PROF N B PITYANA
WELCOME AND ADDRESS FOR THE UNISA SEMINAR ON
ACTIVITY-BASED COSTING FOR ORGANISATIONS AND HIGHER
EDUCATION INSTITUTIONS
30 – 31 AUGUST 2005
WELCOME
Dr (Sanet) Boshoff, Prof. Vijay Jog, Prof. Enrico Uliana, Prof.
Stella Nkomo, Ms Pat Lawrence, Mr Tjaart Erasmus, Ms Sarah
Batchelor, Mr Rynier Keet, Mr Justin Joseph, Dr Pieter Buys, Prof.
Gerhard Cronj ė, Mr Nkuli Swana, Ms Liana Griesel, co-sponsors
Accenture and Absa, colleagues
Probably the most difficult and taxing area of transformation in
Higher Education is the effective financial management of resources. Finances touch every aspect of an instit ution’s operations and likewise, poor financial management affects every aspect of an institution’s operations. The more complex and sophisticated an institution, the more complex and sophisticated its financial operations and the greater the need for sound, practical, efficient and effective financial systems that will ensure reliable and measurable financial management.
The value of an Activity Based Costing Model for an institution such as Unisa lies in the fact that it not only underpins the
1

Universit y’s strategic and operational plans, but it also combines the best information available regarding the cost of activities, to produce performance measures that gauge progress. So in essence, it is a complete tool that provides not only an assessment and implementation function, but also a monitoring and evaluation function. Ladies and gentlemen, if you can measure an activity or a cluster of activities; if you can measure what people do, then you can manage it. For example, if you can measure the cost of a car wash, or a course that is offered, or the financial contribution of research, or the cost thereof, then you can manage it. The end result, ladies and gentlemen, is an increase in the effectiveness of resource utilisation.
I am pleased and proud to say that Unisa is the leader in South
Africa in mapping and costing our almost 10 000 activities.
Because of that, we can measure and manage our resources diligently. This seminar aims to share our experience with, and research into this strategic management tool and promote discussion and information sharing on various aspects of Activity
Based Costing as it pertains to resource management in the HE environment, particularly in the current climate of transformation.
I am most impressed with the calibre and range of speakers who will be offering their insights and expertise over the next two days and I am very pleased to welcome you to Unisa, for what I sincerely believe, will be a most useful and worthwhile exercise.
2

ADDRESS
Ladies and gentlemen
During the second half of the 1990s Unisa experienced its first ever deficit on its budget. At one stage, the deficit was almost
R140 million and it was clear that drastic measures would have to be taken to restore the financial health of the institution. There would have to be a far greater emphasis on the financial management of Unisa’s resources, but none of this would be achievable unless expenditure was properly forecast, managed, evaluated and controlled.
At that stage, Professor Lilla Stack, who was acting as Registrar:
Finance, propagated cost centres as the only way in which Unisa could manage its financial resources effectively. Against a background of reductions in government subsidies, increased operating costs and demands to contain student fees, it made good sense to institutionalise cost centres. Balancing the budget is a function of effective strategic cost management and cost control by the Department of Finance, but this can only be achieved if management has a thorough understanding of where costs are incurred and what it costs to produce the University’s products and services.
And so a project was launched with the aim of developing a costing model to determine the cost per faculty, per course and
3

so on. However despite this important groundwork, nothing ever materialised. Then in 1997 Professor Anthony Melck initiated
“Programme Optimum” in an attempt to address Unisa’s financial woes. Deloitte and Touche were appointed to investigate Unisa’s financial position and their finding was that the major cause of
Unisa’s financial crisis was a lack of strategic financial management. An action plan to introduce a proper cost allocation model was once again proposed.
A shortterm action, namely, “an early retirement” was implemented, but once again, nothing further was done about the costing. As a point of interest, if memory serves me correctly,
250 severance packages were paid out in an attempt to reduce staff, and yet 257 new appointments were subsequently made!
This gives some idea of the lack of discipline and coordination that existed in the institution.
Eventually, after a number of Unisa staff members had attended an ABC conference in March 2001, a proposal by Finance to implement ABC within the University was approved by management, but because of Prof. Melck’s departure it was once again delayed. A second proposal was submitted in September
2001 and shortly thereafter it became the responsibility of the V-P
Finance, who was mandated to develop cost centres and cost management systems, monitor the effective utilisation of financial resources, cost centres and expenditures and advise Council on financial management information.
4

