Costing - how much does it?

Cost Analysis: how, what, why, when & where?

The quest for budget optimisation

Nick Cowan 26/06/09

What am I going to cover?

First a little bit about myself, then:

Section 1: Introduction: Costs & Reports Section 2: Costing Services Section 3: Costing Projects Section 4: Cost Savings: An Approach Section 5: Questions?

INTRODUCTION: COSTS & REPORTSSection 1

Nature of costsDependent on type, here are some: Historic, Current or Future Actual, Committed or Forecast Consumable v Investment Capital (capital accounting rules) Cash or Credit Inflation Foreign Exchange Incurred or Charged (depn, cross-charge) One-off or Recurring Allocated or Apportioned (overheads) Cost Drivers Full Economic Costing (FEC) Project costs (what’s included?) Cost v Price (incl. market price) Cost and Value (Quality , SLA, Perception) Zero cost (cost recognition)

Cost Collection & Reporting

Presentation should assist cost control and support decision making

1. Spend by Cost Type gives a summary of your group’s spend – what is your budget spent on?

2. Spend by Cost Centre gives a total spend for each of your group’s cost centres – where / by whom is the budget being spent?

3. Spend by Cost Centre & Cost Type shows a summary of spend for each cost centre – what is being spent where/by whom?

Cost Transactions

Reporting requirements must define the type and level of cost collection

Coding of transactions must support the reporting requirements (GIGO)

ISCMaterials

May-0910 Months:

Aug-08 to May-09Full Year:

Aug-08 to Jul-09

Actuals Budget Variance Actuals Budget Variance Trend BudgetVarianc

eBudgetUsed

£000s £000s £000s £000s £000s £000s £000s £000s £000s MonthsISC Books, Periodicals & Databases 8 77 69 3,149 2,307 -842 3,779 2,715 -1,064 14.0

Example: Spend by Cost Type

ISCMaterials

May-0910 Months:

Aug-08 to May-09Full Year:

Aug-08 to Jul-09

Actuals Budget Variance Actuals Budget Variance F’cast BudgetVarianc

eBudgetUsed

£000s £000s £000s £000s £000s £000s £000s £000s £000s Months

Arts Resources 4 13 9 538 396 -142 600 466 -134 13.9

Arts Resources

May-0910 Months:

Aug-08 to May-09Full Year:

Aug-08 to Jul-09

Actuals Budget Variance Actuals Budget Variance F’cast BudgetVarianc

eBudgetUsed

£000s £000s £000s £000s £000s £000s £000s £000s £000s MonthsISC Books, Periodicals & Databases 4 13 9 538 396 -142 600 466 -134 13.9

Example: Spend by Cost Centre

Example: Spend by Cost Centre and Cost Type

Review Costs are varied, complex and confusing! Understanding type, nature and relevance

of costs is key to assessing the ‘true’ cost of something

Detailed cost collection and transparent reporting enables various user requirements to be met in addition to budgetary control

Accurate forecasting is critical in controlling outturn and best use of current budget

Questions?

COSTING SERVICESSection 2

Cost Model for IS Shared Services Transition

Business Case

Calculating the Cost of IS Shared Services in terms of Service

Offerings

Background: The Drivers for Change in Shared Services

– SS Cost

– SS Capacity

– SS Capability

– SS Quality

– SS Delivery

SS Cost DriverShared Services needs to reduce its annual operating costs

Background• Spend has risen by 2.5m (38%)

over the last 3 financial years from £6.5m in 2005/6 to £9m in 2007/8

• The budget for 2008/9 is £0.9m (10%) more than 2007/8 at £9.9m

• The good times are gone!

IS5421 - SHARED SERVICES

1

2

3

4

5

6

7

8

9

10

Y/E 31st March 2006 Y/E 31st March 2007 Y/E 31st March 2008

£mCAPEX

OPEX

Expectation• Future funding is likely to be capped at 2008/9 levels at best. The sourcing of SS Service Offerings will need to increase value and enable control of spend

• The level and quality of service demanded by customers will increase A form of recharging the customer for products and services will need to be introduced to constrain demand

IS Shared ServicesThe IS Services provided using resources allocated to cost centre IS5421

Service Offerings (defined later)Managed Application, Employee Lifecycle, Managed Production Environment, Managed Development & Test Environments, Managed Collaboration, Managed Client Interface, Data Management, Professional Services, Projects

