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					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?
Section 1
INTRODUCTION: COSTS & REPORTS
Nature of costs
Dependent 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                   Cost
      – what is your budget spent on?
2.    Spend by Cost Centre gives a                    Type
      total spend for each of your
      group’s cost centres – where /             Cost Centre
      by whom is the budget being
      spent?
3.    Spend by Cost Centre & Cost
      Type shows a summary of spend       Cost Centre + Cost Type
      for each cost centre – what is
      being spent where/by whom?
Reporting requirements must define the type and level of cost collection

                                              Cost Transactions
Coding of transactions must support the reporting requirements (GIGO)
                                       Example: Spend by Cost Type
ISC                                                10 Months:                           Full Year:
                                 May-09
Materials                                       Aug-08 to May-09                      Aug-08 to Jul-09
                                                                                              Budget
                         Actuals Budget Variance Actuals Budget Variance Trend Budget Variance Used
                         £000s       £000s    £000s       £000s £000s      £000s     £000s    £000s     £000s Months
ISC Books, Periodicals
& Databases                      8       77       69       3,149   2,307      -842    3,779     2,715    -1,064   14.0
                                      Example: Spend by Cost Centre
ISC                                                10 Months:                           Full Year:
                                 May-09
Materials                                       Aug-08 to May-09                      Aug-08 to Jul-09
                                                                                               Budget
                         Actuals Budget Variance Actuals Budget Variance F’cast Budget Variance Used
                         £000s       £000s    £000s       £000s £000s      £000s     £000s    £000s     £000s Months

Arts Resources                   4       13           9     538     396       -142     600       466      -134    13.9
                                 Example: Spend by Cost Centre and Cost Type
Arts                                                 10 Months:             Full Year:
                                 May-09
Resources                                        Aug-08 to May-09        Aug-08 to Jul-09
                                                                                               Budget
                         Actuals Budget Variance Actuals Budget Variance F’cast Budget Variance Used
                         £000s       £000s    £000s       £000s £000s      £000s     £000s    £000s     £000s Months
ISC Books, Periodicals
& Databases                      4       13           9     538     396       -142     600       466      -134    13.9
                   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?
Section 2
COSTING SERVICES
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 Driver
     Shared Services needs to reduce its annual operating costs

Background                                                            IS5421 - SHARED SERVICES


                                           10

• Spend has risen by 2.5m (38%)             9
                                            8
  over the last 3 financial years from      7

  £6.5m in 2005/6 to £9m in 2007/8          6
                                         £m 5
                                                                                                                       CAPEX
                                                                                                                       OPEX

• The budget for 2008/9 is £0.9m            4
                                            3
  (10%) more than 2007/8 at £9.9m           2
                                            1
• The good times are gone!
                                                Y/E 31st March 2006      Y/E 31st March 2007     Y/E 31st March 2008


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 Services Transition
                   Cost Structures and Definitions
IS Shared Services
The 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 Instances
Specific Customer Services within Service Offerings
(e.g. Finance or HR system in Managed Application)

Cost Components
Cost of resources associated with providing Service Instances

Cost Drivers
Drivers of Cost Components to provide Service Instances to required SLA
                         Definition of SS Service Offerings
The 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
                    Discover/estimate the
                    proportion of time
                    spent by each Team in
                    delivering each Service
                    Offering and allocate
Establish current   Staff Costs accordingly   Calculate the current
annual costs of
                                              annual cost of existing
existing 9 Teams
                                              Service Offerings
and associated IT
spend
                    Allocate ICT, Admin and
                    Capex costs to the
                    Teams. Then allocate to
                    the appropriate Service
                    Offering
                              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 (%)
                                                                                                                    Total
Shared Services Team                              MA         EL         MPE   MDTE   MC    MCE   DM    PS    Proj    %
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 Offerings
                                            Annual 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?
Section 3
COSTING PROJECTS
Costing Projects

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

 2. Allocate Operational Staff Costs
                                                             Capital
    Timesheets!
                                                           Depreciation
  ISS Teams     Total        BAU          Projects            plus
  FTE           273          147          126               Support &
                                                           Maintenance
  %             100          54           46
                                                             Costs /
                                                             Savings
 1. Capture Incremental Costs
 Dedicated: staff/contractors/consultancy
 Additional: equipment/hardware/software

        Cost of Project (Capital Accounting Rules)               Cost of Service

                  Cost of Project and Service (Financial Business Case)
                   Overview – Project Financial Control & Resource Management


                                                  Project
Project Planning                                                                         Project ‘Go Live’
                                              Implementation

                                                                                           Ensure all recurrent
    Cost of additional
                                                                                              maintenance
     resources to be
                                                                                             costs/savings of
      purchased are               Financial Monitoring & Control                             new/improved
   estimated (working
                                                                                               service are
   with Procurement)
                                                                                              budgeted for



                                Monthly detailed                 Quarterly summary          Agree project costs
  Incremental phased
                                financial reports                  financial reports       to be capitalised and
  budgets by cost type
                              reviewed by Project                     reviewed by                resulting
  reviewed by Finance
                                Board (variance                   Programme Board              depreciation
      (capital and
                               analysis & forecast               (variance summary              charges are
    recurrent costs)
                                    update)                       & forecast review)           budgeted for


