Measuring the Cost of Public Services Through
Activity-Based Cost Management
World Bank Institute
May 25, 2000
Srikant Sastry, Principal Consultant
1
Presentation Overview
The government has often been successful at leveraging new management practices from
the private sector and applying them in public sector settings. Techniques such as process
improvement, process reengineering and Activity-Based Cost Management (ABCM) are
rapidly gaining ground in Federal, State and Local government agencies. However, success
from these initiatives rests not in the mechanics of implementation but in the ability of
government managers to solve real problems and create tangible success. This presentation
will highlight the key drivers for success in the private sector and their relevance for
government agencies.
© Copyright 2000 PricewaterhouseCoopers LLP
2
Presentation Topics

ABCM: What and Why

Drivers of ABCM in the Private Sector

Private vs. Public: Similarities and Differences

Defining Success in ABCM

Lessons Learned

Government Experiences with ABCM -- Examples
© Copyright 2000 PricewaterhouseCoopers LLP
3
Impetus for Change:
From Traditional Costing to ABCM
Best Practice
Worldclass companies know their profitability by
product, customer (market segment), and geography.
Professor Larry Seldon - Columbia University
© Copyright 2000 PricewaterhouseCoopers LLP
4
Changing Role of Finance Managers
Business Partnering
Decision
Support
10%
Role Transformation
Control
30%
Process Redesign
Reporting
20%
Value Added Services
Integrated Systems
Transaction Processing
40%
Decision
Support
50%
Control 10%
Reporting 20%
Transaction Processing 20%
Cost Reduction
© Copyright 2000 PricewaterhouseCoopers LLP
5
The Components of ABCM
ABC - Product Costing
• Accurate Product Costs
• Precise Cost Estimating
• Product and Service Pricing
Activity-Based
Cost Management
ABC - Event Costing
• Custom Services
• Investment Justification
• Distribution Alternatives
ABCM
ABC - Profitability Analysis
• Customer Profitability
• Channel Profitability
• Product Profitability
•
•
© Copyright 2000 PricewaterhouseCoopers LLP
Performance Measurement
Balance and Rationalizes
– Efficiency
– Effectiveness
– Productivity
– Utilization
– Strategy
Process Improvement
• Process Value Analysis
• Streamlining Operations
• Costs of Total Operations
• Reducing Waste and
Non-Value Added Cost
• Cycle Time Improvement
6
Traditional Versus ABC Costing
TRADITIONAL COSTING
ADVANCED (ABC)
Allocates costs
directly to products
Traces costs based on their demand
for activities
Resources
Resources
Consumed
by
Consumed
by
Products
Activities
Consumed
by
Products
© Copyright 2000 PricewaterhouseCoopers LLP
7
How Does ABCM Work: Cost Assignment
Cost Assignment View
Resources
Resource Driver: Measure of the
frequency of demand placed
upon resources
Activities
Performance
Measures
Process View
Cost Drivers
Cost Driver: Any factor that causes
a change in the cost of an activity.
© Copyright 2000 PricewaterhouseCoopers LLP
Cost Objects
Activity Driver: Measure of the
frequency of demand placed upon
activities
8
How Does ABCM Work: Managing Processes
Cost Assignment View
Resources
Resource Driver: Measure of the
frequency of demand placed
upon resources
Activities
Performance
Measures
Process View
Cost Drivers
Cost Driver: Any factor that causes
a change in the cost of an activity.
© Copyright 2000 PricewaterhouseCoopers LLP
Cost Objects
Activity Driver: Measure of the
frequency of demand placed upon
activities
9
ABCM Helps Organizations

