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