Service InstancesSpecific Customer Services within Service Offerings (e.g. Finance or HR system in Managed Application)

Cost ComponentsCost of resources associated with providing Service Instances

Cost DriversDrivers of Cost Components to provide Service Instances to required SLA

IS Shared Services TransitionCost Structures and Definitions

Definition of SS Service OfferingsThe Managed Application Service runs a business software application on behalf of a business owner and presents the application as a managed service. The owner is required to provide only business-level administration of the application; all other elements of the service are provided by IS Shared Services

The Employee Lifecycle Service provides IS support for any CR-UK employee (contractor, temporary or permanent) throughout their tenure in the organisation. By signing an IS Conditions of Use form when starting work, every staff member is subscribed to the Employee Lifecycle Service.

The Managed Production Environment Service runs a production environment on behalf of a business owner. The owner or nominated third party are required to install the applications required and provide application-level administration; all other elements of the service are provided by IS Shared Services.

The Managed Development & Test Environment Service runs a dev environment on behalf of a business owner. The owner or nominated third party are required to install the applications required and provide application-level administration; all other elements of the service are provided by IS Shared Services

The Managed Collaboration Service is a collection of ubiquitous services required for employees to operate effectively as teams: the network, internet link, directory services (e.g. AD), fixed line voice, mobile voice and data, intranet, email, calendaring, web-based collaboration tools (e.g. eRoom, wikis, message boards), remote working, fax, printing, file servers. All these are provided to customers as fully-managed services

The Managed Client Environment Service provides hardware, software, and connectivity, to a business user. All elements of the service are provided by IS Shared Services. This covers various hardware devices such as PC, Mac, Smartphone, Mobile, CR-UK extension, BT Landline, Fax Machine, Printer

The Data Management Service manages the corporate data on behalf of the business owners. The owner or nominated third party vendors are required to define how the data should be presented, accessed, backed up and restored. All other elements of the service are provided by IS Shared Services.

Professional Services are run in response to requests from customers both internal and external to IS. The customer must provide request details and the appropriate authorisation for execution by IS Shared Services.

Model for Costing IS Service Offerings

Establish current annual costs of existing 9 Teams and associated IT spend

Discover/estimate the proportion of time spent by each Team in delivering each Service Offering and allocate Staff Costs accordingly

Allocate ICT, Admin and Capex costs to the Teams. Then allocate to the appropriate Service Offering

Calculate the current annual cost of existing Service Offerings

Current Annual Costs of Teams

Annual Cost Components (£m)

Payroll Staff Contract Staff Total Staff ICT Admin Capex Total

Shared Services Team Cost FTE Cost FTE Cost FTE Cost Cost Cost Cost

Network & Communications £0.224 4.00 £0.169 2.33 £0.393 6.33 £0.635   £0.075 £1.103

Systems Administration £0.234 4.00 £0.570 6.56 £0.805 10.56 £0.150   £0.125 £1.080

Systems Management £0.096 2.00 £0.012 0.11 £0.108 2.11       £0.108

Service Desk Incident & PM £0.018 0.22 £0.253 6.00 £0.271 6.22       £0.271

Technical Analysis £0.365 9.37 £0.043 1.00 £0.408 10.37 £0.525 £0.040   £0.973

Local & Regional Support £0.280 6.30 £0.073 2.00 £0.353 8.30 £0.500 £0.050   £0.903

Moves & Telephony £0.127 3.11     £0.127 3.11 £0.840     £0.967

Applications Support £0.202 4.00 £0.469 5.56 £0.671 9.56 £1.500     £2.171

Technical Support £0.169 3.00 £0.448 4.44 £0.617 7.44       £0.617

Total £1.715 36.00 £2.037 28.00 £3.752 64.00 £4.150 £0.090 £0.200 £8.192

Source: IS management accounts Aug-08

Proportion of Time Spent by Team to Deliver Service

Staff Allocation to Service Offering (%)

