending on procurement of goods and services.
CASE STUDY 1
Australian 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 the
need for reform to achieve greater efficiencies. It also identifies the strategy Defence put in place to realise these
efficiencies, which requires the involvement of every person within Defence and incorporates a focus on creating
a cost conscious culture within Defence.
During the 2009 Defence White Paper process Defence identified a range of areas where support structures
and processes were not working well. As part of that process, an independent audit of the Defence budget was
conducted. This very comprehensive audit identified a number of areas where Defence could initiate reforms and
be more efficient in the way it used its resources it assessed that Defence could reduce costs by around $20
billion between 2009 and 2019.
Continued on next page
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CASE STUDIES
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 one
of the largest and most complex reform programmes ever undertaken in Australia. It is a decade-long campaign
of reform that requires the participation and support of every person in Defence. It is clearly identified within
Defence that SRP is not a passing fad and is not something that anyone can wait out it is identified by the
Defence leadership group as being fundamental to the future of Defence.
Defence receives a substantial part of the Governments budget and Defence managers have a responsibility
to ensure that resources are used wisely. A key feature of SRP is to demonstrate that everything Defence does
counts 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 with
mixed results. Some of its past reform efforts have not sufficiently recognised that in some cases money needs
to 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 SRP
budget includes around $2.4 billion to enable implementation of the reforms. ICT and Logistics are two examples
of 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
BRIEFING NOTE
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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 pressures
and 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 policy
entitlements. 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 business
volumes and the macro economic outlook, it became clear to Inland Revenues senior management that the
department 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 base
level staffing by 630 full-time equivalents (FTEs).
1
Far from suffering a slump in performance, the department
met 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 and
savings options
Ensuring that senior managers are fully engaged and committed to meeting the fiscal challenges, and that
their 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, a
new 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 and
Inland Revenue. Examples include: improved on-line services, enhancements to telephone technology (voice
recognition 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 was
driving 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 and
business 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 is
tailored to specific user requirements. The new framework aims to measure the three core aspects of the
departments value-for-money programme:
Effectiveness achieving the departments desired impacts and outcomes. A report that tracks impact
indicators is produced quarterly for Inland Revenues senior managers. They also receive monthly reports on
both financial and non-financial performance, which include forecasts. Third-tier service delivery managers
use 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 both
the 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.
Continued on next page
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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CASE STUDIES
Introduced a product costing model to better understand administration costs allowing the department to
compare, for example, the cost of administering GST to that of administering Income Tax, or Child Support to
Student Loans.
Inland Revenues value for money programme is an ongoing journey, requiring continued commitment, careful
management and monitoring and a constant forward looking focus.
BRIEFING NOTE
Page 14
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 programme
and 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 the
Northern 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 and
public 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 to
develop 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 Indigenous
Housing 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 and
streamlining 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 dollar
will be spent on management.
In December 2009, a Post Review Assessment (PRA) was commissioned by the Australian Government to
report against the recommendations made in the Review and to advise on issues relevant to achieving the
SIHIP targets.
The PRA found that all of the changes and recommendations arising from the Review have been or are being
implemented and that immediate improvements are visible as a result. In particular, programme management
costs 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, Strategic
Indigenous 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
Page 15
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 and
hard to control. Members could see variations in actual spending compared to the original estimates and they
found it hard to understand this or to challenge it.
The council was considering merging its childrens services department with that of Westminster City Council.1
Leading members were concerned that they would not be able to identify where the merger would produce
savings, 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 the
costs of its childrens services department to the activities it undertook. The council then set those alongside
the numbers of children involved, to produce an estimate of the unit cost of individual activities within childrens
social care. This helped the council to understand not only the cost of one assessment, on foster care
placement, and one package of post care support, but also what it costs to support one child right through the
system to age 25.
This process produced more benefits for financial management than the council had anticipated. As
expected, understanding unit costs helped members to understand and challenge variations in spending. This
understanding also informed the merger discussions. Members were able to start a process of questioning
where the costs of high performance might be higher than the costs of comparable councils. Managers were
able to discuss with frontline staff the direct financial consequences of the decisions the staff had to take. The
financial data provided a basis for understanding the potential savings, if effective interventions could prevent
children 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 Kensington
and Chelsea.
