Costing - how much does it?

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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

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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?

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Introduction Costs REPORTS

• Section 1

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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 (whats included?)
• Cost v Price (incl. market price)
• Cost and Value (Quality , SLA, Perception)
• Zero cost (cost recognition)

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Cost Collection Reporting

• Presentation should assist cost control and
  support decision making

1. Spend by Cost Type gives a summary of your
   groups spend what is your budget spent on?
2. Spend by Cost Centre gives a total spend for each
   of your groups 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?

Reporting requirements must define the type and
level of cost collection
Cost Transactions
Coding of transactions must support the
reporting requirements (GIGO)
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Example Spend by Cost Type
ISC Materials May-09 May-09 May-09 10 Months Aug-08 to May-09 10 Months Aug-08 to May-09 10 Months Aug-08 to May-09 Full Year Aug-08 to Jul-09 Full Year Aug-08 to Jul-09 Full Year Aug-08 to Jul-09
Actuals Budget Variance Actuals Budget Variance Trend Budget Variance Budget 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 Materials May-09 May-09 May-09 10 Months Aug-08 to May-09 10 Months Aug-08 to May-09 10 Months Aug-08 to May-09 Full Year Aug-08 to Jul-09 Full Year Aug-08 to Jul-09 Full Year Aug-08 to Jul-09
Actuals Budget Variance Actuals Budget Variance Fcast Budget Variance Budget 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 Resources May-09 May-09 May-09 10 Months Aug-08 to May-09 10 Months Aug-08 to May-09 10 Months Aug-08 to May-09 Full Year Aug-08 to Jul-09 Full Year Aug-08 to Jul-09 Full Year Aug-08 to Jul-09
Actuals Budget Variance Actuals Budget Variance Fcast Budget Variance Budget 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
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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?

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COSTING SERVICES

• Section 2

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Cost Model for IS Shared Services Transition
Business Case

• Calculating the Cost of IS Shared Services in
  terms of Service Offerings

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Background The Drivers for Change in Shared
Services

• SS Cost
• SS Capacity
• SS Capability
• SS Quality
• SS Delivery

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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!

• 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

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IS Shared Services TransitionCost 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
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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.
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Model for Costing IS Service Offerings
Discover/estimate the proportion of time spent by
each Team in delivering each Service Offering and
allocate Staff Costs accordingly

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

Calculate the current annual cost of existing
Service Offerings
Allocate ICT, Admin and Capex costs to the Teams.
Then allocate to the appropriate Service Offering
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Current Annual Costs of Teams
Annual Cost Components (m) Annual Cost Components (m) Annual Cost Components (m) Annual Cost Components (m) Annual Cost Components (m) Annual Cost Components (m) Annual Cost Components (m) Annual Cost Components (m) Annual Cost Components (m)
Payroll Staff Payroll Staff Contract Staff Contract Staff Total 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 Source IS management accounts Aug-08
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Proportion of Time Spent by Team to Deliver
Service
Staff Allocation to Service Offering () Staff Allocation to Service Offering () Staff Allocation to Service Offering () Staff Allocation to Service Offering () Staff Allocation to Service Offering () Staff Allocation to Service Offering () Staff Allocation to Service Offering () Staff Allocation to Service Offering () Staff Allocation to Service Offering ()
Shared Services Team MA EL MPE MDTE MC MCE DM PS Proj Total
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) Source Team managers' judgement and TMS data Apr-08 to Aug-08 (Proj) Source Team managers' judgement and TMS data Apr-08 to Aug-08 (Proj) Source Team managers' judgement and TMS data Apr-08 to Aug-08 (Proj) Source Team managers' judgement and TMS data Apr-08 to Aug-08 (Proj) Source Team managers' judgement and TMS data Apr-08 to Aug-08 (Proj)
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Allocation of ICT, Admin Capex Costs to Services
Cost Allocation to Service Offering (m) Cost Allocation to Service Offering (m) Cost Allocation to Service Offering (m) Cost Allocation to Service Offering (m) Cost Allocation to Service Offering (m) Cost Allocation to Service Offering (m) Cost Allocation to Service Offering (m) Cost Allocation to Service Offering (m) 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 lt2,500     0.050     0.350       0.400
IT Software lt50,000 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                    
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Current Annual Costs of Service Offerings
Annual Cost Components m Annual Cost Components m Annual Cost Components m Annual Cost Components m Annual Cost Components m Annual Cost Components m Annual Cost Components m Annual Cost Components m Annual Cost Components m
Payroll Staff Payroll Staff Contract Staff Contract Staff Total 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 DT 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
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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?

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COSTING PROJECTS

• Section 3

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Costing Projects
3. Apportion Overhead Costs Indirect support
time, Training and Estates
Capital Depreciation plus Support Maintenance
Costs / Savings
2. Allocate Operational Staff Costs
Timesheets!
ISS Teams Total BAU Projects
FTE 273 147 126
100 54 46
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)
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Overview Project Financial Control Resource
Management
Project Planning
Project Implementation
Project Go Live
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
Financial Monitoring Control
Incremental phased budgets by cost type reviewed
by Finance (capital and recurrent costs)
Monthly detailed financial reports reviewed by
Project Board (variance analysis forecast
update)
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)
Estimation of ISS and sponsors operational
staff time, availability and associated costs
Reporting and reviewing full project resourcing
(FTE) and costing
Tracking benefits, costs and savings over life
of service
Current
Future
Nick Cowan 24/04/09
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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

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Cost Savings An Approach
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Evaluate Opportunities
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Cost Savings 1. Prepare
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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?

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Potential Ways of Reducing Costs

• Popular and worthwhile
• Prioritising projects
• Renegotiating prices

• Unpopular but worthwhile
• Restructuring
• Outsourcing generic activities

• Unpopular and less worthwhile
• Delay equipment upgrades
• Reduce consumables

• Popular but less worthwhile
• Stopping unnecessary activities
• Outsourcing projects

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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

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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
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Cost Savings 2. Identify Opportunities

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

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Annual Contracts gt 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
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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

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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






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Cost Savings 3. Evaluate Opportunities
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Potential Ways of Reducing IS Cost - Examples
Opportunity 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 systems Migrate 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
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Evaluating Cost Savings Opportunities - Examples
Opportunity Potential Certainty Implementation Implementation Payback Rate
Opportunity Potential Certainty Ease Speed Payback Rate
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
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Cost Savings - 4. Implement Savings Plan

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

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Cost Savings 5. Report and Review

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

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ANY QUESTIONS?

• Section 5