Understand the cost of doing business

Identify and manage processes, activities,
and products

Identify and act upon improvement opportunities

Enable comparisons and benchmarking

Determine product and customer profitability

Succeed in a competitive environment
© Copyright 2000 PricewaterhouseCoopers LLP
10
Evolution of ABCM Systems
Most of Twentieth
Century
1990's
First Wave
Future
Second Wave
© Copyright 2000 PricewaterhouseCoopers LLP
Traditional
Experimentation
Integration
• Standard Costing
• Material, Labor, and Overhead
• Volume - Bias
• Absorption Focus
• Limited Decision Support
• Activity-Based Costing
• Stand-Alone PC
• Experimentation with ABC Principles
• Focused on Better Product Costing
• Significant Informational Value
• Limited Cost & Risk
• Activity-Based Management
• Enterprise-Wide Coverage
• Legacy System Integration
• Decision-Making Orientation
• Performance Measurement Integration
• Recurring Management Reporting
11
ABCM Must Focus on Real Business Issues
Business Issue:
ABCM - Provided Business Information:
Which customers and products are delivering the
greatest / least profitability?
Customer and Product Level Profitability
Information
$
Service Level Agreements
based on Shared Service
Catalog
What are the costs of shared services? How do I foster
a spirit of cost accountability for internal services?
Product / Service Cost
Model with “What If”
Capabilities
How do factors such as volume and complexity
impact the cost of my products?
$50
How do the service demands of customers impact
profitability?
What impact will a 20% increase in volume have
on next year’s costs?
© Copyright 2000 PricewaterhouseCoopers LLP
$45
$40
$35
$30
1nd Qtr
2nd Qtr
3rd Qtr
4th Qtr
$25
$20
$15
$10
$5
Cost to Serve Information
at a Customer Level
$0
LocationX
Location Y
Location Z
Activity Based Budgeting
12
Need to Align ABCM with Five Strategic Questions
If...
Then...
Which customers are
delivering profit?
Customer Profitability /
Cost to Serve
Which products are
delivering profit?
Product Profitability
What are my highest/lowest
delivery cost options?
Cost to Serve
Cost by Supply Chain Option
What is my pricing “floor”
for product X?
Product Cost by Dimension
(Sunk/Cash/Variable)
What are my costs of complexity
And how do I manage them?
Cost by Major
Business Process
© Copyright 2000 PricewaterhouseCoopers LLP
13
ABCM Business Drivers: More Similar Than Not
Private Sector
Public Sector
Product Pricing
Similar
Fee Setting
Reduce costs
Similar
Survive a budget cut
Reduce overhead
Same
Reduce overhead
Outsource work
Similar
A-76 Study
Cost of compliance
Same
Cost of compliance
Business case analysis
Similar
Transition to fee-for-service
Reorganization/new mission
Same
Reorganization/new mission
Performance Measurement
Same
Performance Measurement
Budgeting
Same
Budgeting
Comply with SEC
Similar
Comply with CFO/GPRA
Goal Setting
Same
Goal Setting
Resources Utilization
Same
Resources Utilization
Shared services
Same
Cross-Svc/Franchise Svcs
© Copyright 2000 PricewaterhouseCoopers LLP
14
Milestones of Success in ABCM
Milestone
Benefit
Completed Model
Cost Awareness
“Accurate” Model
You understand
more than you
did before
Sustained ABC
Opportunities Identified
Decisions Made
Improved Management
Actions Taken
Improvements Initiated
Improved Processes
Measurable Improvements
Measurable Success
You make better
decisions than you
did before
You accomplish
work better than you
did before
Competitive Advantage
You own more
business
Source: CAM-I Interest Group on ABM Design Framework
© Copyright 2000 PricewaterhouseCoopers LLP
15
When Is Value Created in ABCM?
Milestone
Benefit
ROI
Completed Model
Cost Awareness
-$
Improved Management
-$
Improved Processes
$
Competitive Advantage
$$
“Accurate” Model
Sustained ABC
Opportunities Identified
Decisions Made
Actions Taken
Improvements Initiated
Measurable Improvements
Measurable Success
© Copyright 2000 PricewaterhouseCoopers LLP
16
What Triggers ABCM?
What decisions need to be made
using cost data?
Business Need
ABCM is most meaningful with a
clearly defined objective.
© Copyright 2000 PricewaterhouseCoopers LLP
What is the consequence of
doing nothing?
Compelling Need
A burning platform clarifies
purpose and helps gain
commitment
17
The Compelling Difference
Between Public and Private Sectors:
Business Need
Compelling Need
Common challenges
Very different motivators
Public sector can safely
emulate private sector practices
Compliance is not a
compelling need
© Copyright 2000 PricewaterhouseCoopers LLP
18
Process-Centered Management: Uncommon Opportunity
HQ
Division A
Division B
Division C
Activity Cost
Activity Cost
Activity Cost
Activity Cost
Activity Cost
Activity Cost
Activity Cost
Activity Cost
Activity Cost
Activity Cost
Activity Cost
Activity Cost
New Capability
Development
In-Service
Support
Emergency
Response
Division Cost
© Copyright 2000 PricewaterhouseCoopers LLP
Division Cost
Division Cost
19
Stages to Process-Centered Management
Function or
Department
Function or
Department
Function or
Department
Function or
Department
Function or
Department
Function or
Department
Function or
Department
Function or
Department
Function or
Department
Function or
Department
Stage 2
(Overlay)
Function or
Department
Function or
Department
Function or
Department
Function or
Department
Function or
Department
Strong Functions
Strong Processes
Stage 3
(ProcessCentered)
Function or
Department
Function or
Department
Function or
Department
Function or
Department
Function or
Department
Weak Functions
Dominant Processes
Stage 0
(Invisible)
Stage 1
(Recognition)
© Copyright 2000 PricewaterhouseCoopers LLP
Dominant Functions
No Documented
Processes
Dominant Functions
Weak Processes
20
Key Success Factors for ABCM

