Counting Costs

Creating a Cost Conscious Culture

The Australian Edition February 2012

A joint initiative of

Published by:
CIPFA \ The Chartered Institute of Public Finance and Accountancy
3 Robert Street, London WC2N 6RL
+44 20 7543 5600 \ publications@cipfa.org.uk \ www.cipfa.org.uk
The Institute of Chartered Accountants in Australia
33 Erskine Street, Sydney, New South Wales, 2000 Australia
+61 2 9290 1344 \ www.charteredaccountants.com.au
2012 CIPFA
The content available within this publication is the property of CIPFA, with the contribution of its joint partner ICAA.
Apart from any fair dealing for the purposes of research or private study, or criticism or review, as permitted under the Copyright,
Designs and Patents Act, 1988, this publication may be reproduced, stored or transmitted, in any form or by any means, only
with the prior permission in writing of the publishers, or in the case of reprographic reproduction in accordance with the terms of
licences issued by the Copyright Licensing Agency Ltd. Enquiries concerning reproduction outside those terms should be sent to
the publishers at the above mentioned addresses.
0112-133

Counting Costs: Creating a Cost Conscious Culture

Statement of purpose
This briefing is written for the organisations leadership, the Executive and Chief Executive or
Secretary. With budgets under strain organisations will prioritise making cost control and efficiency
part of the mindset of the way they do business. The briefing supplements CIPFAs Counting Costs:
Understanding and Using Costing Information to Make Better Decisions and is based on two CIPFA
Briefing Notes: Briefing Note 1 Counting Costs: Making Costing Count Improvement Actions for
Council Managers; and Briefing Note 2 Counting Costs: Creating a Cost Conscious Culture. The briefing
draws on audit findings and case study examples and examines elements of a culture that prioritises
the better use of costing information in decision taking.

Introduction
As part of their contribution to returning the national budget to surplus, public sector organisations have set
challenging budgets and financial plans. Having a cost conscious culture will be fundamental to achieving fiscal
strategy targets and demonstrating efficient, effective, economical and ethical use of public resources.

Characteristics of a cost-conscious culture

Organisations that excel at cost management have common characteristics. They:

Demonstrate visible leadership: leaders and senior managers lead by example. This means that they
think frequently about cost and talk about cost; it crops up, in formal and informal conversations around the
organisation, as well as in management meetings and operational and service reviews
Build good working relationships: senior operational managers and finance professionals recognise the
contribution and expertise each brings to decision-taking processes. Finance staff work closely with other
senior managers, to produce timely and accurate cost management information to support evidence-based
decision taking
Know their baseline: organisations have established cost and performance baseline information, against
which managers can check their progress in driving down costs and driving up efficiency and productivity
Develop ownership and expert knowledge: organisations create cost category owners or cost champions
who build detailed knowledge of categories of cost and have the responsibility, and the authority, to promote
value for money vertically within divisions and branches and horizontally against their deliverable or output
category, and across program and service lines or divisions and branches
Use comparative data: senior managers use key performance indicators to benchmark costs internally
(and externally wherever possible) and to work out how to get costs down to the target level
Have the right tools in place: to manage cost information efficiently and effectively and the capacity to use
them for information, management and reporting. Having the right tools starts with ensuring that all managers are
trained to read and use cost centre reports competently, and providing specialist software, including spreadsheet
and other analysis tools and appropriate training in both cost concepts and software and analysis tools.

Counting Costs: Creating a Cost Conscious Culture

What gets in the way of effective cost management?

Barriers to understanding costs and managing them effectively include:

Prevailing organisational culture that does not prioritise cost management

A lack of clarity on the respective roles and responsibilities of the finance, policy, operational and service delivery
divisions and branches, and a view that managing costs is difficult, or is the responsibility of finance staff

Failure to integrate finance and performance data and to share it across division and branch boundaries,
or to take an enterprise-approach to finance and performance data

A lack of financial literacy, skills and competencies in the leadership team, operational and service delivery managers

Poor communication skills and lack of business-knowledge of finance professionals

Inflexible IT systems which make it difficult to bring together cost information in ways that support decision
taking (for example, systems configured solely round traditional hierarchical structures)

A lack of leadership drive and ambition for transformational improvement in performance.