Shared Services Team MA EL MPE MDTE MC MCE DM PS ProjTotal

%

Network & Communications 1% 4% 22% 6% 35% 2%   21% 9% 100%

Systems Administration 6% 2% 32% 8% 10% 2% 5% 20% 15% 100%

Systems Management     44% 11% 5% 5% 15% 13% 7% 100%

Service Desk Incident & PM 5% 50%     7% 30% 3% 5%   100%

Technical Analysis 4% 4%     15% 30% 2% 29% 16% 100%

Local & Regional Support 2% 2%     11% 58% 2% 22% 3% 100%

Moves & Telephony   20%       50%   30% 0% 100%

Applications Support 50% 5%   10% 7%   7% 12% 9% 100%

Technical Support 50% 1%   7% 5%   7% 8% 22% 100%

Source: Team managers' judgement and TMS data Apr-08 to Aug-08 (Proj)

Allocation of ICT, Admin & Capex Costs to Services

Cost Allocation to Service Offering (£m) Total

ICT Costs MA EL MPE MDTE MC MCE DM PS Proj Cost

Telecommunications           £1.700       £1.700

Web Hosting & Mtce     £0.800             £0.800

IT Hardware <£2,500     £0.050     £0.350       £0.400

IT Software <£50,000 £0.700   £0.100     £0.300       £1.100

IT Equipment Mtce           £0.150       £0.150

ICT Cost Allocation £0.700   £0.950     £2.500       £4.150

Admin Cost Allocation           £0.090       £0.090

Capex Cost Allocation     £0.125     £0.075       £0.200

Total £0.700   £1.075     £2.665       £4.440

Source: IS management accounts Aug-08, review of major contracts and judgement of operations management                    

Current Annual Costs of Service OfferingsAnnual Cost Components £m

Payroll Staff Contract Staff Total Staff ICT Admin Capex Total

Service Offering Cost FTE Cost FTE Cost FTE Cost Cost Cost Cost

MA Managed Application £0.223 4.29 £0.510 5.80 £0.733 10.09 £0.700     £1.433

EL Employee Lifecycle £0.080 1.70 £0.176 3.63 £0.256 5.33       £0.256

MPE Mgd Prodn Environment £0.167 3.06 £0.226 2.67 £0.393 5.73 £0.950   £0.125 £1.468

MDTE Mgd D&T Environment £0.074 1.37 £0.135 1.53 £0.208 2.91       £0.208

MC Managed Collaboration £0.216 4.44 £0.204 2.88 £0.420 7.32       £0.420

MCE Mgd Client Environment £0.355 8.35 £0.146 3.44 £0.502 11.79 £2.500 £0.090 £0.075 £3.167

DM Data Management £0.065 1.31 £0.104 1.28 £0.170 2.59       £0.170

PS Professional Services £0.351 7.67 £0.284 3.87 £0.635 11.54       £0.635

Proj Projects in PMO £0.184 3.81 £0.251 2.90 £0.436 6.71       £0.436

£1.715 36.00 £2.037 28.00 £3.752 64.00 £4.150 £0.090 £0.200 £8.192

Review The model is relatively straight-forward and

easily understood It enabled the cost of team activities to be

viewed as distinct services (service offerings) to customers

The model is not perfect. In the absence of recorded evidence, (allocation of team time to services) management judgement was used

It only provides an initial estimate of the cost of providing the services and therefore could be dangerous!

Questions?

COSTING PROJECTSSection 3

Costing Projects

Cost of Project and Service (Financial Business Case)

1. Capture Incremental CostsDedicated: staff/contractors/consultancy Additional: equipment/hardware/software

2. Allocate Operational Staff Costs Timesheets!

3. Apportion Overhead Costs Indirect support time, Training and Estates

Cost of Project (Capital Accounting Rules)

ISS Teams Total BAU Projects

FTE 273 147 126

% 100 54 46

Cost of Service

Overview – Project Financial Control & Resource Management

Project Planning Project Implementation

Financial Monitoring & Control

Incremental phased budgets by cost type reviewed by Finance

(capital and recurrent costs)

Estimation of ISS and sponsors’ operational staff

time, availability and associated costs

Monthly detailed financial reports

reviewed by Project Board (variance

analysis & forecast update)

Project ‘Go Live’

Agree project costs to be capitalised

and resulting depreciation charges are

budgeted for

Quarterly summary financial reports

reviewed by Programme Board (variance summary & forecast review)

Current Future

Cost of additional resources to be purchased are

estimated (working with Procurement)