Plan long-term, but implement in stages

Integrate with other business processes, not stand-alone

Understand why, how, and by whom cost information will be used

Identify “champions” who will visibly lead the effort

Develop early “pull” or demand through a successful pilot

Strive for relevance, not necessarily precision

Don’t lead with technology; prove value first

Develop working consensus between key internal stakeholders:
finance, programs, and IT
© Copyright 2000 PricewaterhouseCoopers LLP
21
ABCM Implementation Model:
Plan Globally / Implement Locally
Company Strategy “Five Questions”
Scope of Eventual Cost
Management System
Requirements/Design
of Eventual Cost
Management System
Staged
Implementation
Enterprise
Infrastructure
Pilot A
Pilot B
Pilot C
Pilot D
Pilot E
Organization, Processes, Performance Metrics
Enterprise ABM
© Copyright 2000 PricewaterhouseCoopers LLP
22
Federal Agency Experiences

Compliance with Federal regulations

Fee-setting

Shared services

Resource allocation

Process improvement
© Copyright 2000 PricewaterhouseCoopers LLP
23
Compliance with Federal Regulations
Case Example



The National Science Foundation

Assessed Managerial Cost Accounting capabilities for compliance with federal accounting standards,
reporting requirements and GPRA initiatives

Evaluated data collection methods to support linkages between strategic planning, budget formulation,
financial reporting and managerial accountability
Social Security Administration (SSA)

Reviewed the SSA’s cost allocation methodology and made recommendations for improving the process.

Obtained buy-in of key stakeholders, including GAO and OMB
Department of Labor

Identifying gaps between “as-is” cost accounting processes and best practices per FASAB and JFMIP

Develop costing pilots with program offices to use as a benchmark and as a tool to evaluate their programs by connecting
cost data to program performance.
© Copyright 2000 PricewaterhouseCoopers LLP
Fee-Setting
Case Example


Immigration and Naturalization Service (INS), Executive
Office of Immigration Review (EOIR)

Developed a fee schedule for Examination and User Fee applications and services using Activity-Based
Costing principles

Identified the cost to process each immigration appeal and motion

Developed the total cost to perform each EOIR activity and the total unit cost to process each INSfunded appeal and motion
Drug Enforcement Agency

Determined full cost of Diversion Control Program services

Recommended appropriate registrant fees
© Copyright 2000 PricewaterhouseCoopers LLP
Shared Services
Case Example


USPS Corporate Call Management

Determined full cost of Call Center service offerings

Implementing internal charge-back fee-setting structure for call center services
US Department of Agriculture, National Finance Center

Determining full cost of NFC processes, activities, and products

Seeking to improve customer service and accuracy of shared service fees

Defining customer products and services, soliciting customer perspectives of the delivery of
those services, mapping high level processes used in accounting product delivery, and developing
as-is process maps based on the evaluation of existing accounting systems and activities

Providing recommendations on the financial management model, optimal structure and
organizational placement to improve accounting operations
© Copyright 2000 PricewaterhouseCoopers LLP
26
Resource Allocation


US Customs Resource Allocation Model

Developed a “service-wide” staffing allocation model to support staffing decision-making and budgeting
using ABC

Linked Customs performance measures to occupations performing specific activities

Developed what-if capability to analyze different workload scenarios

Praised by GAO before Congress
Federal Deposit Insurance Corporation

Implementing ABC in Receivership Management Program

Objectives include accurate billings, benchmarking and cost management

Realigning FDIC budget along activities and processes to support better integration with planning and
promote process ownership
© Copyright 2000 PricewaterhouseCoopers LLP
Process Improvement
Case Example


Department of Veterans Affairs

Veterans Health Administration - Medical Care Cost Recovery

Board Of Veterans’ Appeals - Full Cost of Operations

Veterans Benefits Administration - Entity-wide ABC Implementation
Fleet Technical Support Center Atlantic (FTSCLANT)

Naval Station Norfolk has embarked on an ABC project to provide insight into the activities performed
by both the Civilian and Military employees and the contractors who support them.

The Command has special interest in understanding the work performed by Headquarters back-office
personnel, the numerous contractors employed, and the personnel at the four detachments

Project motivation is to better understand the cost and performance of the work that is due to many
external forces which includes: pending Commercial Activity (A-76) studies, commercial contractor
competition, and pressure from CINCLANTFLT (their parent command).