High performing organisations are those that overcome these barriers and manage their costs effectively. Leaders
in public sector organisations are increasingly addressing the barriers to efficient and economical use of resources.
For public sector managers too, whether they work in front-line operational and service delivery areas or the backoffice support activities, understanding and managing down cost is essential to ensure that budgets can be met and
that every dollar is used properly.

Case Study 1: Consequences of shortcuts and poor communication

This case study identifies the consequences of a failure to involve finance, policy, operational and service
delivery teams in the design and operation of programs, poor communication between program and other
support areas, and limited financial literacy within operational teams.
The Faulkner Inquiry into Green Loan procurement processes and contracting arrangements between May
2008 and January 2010 found a widespread lack of compliance with the principles, guidelines and regulations
relating to procurement in the rollout of the Program and hence a lack of probity. The ANAO (Australian
National Audit Office) observed all interviews and reviewed documentation for the Faulkner Inquiry, and
generally agrees with its findings that include, among other things:

Repeated and systemic breaches of Regulations 9 and 10 of the Financial Management and Accountability
Regulations 1997 (FMA Regulations) in respect of spending proposals not being approved by the
appropriate delegate(s) before procurement commenced

Significant cost escalations and weak budgetary control demonstrated by contracts for IT project
management, the contract centre and logistics (program marketing materials and assessment report
distribution) escalating by factors of 4, 9 and 19, respectively, on the original contract terms.

The Faulkner Inquiry identified the pressure to achieve outcomes within tight time frames as a motivator for
the Green Loans team adopting short cuts to deliver the program that minimised intervention from outside
the program area. However, the Faulkner Inquiry and the ANAO found no evidence of any direction being
given to the Green Loans team to adopt such an approach.
Source: A
 ustralian National Audit Office, Audit Report No. 9 201011 Performance Audit: Green Loans Program,
Commonwealth of Australia, Canberra, 2010

Initial responsibility for creating a cost conscious culture lies with leaders and senior managers in all public
organisations; the next section of this guide suggests some steps they can take.

Counting Costs: Creating a Cost Conscious Culture

Creating a cost conscious culture

There are four main steps to building a cost conscious culture:

Communicating the importance of costs

Making sure roles and responsibilities are clear to all

Creating the environment for dialogue between finance and operational managers

Ensuring decisions are based on sound costing information.

Getting started: communicating the message that understanding cost matters

Organisations with a cost conscious culture have communicated successfully the Chief Executives or
Secretarys message that managing down costs is every managers responsibility. There are four important
elements in communicating this message:

The consistency of the message

Using every opportunity to get the message across

Creating supportive organisational systems

Sharing good examples of how understanding cost has brought benefits.

When these elements are in place, managers are more likely to understand that cost is one of their most
important priorities and that their performance appraisal will include an evaluation of their performance in
this area. The key lever for organisational transformation is the middle manager level. Staff at this level must
understand the importance of understanding costs.

Case Study 2: Recognising the need for reform and taking action
This case study demonstrates that the Australian Government Department of Defence (Defence) recognised
the need for reform to achieve greater efficiencies. It also identifies the strategy Defence put in place to
realise these efficiencies, which requires the involvement of every person within Defence and incorporates
a focus on creating a cost conscious culture within Defence.
During the 2009 Defence White Paper process Defence identified a range of areas where support structures
and processes were not working well. As part of that process, an independent audit of the Defence budget
was conducted. This very comprehensive audit identified a number of areas where Defence could initiate
reforms and be more efficient in the way it used its resources it assessed that Defence could reduce costs
by around $20 billion between 2009 and 2019.
Among other things, the audit identified the need to:

Provide greater budget transparency

Understand the underlying drivers of the costs of Defence

Achieve the required productivity and efficiency gains necessary to fund required capability.