BRIEFING NOTE
Page 16
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 and
examples on how to develop effective frameworks.
1
It provides guidance to public sector managers on how
to develop robust performance measurement and reporting frameworks. It describes the benefits of robust
performance measurement as:
Understanding what impact your interventions are having, and how your outputs contribute to the
achievement of the right outcomes for New Zealanders
Charting and reporting on the progress you are making towards outcomes, and making adjustments
when 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 improving
the quality and usefulness of performance reporting.
2
These reports emphasise the importance of high quality
performance 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 clear
picture of what outcomes the public sector agency is trying to achieve and how it believes it contributes to
those outcomes a performance story. These matters are basic to an organisations management of its own
performance, 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 reader
to understand:
the entitys purpose and what it is achieving
how well the entity is performing, and what improvements it needs to be aiming for
the 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 local
authorities performance measures (2010).
Page 17
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 operational
performance to desired outcomes and impacts, allowing for more informed decision making about where to focus
effort and resources.
Inland Revenue has an operating budget of NZ$642.9 million, and the careful management of these public
funds is extremely important. The department also has the responsibility for the collection of NZ$46.9 billion
in tax revenue, the disbursement of NZ$2.7 billion in Working for Families tax credit payments, the collection
and transfer of NZ$2.9 billion of KiwiSaver payments to superannuation fund providers, and collection and
disbursement of child support payments totalling NZ$412 million. It manages a student loan portfolio of more
than 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 is
seeking, especially in the current fiscal environment. A very small increase in the departments effectiveness can
mean 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 of
their 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 towards
achieving these outcomes.
Operational performance measures
Inland Revenue has a comprehensive set of more than 50 operational business performance measures that look at
all aspects of its daily operation, and enable it to assess the quality, timeliness, quantity, productivity and efficiency
of 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 framework
While the department had articulated a large number of operational measures and high level outcomes, a review
of its existing performance measurement framework revealed that a crucial middle layer of measurement was
missing: 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 broad
categories of taxpayer obligation defined by the OECD, while also incorporating Inland Revenues social policy
functions. 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 a
clear link between the outcomes the department is seeking to achieve and the daily outputs it delivers. Inland
Revenue has developed a number of indicators to measure its performance over the longer term (see Case
Study 2, page 59).
Continued on next page
1. Inland Revenue Annual Report 20102011. The Student Loan value is based on the nominal value of loans with Inland Revenue
as at 30 June 2011.
BRIEFING NOTE
Page 18
Figure 3: Inland Revenue performance framework
Our inputs the way we use our resources
People Systems Assets
Our Mission
We contribute to the economic and social wellbeing
of 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 through
people 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 of
non-compliant
customers improves
More customers
claim their correct
entitlements
More customers
pay and file
information on time
More customers
register and report
accurate information
when required
We improve
compliance by ensuring:
Compliance includes when:
We address
non-compliance so that:
Our outputs the activities we do
Services to inform the public
about entitlements and
meeting obligations
Taxpayer audit
Services to process
obligations and entitlements
Management of debt and
outstanding returns
Policy advice
Our priorities the key areas we will direct our effort and resource to
We retain, develop
and attract
high-calibre people
with skills required
in the future
We proactively
influence compliance
and address the
causes of the
compliance risk
and threats
through a range of
interventions
We move customers
to cost-effective
channels while
creating an
environment to
make it easy
for customers
to self-manage
We improve the
efficiency and
effectiveness of
govt through
working with other
agencies and
private providers
We use our
information to
make timely
decisions and build
an intelligence-led
organisation
Our systems meet
our current and
future needs
Value for
money
E
f
f
e
c
t
i
v
e
n
e
s
s
E
f
f
i
c
i
e
n
c
y
E
c
o
n
o
m
y
Source: Inland Revenue
Page 19
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 looks
at how improving the understanding of costs helped Virgin Media to identify savings in procurement.
