Costing

The emphasis of this infoKit is on designing business processes in line with the six administrative principles outlined previously and on seeking opportunities for income generation. The infoKit is intended for an audience of functional specialists rather than management accountants hence we do not cover the costing of business processes in any technical detail. It is however worth taking the time to outline the sort of financial model that would support a process-driven approach.

The concept of Activity Based Costing (ABC) developed during the late 1980s, largely out of work undertaken by Harvard Business School, is one that fits well with a process approach.

'When you cut to the chase, costs are simply the residual of people or equipment doing activities. Costs are a derivative. They are a dependent variable - the residual of work being done and things being purchased. They reflect an impact. Costs are the shadow of a body or the echo of a sound.' [Cokins G. 1996 - Activity Based Cost Management: Making it Work]. This view is one which recognises that costs are symptoms not causes. Going back to the concept of process dysfunction outlined above, all of the problems identified result in the symptom of increased costs.

We have already seen that it is processes not departments that deliver client satisfaction and that a process approach necessitates looking across organisational boundaries. With this in mind it is easy to see how traditional financial accounting models are frequently incapable of supporting a process-driven approach. Financial reporting by Department or cost centre perpetuates the vertical hierarchy, the stovepipes or silos, that inhibit an organisation's performance.

Cokins (ibid) says 'Traditional accounting blocks managers from seeing, understanding, and reacting to the costs they should be managing. It blocks them from understanding the causes of their costs. In contrast, activity accounting brings visibility. It also brings quantification. ABC connects action words to management concepts and vice versa. It shows end-users where accountability and empowerment intersect. It is a mirror reflection of the organization's costs of business processes.' He also goes on to say 'Activity accounting provides a natural framework to assign value. Where are we adding value? Where are we not adding value? Where should we be adding value? How well are we adding value?' The judgement of this value must of course be related to your strategic objectives.

The difference can be seen most clearly by considering some example financial reports (below). The first is a traditional financial report and the second an activity based report. The activity based report uses the same descriptive terms recommended for process analysis: verb + noun.

In education sector organisations, where staff costs make up roughly 70% of expenditure in any institution, it is easy to see the value of the second approach particularly when taking cost/benefit decisions on implementing new systems or processes. Faced with the first report many managers feel powerless when asked to cut costs and generate efficiencies. However by starting to look at activities people are faced with something they can easily understand and something they are empowered to affect.

Defining and implementing an ABC model is a matter for finance specialists and thus outside the scope of this infoKit. Further references are available for those wishing to find out more about ABC approaches.

Before leaving the subject of costing, a brief word about budgets. The issue of budget setting is again far outside the scope of JISC infoNet's remit but, since it is our role to provoke discussion about strategic approaches, it is worth a brief digression to consider how the traditional budget process impacts on strategic approaches to process and system improvement.

Budgets are the standard means of controlling expenditure. Income is divided up amongst departments who then subdivide it amongst their component parts. In other words the budget mirrors the organisation structure not the business process. Cokins (ibid) demonstrates that an ABC approach demands a new approach to budgeting 'Low cost is a dependent variable; it's the result of doing other things well. You cannot budget your way into low-cost operations. Budget management and cost management are not synonymous - Budget should reflect strategy.'

Bearing in mind the effects of process dysfunction and their associated symptom, increased costs, it is worth considering whether your institution's budget process exhibits any of the following features.