In order to ensure that the costing model achieved complete buyin the ABC project was explained in detail to the institutions ’ stakeholders during 63 different sessions. The initiative was successful and the hard work was rewarded with a successful first set of comparative cost data based on the 2000 financial year.
The rest, as they say, is history. What Unisa has achieved in terms of managing its finances since then is nothing short of remarkable. It certainly hasn’t been plain sailing. Barely had the practice of costing taken root than we were faced with a merger that brought a huge additional staff and student component on board and completely changed the resource profile of the institution. It seemed that we were back to square one and in a sense we were, because we were faced with the daunting prospect of managing a new mega institution in a climate of change and uncertainty. Not only that, but the entire ethos and character of the institution has been undergoing a metamorphosis, and so financial planning had to be done with this in mind and with due cognisance of the financial framework, targets and policy of the Department of Education.
It must also be borne in mind that in South Africa there were no precedents for Educational mergers, especially not of the magnitude with which we were faced. Perhaps it is just as well that we did not fully appreciate the complexity of the task,
5

because if we had, we might not have been able to tackle it with such an open mind, and with the enthusiasm, commitment and determination that we have exhibited throughout the process.
Nevertheless, by the onset of the merger, we had a better understanding and insight, into not only the need for very tight financial management, but also the importance of buy-in and support in setting, implementing and monitoring financial goals.
And ladies and gentlemen, this is what we have been busy with these past three or so years, and as I mentioned just now, to date we have costed and mapped almost 10 000 activities. This has allowed us to effect a much more focussed and targeted financial strategy. We are able to determine quite accurately, what any particular activity is likely to cost, and plan accordingly. This has been tremendously beneficial in terms of managing the shortfalls on the pension fund and liquidating the post-retirement medical provision.
Interestingly we have entered another, perhaps more in-depth if you will, phase of ACM. Management held a strategic planning breakaway at Kloofzicht in June this year. The aim of the breakaway was to finalise business plans and structures so that these could inform the Institu tion’s 2015 Strategic Management plan which is to be presented to Council in September this year.
During the initial discussions it became increasing clear that in some core areas, Unisa was operating above those targets that
6

would see it not only meeting DoE requirements, but also ensuring that Unisa is managed as a sustainable and vibrant institution. For example, Unisa’s expenditure on salaries is 6 % higher than the target set by the DoE, so clearly this had to come down. Second, it was acknowledged that Unisa needed to improve on its throughput rate and accordingly, might have to look at mechanisms such as limiting intake, attracting a better calibre student or providing more student support. Third, it was clear that Unisa would have to look at the feasibility of some of its offerings in order to determine their value: expenditure: feasibility ratios. Fourth, the sustainability of non core functions would have to be investigated with an eye to the possible outsourcing thereof.
These were but a few of the central issues that came to the fore during the discussions, and while it was clear that there are a number of areas that will have to be managed down, there was a general concern at the lack of suitable units of measurement that could be employed by management to determine the cost efficiency of an activity and ultimately its sustainability or feasibility. For example, how would one determine how many staff members should be employed in a particular department so as to ensure the appropriate degree of productivity within the proposed financial targets? What would an appropriate
“benchmark” or unit of measurement be?
At the second structures discussion held at Irene, Ms Elana
Griesel explained the concept of this benchmarking exercise and
7

provided some example of units of measurements that could be employed against a variety of activities. These would enable managers to measure activities in a sensible and cost efficient manner, and likewise, arrive at sensible and cost efficient targets.
Unisa now finds itself at a juncture where the process is in full swing. Managers understand the need to limit costs, but much of the confusion and resentment that might otherwise have existed, has been pre-empted by a sound understanding of the imperative to manage down expenditure over both the short and long-term, and of the ABC tool that offers a sound basis for measurement.
We are very pleased that our Department of Finance had the foresight to persevere with the ABC project because it has already begun to bear fruit. Its value is undeniable. We envisage that as the process continues and as our strategic plan unfolds, the ABM system will become an increasingly integral part of our
Institution’s management strategy. I have no doubt that this will ensure not only sound financial management but the sustainability of Unisa as a quality institution of choice for generations to come.
8