Ensure all recurrent maintenance

costs/savings of new/improved

service are budgeted for

Reporting and reviewing full project resourcing (FTE)

and costing

Tracking benefits, costs and savings over life of

service

Nick Cowan 24/04/09

COST SAVINGS: AN APPROACHINSTITUTE OF FISCAL STUDIES ESTIMATES A 2-3% REDUCTION IN PUBLIC SPENDING IN REAL TERMS BETWEEN 2011 AND 2014 (WITH EXCEPTION OF SCHOOLS AND HEALTH)

Section 4

Cost Savings – An Approach

Evaluate Opportunities

5432

Cost Savings – 1. Prepare

Cost Savings - Identifying Opportunities

Consider:

• What are the potential cost saving opportunities? (use action words e.g. ‘stop’, ‘reduce’, ‘slow down’, ‘defer’, ‘introduce’, ‘consolidate’ etc.)

• For each opportunity:• What are the magnitude of savings?• Is there a cost to implement the saving?• Over what timeframe could savings be achieved?• How easy would they be to implement?

Potential Ways of Reducing Costs

• Unpopular but worthwhile

Restructuring Outsourcing generic activities

• Popular and worthwhile

Prioritising projects Renegotiating prices

• Unpopular and less worthwhile

Delay equipment upgrades Reduce consumables

• Popular but less worthwhile

Stopping unnecessary activities

Outsourcing projects

Cost Reduction Guidelines• Review projects already underway and identify

opportunities for savings

• Where drivers of cost are within the business, look at ways of managing demand (avoid just moving costs)

• Consider improvements to IS financial processes

• Focus on larger categories of spend and consider consolidating smaller items of expenditure

• Consider stopping/deferring/slowing down activities

‘Brainstorm’ Potential Cost Savings - ExamplesOpportunity Owner

Reduce services to business ‘Support’

Stop new purchases on laptop ‘Equipment’

Stop use of Macs as desktop (non-Science) ‘Support’

Stop new mobile phones ‘Equipment’

Stop new external hosting Nathan

Consolidate external hosting Nathan

Reduce printing, limit colour, projector only meetings ‘Policy’

Turn off non essential incoming calls to IS Unassigned

Consolidate printers/network Equipment

Introduce improved resource management Vaughan

Review project portfolio ‘Projects’

Stop project proposals ‘Projects’

Reduce size of PMO Unassigned

Cost Savings – 2. Identify Opportunities

•Present cost info• Analyse cost info• Identify opportunities• Highlight ‘quick wins’• Prioritise opportunities

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0

TEMPORARY STAFF

CAPITAL EXPENDITURE

TELECOMMUNICATIONS

IS CONSULTANCY FEES

IT EQUIPMENT SOFTWARE <£50,000

IT EQUIPMENT HARDWARE <£2,500

WEB HOSTING AND MTCE FEES

IT EQUIPMENT MAINTENANCE

RECRUITMENT

TRAINING & DEVELOPMENT

IS CABLING COST - NETWORK & TELECOMS

£m

TYPE OF SUPPLIER SPEND > £100k OVER LAST 12 MONTHS

IS STANDARDS & INNOVATION

IS PROGRAMMES

IS SHARED SERVICE

IS DIRECTOR

IS CRI

IS RESEARCH

IS LRI

SUPPLIER SPEND > £100K OVER LAST 12 MONTHS

0.0 0.5 1.0 1.5 2.0 2.5 3.0

ORACLE CORPORATION (UK) LTD

CAPGEMINI UK PLC

TRAMS LTD

EMC COMPUTER SYSTEMS (UK) LTD

BRITISH TELECOMMUNICATIONS PLC

PROACTIVE APPOINTMENTS LTD

HUDSON GLOBAL RESOURCES LIMITED

PREFERRED RS LIMITED (PREFERRED IT)