   Estimation of ISS and
                                           Reporting and reviewing full
sponsors’ operational staff                                                            Tracking benefits, costs and
                                           project resourcing (FTE) and
   time, availability and                                                               savings over life of service
                                                      costing
     associated costs


  Current         Future                                                                                 Nick Cowan
                                                                                                         24/04/09
Section 4
COST SAVINGS: AN APPROACH
INSTITUTE OF FISCAL STUDIES ESTIMATES A 2-3% REDUCTION IN PUBLIC SPENDING IN
REAL TERMS BETWEEN 2011 AND 2014 (WITH EXCEPTION OF SCHOOLS AND HEALTH)
                Cost Savings – An Approach

1               2                   3                   4               5


                                                            Implement       Review
                       Identify          Evaluate                            and
      Prepare                                                Savings
                    Opportunities       Opportunities         Plan          Report




• Get a sponsor            • Obtain benchmark data          • Communicate progress
• Manage process           • Consolidate savings            • Communicate successes
• Create virtual team      • Report progress                • Manage expectations
• Liaise with Finance      • Raise awareness of costs       • Promote new behaviours
•Liaise with Procurement   • Consider consultancy
• Facilitate workshops
    Cost Savings – 1. Prepare

1
        • Establish team
        • Agree target savings
        • Prepare cost information
        • Initial cost analysis
        • Obtain external benchmarks
        • Design evaluation approach
        • Identify candidate savings
                  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                    • Popular and
  worthwhile                         worthwhile
  Restructuring                      Prioritising projects
  Outsourcing generic activities     Renegotiating prices


• Unpopular and less               • Popular but less
  worthwhile                         worthwhile
                                     Stopping unnecessary
  Delay equipment upgrades           activities
  Reduce consumables                 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 - Examples
Opportunity                                                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

     2

           •Present cost info
           • Analyse cost info
           • Identify opportunities
           • Highlight ‘quick wins’
           • Prioritise opportunities
                                             TYPE OF SUPPLIER SPEND > £100k OVER LAST 12 MONTHS


                   TEMPORARY STAFF



                CAPITAL EXPENDITURE



                TELECOMMUNICATIONS



                IS CONSULTANCY FEES



      IT EQUIPMENT SOFTWARE <£50,000
                                                                                                              IS STANDARDS & INNOVATION
                                                                                                              IS PROGRAMMES
       IT EQUIPMENT HARDWARE <£2,500                                                                          IS SHARED SERVICE
                                                                                                              IS DIRECTOR
                                                                                                              IS CRI
         WEB HOSTING AND MTCE FEES
                                                                                                              IS RESEARCH
                                                                                                              IS LRI
           IT EQUIPMENT MAINTENANCE



                       RECRUITMENT



             TRAINING & DEVELOPMENT



IS CABLING COST - NETWORK & TELECOMS


                                       0.0      1.0      2.0     3.0     4.0     5.0      6.0     7.0   8.0
                                                                         £m
                                            SUPPLIER SPEND > £100K OVER LAST 12 MONTHS


       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                                                                    IS STANDARDS & INNOVATION
                                                                                                     IS PROGRAMMES
                CIVICA SERVICES LTD
                                                                                                     IS SHARED SERVICE
      BT CONVERGENT SOLUTIONS LTD
                                                                                                     IS DIRECTOR
     HAYS INFORMATION TECHNOLOGY
                                                                                                     IS CRI
     CAMBRIDGE ONLINE SYSTEMS LTD                                                                    IS RESEARCH
               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

                                      0.0     0.5       1.0        1.5       2.0         2.5   3.0
                                                                   £m
Annual Contracts > £10k
                                                          Net Value Renewable
Contract Manager                      Annual Net Value      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 - Examples
Opportunity                                          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

     3
          • Quick wins?
          • Identify risks
          •   Are savings one-off?
          •   Savings timeline?
          •   Value of saving ?
          •   Cost of savings?
     Potential Ways of Reducing IS Cost - Examples
Opportunity              Description
Adopting application     Buy application packages instead of building your own
packages                 applications for major business functions
Automating data centre   Replace manual procedures such as file loading, backups and
procedures               job schedules by automated ones
Cancelling non-viable    Kill projects that lack sponsors, benefits realisation plan,
projects                 competent project manager or access to key resources
Consolidating data       Move the work of two or more data centres to a single centre,
centres                  including selective transfer of equipment and staff
Consolidating data       Combine traffic from several existing data networks on one
networks                 TCP/IP network
Consolidating LAN
                         Replace many small servers with one or two larger ones
servers
                         Migrate applications to a less expensive platform such as Unix,
Downsizing systems
                         NT or client-server
Improving project        Improve project management capability by introducing project
management               management methods, training and recruitment
Managing mobile          Bring mobile telephony under corporate control by aggregating
telephony                demand and select supplier competitively
Opening telecoms to
                         Aggregate telecoms requirements and go to competitive tender
bidding
       Evaluating Cost Savings Opportunities -
                     Examples
                                                          Implementation   Payback
Opportunity                      Potential   Certainty
                                                         Ease      Speed    Rate
Adopting application packages      XXX          XX        XX        XXX      XX
Automating data centre
                                 XXXXX        XXXXX      XXXX       XXX     XXX
procedures
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

     4
           • 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
Section 5
ANY QUESTIONS?

				
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