Spending on procurement: categories and priorities
Senior managers first step was to identify levels of expenditure across the organisation. They categorised
costs into consistent groups, based on current information. This provided a baseline against which to measure
cost 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 cost
category 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 price
from 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 can
vary and how critical this is to the business. Some components may be relatively expensive to replace and be
critical to the business; for example, specialised computer server technology, where paying a higher price may
ensure robustness and reduce the risk of failure.
Under the final category: strategy, the senior managers considered whether the cost category was strategically
important 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 critical
computer systems such as customer account management systems. This would suggest that senior managers
should direct the focus of cost reduction onto transportation costs rather than the business critical systems.
Elements of cost: acquiring, paying for, handling and using goods
Next, the senior managers analysed the three elements that comprise the total cost of ownership for each cost
category: 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. They
considered what volume discounts were available; whether there were incentive structures that offered a cheaper
price for buying a greater volume; and what determined the price for one item was it an agreed level of business
with a particular supplier? For example, we will charge you 10% less for stationery if you spend over X,000 with
us each year.
Understanding how Virgin Media uses the goods it buys provided senior managers with further insights into
what materials offered the greatest value for money. Considerations included: what is the expected life of an
item 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?
Continued on next page
BRIEFING NOTE
Page 20
Understanding these four elements gave the company a clearer understanding of its true costs and gave it a
better 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. When
senior managers take into account the full life costs, a more expensive item may have lower overall costs to the
company. For example, the cost of a computer system will include long-term maintenance and support costs and
the costs of obsolescence, as well as the initial outlay; decision-takers need to consider whether the computer will
last three or five years.
Cost category analysis enabled management to understand the importance of each cost category, and its real
cost to the organisation. This understanding allowed senior managers to decide the most appropriate method of
sourcing 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 according
to the priority and level of impact on Virgin Media and its customers. Virgin Media estimated that the purchasing
savings they secured through this approach would be over 60% of their original 250 million target.
Page 21
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.
Page 22
APPENDIX B
SETTING UP A STRATEGIC APPROACH TO COST MANAGEMENT
Generate insights including quick win opportunities Generate insights into efficient use of
resources 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 Cost
Understanding
Negotiate Budgets
and KPIs
Monitor
Agree scope Examine financial
systems and
accounts
Review current
analyses and
apply additional
analysis methods
to gain further
understanding
Recalculate
budget based on
new baseline and
costs targets
Monitor cost
targets alongside
KPIs
Establish project
team and/or
steering group
Identify data
gaps and
inconsistencies
Benchmark
appropriate cost
levels to set new
budget baseline
Consider phased
introduction of
zero-based or
activity-based
budget
Track variance
between budget
baseline and
actuals
Confirm
leadership
endorsement
Identify key cost
categories
Set top-down cost
category targets
Analyse drivers
of cost to identify
more detailed
savings
Monitor and
evaluate trends in
drivers of cost and
performance
Analyse current
approach to cost
management
Map department,
agency,
programme,
and service
costs against
cost categories
define who
spends how much
and on what
Agree
responsibility and
policies to support
cost targets
Identify early
warning indicators
and limits
Use early warning
indicators to
trigger early
action to address
areas of over- or
under-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 of
programmes and services, or non-financial managers level of financial literacy
Page 23
Acknowledgements
CIPFA is grateful to the members of its Financial Management Panel and in particular the editorial
group 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 their
contributions.
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 throughout
the public services, in national audit agencies, in major accountancy firms, and in other bodies
where public money needs to be effectively and efficiently managed.
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and practical services.
As the worlds only professional accountancy body to specialise in public services, CIPFA stands
up for sound public financial management and good governance around the world.
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ICAA is the professional body representing Chartered Accountants in Australia. Our reach extends
to more than 67,000 of todays and tomorrows business leaders, representing more than 55,000
Chartered Accountants and 12,000 of Australias best accounting graduates currently enrolled in our
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We work in the public interest, aiming to lead the profession by delivering visionary leadership projects,
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with government, industry, academia and local and international bodies on public policy, government
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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 prestigious
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institutions, and in corporate and not-for-profit organisations.
As an organisation NZICA is focused on championing the accounting profession and nurturing the
next generation of business leaders. We act in the public interest by advocating sound public policy in
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regulating the profession, and promoting quality, integrity and expertise.