BRITISH TELECOM PLC

SAVVIS UK LTD

VECTOR RESOURCING LTD

CIVICA SERVICES LTD

BT CONVERGENT SOLUTIONS LTD

HAYS INFORMATION TECHNOLOGY

CAMBRIDGE ONLINE SYSTEMS LTD

PIONEER CONSULTING

COMPUTER FUTURES SOLUTIONS LTD

LOGICA CMG

SYNAPSYS CONSULTING LIMITED

HANFZARAH SERVICES LTD

SIPTUS LTD

EXECUTIVE RECRUITMENT SERVICES PLC

AGRESSO LTD

NEXTIRAONE UK LTD

TELE-RESPONSE LTD

£m

IS STANDARDS & INNOVATION

IS PROGRAMMES

IS SHARED SERVICE

IS DIRECTOR

IS CRI

IS RESEARCH

Annual Contracts > £10k

Contract Manager Annual Net

Value

Net Value Renewable Sep-

08 to Mar-09

Nathan Total £4,077,587.71 £579,428.56

John Simpson Total £1,564,290.40 £450,000.00

Andrew Broadbent Total £1,422,818.98 £293,949.65

Keith Morgan Total £1,208,528.38 £20,956.50

Madhu Rees/Ian Buckley Total £441,044.25  

Richard Cariss Total £282,603.62  

Nick Cowan Total £169,600.00  

Louis Bradshaw Total £151,526.88  

Jane Swindle Total £134,754.49  

Vaughan Total £110,851.17 £7,260.00

Kevin Clarkson Total £95,903.10 £61,800.00

TBC Total £93,859.20  

Michael Toothill Total £70,276.04  

Tony Gordon Total £65,125.00  

Peter Swinburne Total £54,729.00  

Mahboob Total £40,700.00  

Ian Buckley Total £35,944.00  

David Bernie Total £21,531.79 £21,246.79

Alison Fothergill/Chris Dodge Total £17,286.00  

Peter Maccallum Total £16,950.02 £14,950.02

Aisling Finneran Total £16,570.90  

Jacky Duncan Total £10,000.00  

Jon Messer Total £10,000.00 £10,000.00

Grand Total £10,112,480.93 £1,459,591.52

Target Cost Reduction Equivalence

• x % annual directorate budget

• y months of temporary staff costs

• z months of payroll costs

• a specific non-staff cost for a year

• a proportion of a major non-staff cost

Identified Quick Wins - ExamplesOpportunity Owner

Adopt change release process Unassigned

Stop CAB Unassigned

Stop non-project changes Unassigned

Remove one in five contractors over next 3 months Unassigned

Enforce contractor ‘holidays’ Unassigned

Recruitment Freeze Unassigned

Cost Savings – 3. Evaluate Opportunities

Potential Ways of Reducing IS Cost - ExamplesOpportunity Description

Adopting application packages

Buy application packages instead of building your own applications for major business functions

Automating data centre procedures

Replace manual procedures such as file loading, backups and job schedules by automated ones

Cancelling non-viable projects

Kill projects that lack sponsors, benefits realisation plan, competent project manager or access to key resources

Consolidating data centres

Move the work of two or more data centres to a single centre, including selective transfer of equipment and staff

Consolidating data networks

Combine traffic from several existing data networks on one TCP/IP network

Consolidating LAN servers

Replace many small servers with one or two larger ones

Downsizing systemsMigrate applications to a less expensive platform such as Unix, NT or client-server

Improving project management

Improve project management capability by introducing project management methods, training and recruitment

Managing mobile telephony

Bring mobile telephony under corporate control by aggregating demand and select supplier competitively

Opening telecoms to bidding

Aggregate telecoms requirements and go to competitive tender

Evaluating Cost Savings Opportunities - Examples

Opportunity Potential Certainty

ImplementationPayback

RateEase Speed

Adopting application packages XXX XX XX XXX XX

Automating data centre procedures

XXXXX XXXXX XXXX XXX XXX

Cancelling non-viable projects XXXX XXX XXXXX XXX XXX

Consolidating data centres XXXX XXXXX XXX XX XX

Consolidating data networks X XXXX XXXX XX X

Consolidating LAN servers XXX XXXXX XXXXX XXX XXX

Downsizing systems XXX XXX X X X

Improving project management XXX XX XXX XX X

Managing mobile telephony X XXXX XXX XX XX

Migrating to thin clients XXX XXXX XXXXX XXX XXX

Opening telecoms to bidding XX XXXXX XXXX XX X

Cost Savings - 4. Implement Savings Plan

• Manage risks• Execute Plan• Report progress• Track savings• Implement new roles• Implement process improvements• Identify issues

Cost Savings – 5. Report and Review

5• Review savings• Review process changes• Review new roles• Celebrate successes• Embed changes• Identify further improvements• Disband virtual team

ANY QUESTIONS?Section 5