Ultimate goal is to identify "areas for improvement" and reengineer them so as to be able to better
support the Fleet and warfighter.
© Copyright 2000 PricewaterhouseCoopers LLP
28
Process Improvement (con’t)
Case Example

Defense Finance and Accounting Service

Service organization of 20,000 employees at 24 sites with separate divisions serving separate
customer groups and all doing work differently

Different “Stage II” systems, no common means of measuring cost performance other than budget
variance

Objective: Determine the total cost of providing key services to different customers and identify
process inefficiencies

Capture costs for a selected Division (5,000 employees) at all sites

Develop separate site costing models, all with the same structure -- easy to aggregate, compare
across the organization

A Web-based survey application was developed to facilitate identifying the activities individuals
perform (labor resource driver data). Specific features included the following:
 Employees need only Internet access and a PC-based Web browser, thus avoiding problems
associated with disparate IT infrastructures.
 Employee time allocation information is passed directly to a centralized database.
 Built-in data integrity and validation checks
 Receipts are returned to each employee providing a record of their transaction.
© Copyright 2000 PricewaterhouseCoopers LLP
29
Process Improvement (con’t)

U.S. Coast Guard

Approximately 450 employees deployed across 40 field sites with all sites perform similar work,
although certain mission specific activities performed at selected site

Objective: Develop cost information to assist HQ in budgeting and fee setting; Integrate with
GPRA/performance measurement efforts; and, Provide visibility to field units over work activities
on a frequent (daily) basis
Case Example

Cost Model Design: Prototype cost models, aggregate labor and costs from all sites

Capture workload data daily -- report cost results quarterly

A Web-based survey application was developed to facilitate identifying the activities individuals
perform (labor resource driver data). Specific features included the following:
 Employees need only Internet access and a PC-based Web browser, thus avoiding problems
associated with disparate IT infrastructures.
 Employee time allocation information is passed directly to a centralized database.
 Built-in data integrity and validation checks
 Receipts are returned to each employee providing a record of their transaction.
 The project team can perform administrative adjustments to the application from any site
location
© Copyright 2000 PricewaterhouseCoopers LLP
30
Process Improvement (con’t)
Case Example

U.S. Postal Service

Mail Processing and Distribution Center - developing and implementing cost management and
standard costing system

Corporate Treasury - developed ABC model to determine cost of various means of receiving
payment for domestic Postal products and services
© Copyright 2000 PricewaterhouseCoopers LLP
31
USPS - Business Environment
Case Example

Uncertainty of regulatory environment

Preparation for competition

Pressure to cut costs

The need for a “lifestyle change”

Process Standardization and Control

The Information Platform

Transition of Finance to role of “Business Enabler”
© Copyright 2000 PricewaterhouseCoopers LLP
32
USPS - Focus on High Cost Processes
Case Example
Postal
Network
Individual Plants
Comparable
Plant Process
Sell/
Market
Collect/
Induct
P&DC
1
P&DC
2
Receive
Mail
© Copyright 2000 PricewaterhouseCoopers LLP
Prepare
Mail
Sort/
Distribute
P&DC
3
Sort
Mail
Distribute
Mail
Transport
Mail
Deliver
Mail
P&DC
4
P&DC
5
Dispatch
Mail
Load
Mail
33
USPS - ABM in Mail Processing - Objectives
Case Example

To realize ongoing and measurable benefits through
implementation of automated ABM system prototype

To focus on process improvement in operations

To develop improved workload measures for automated and
manual activities

To identify improvement opportunities and
take action
© Copyright 2000 PricewaterhouseCoopers LLP
34
USPS - Traditional Plant Information not Integrated for
Decision-making
ETC
Case Example
VMARS
EOR
SPS
MODS
OT
Report
Penalty
OT Rpt.
DMCR
EVA
PSFR
NWRS
Plant
Manager
Other
Initiatives
FMLA
PPAS
Higher
Earning
Sup.
WorkHour
VOB
© Copyright 2000 PricewaterhouseCoopers LLP
Admin
Work Hour
Business
Review
Casual
Time & Exp.
VOC
35
ABM System Provides Integrated Decision Support
Information
Case Example
Product Costs
• 9 plant products
Financial Data
• Labor costs
• Facility costs
• Supply costs
• Contractual costs
• Maintenance costs
Human Resources Data
• Regular time
• Overtime
• ETC
• Headcount
Operations Data
• End of Run
• Sort Plan System
• Dispatch flows
• Product volumes
© Copyright 2000 PricewaterhouseCoopers LLP
ABM System
Activity Costs
• 58 activities
Activity Rates
• cost per unit of activity
workload
36
USPS - Accomplishments To Date
Case Example 
Developed AP-based activity costs, product costs, and activity
rates

Developed more accurate, cost-effective approach to measuring
workload

Ensuring knowledge transfer to HQ, District and Plant
management

Taking action through series of process improvement workshops

Identified significant cost reduction opportunities

Rolling out system to additional Plants
© Copyright 2000 PricewaterhouseCoopers LLP
37
Summary

Need compelling business reasons to drive ABCM

Clearly communicate the compelling need for change

Several similarities between public and private sector drivers

Bottom line is the same: Need to demonstrate tangible value!
© Copyright 2000 PricewaterhouseCoopers LLP
38