The Strategic Reform Program (SRP) is the way that Defence will make those improvements. The SRP is one
of the largest and most complex reform programs ever undertaken in Australia. It is a decade-long campaign
of reform that requires the participation and support of every person in Defence. It is clearly identified within
Defence that SRP is not a passing fad and is not something that anyone can wait out it is identified by the
Defence leadership group as being fundamental to the future of Defence.
Continued overleaf >

Counting Costs: Creating a Cost Conscious Culture

Defence receives a substantial part of the Governments budget and Defence managers have a responsibility
to ensure that the resources under our control are used wisely. A key feature of SRP is to demonstrate that
everything Defence does counts every minute of time, every dollar spent and every round fired.
Defence leadership has recognised that the organisation has attempted significant reform in the past but,
with mixed results. Some of its past reform efforts have not sufficiently recognised that in some cases
money needs to be spent in order to make future savings. The Government has recognised that without
proper investment it is very difficult to successfully implement some of the deeper changes that are required.
As a result the SRP budget includes around $2.4 billion to support investment to enable implementation of
the reforms. ICT and logistics are two examples where significant investment has been provided to allow
the reforms to be properly implemented.
How will the SRP work? In the broadest sense the reforms are about:

Simplifying internal processes to reduce time and/or waste

Consolidating where process work is conducted so it is not duplicated in other parts of the organisation

Aligning more complex processes, like the acquisition of new capability, so there is a clear linkage
between the identified need and the final product

Ensuring policies reflect contemporary standards

Improving decision making around expending resources

Reducing demand for goods and services

Building a cost-conscious culture in Defence.

Sources: Department of Defence, The Strategic Reform Program: Making it happen, Commonwealth of Australia, Canberra, 2010,
and Pappas, G., Defence Budget Audit, Commonwealth of Australia, Canberra, 2009

Being clear about roles and responsibilities in managing cost

There are several reasons for the common opinion among non-financial and operational managers that managing
cost is difficult. Many managers lack confidence and are wary of involvement in what they see as a specialist
area. Some managers express the belief that cost management is solely the province of the finance staff and the
Chief Financial Officer.
Misapprehensions and lack of confidence can be addressed by clarifying roles and responsibilities. Managers
financial responsibility extends beyond reviewing monthly cost centre reports and analysing and explaining
variances from budget. Increasingly they have responsibility for actively managing their current costs and
forecasting future costs. Unless they understand their cost drivers they will be unable to plan services, budget
and forecasts costs or identify and lock-in savings.
Finance professionals roles often involve a combination of challenge and support to operational managers.
The precise divisions of responsibilities vary in different organisations; they need to be clearly understood by
both parties. Managers need to be clear about their own financial responsibilities and on what the finance
department can do to support them, for example by carrying out cost analysis, trend analysis and cost scenario
modelling for service planning.
There are other models. Some organisations have appointed cost champions; senior managers whose task is to
understand the drivers of cost in one cost category (IT, property or procurement), set organisation-wide targets for
cost reduction and implement those reductions by negotiating targets with divisional and branch budget holders.
They check progress in reducing spending across the organisation and lead by example in driving down costs.

Counting Costs: Creating a Cost Conscious Culture

Getting operational and finance teams working well together

Finance teams and operational and service-delivery teams can work together to support decision takers with
relevant, high-quality cost information. These relationships are effective when characterised by openness and
mutual respect for each others professional expertise. Where that is not in place managers may need to promote
better mutual understanding. Operational managers need to understand how a finance department works and
what assistance it can provide. Equally, finance professionals need to understand the operational and service
delivery teams needs for financial information and analysis and address the best way of communicating financial
and performance information.
Many senior managers are unable to specify what analysis they would like the finance professionals to perform,
simply because they do not know what analysis tools are available to them. Managers need to be able to explain
to finance staff what cost information they need to help them weigh up the issues and arrive at a well-founded
decision. The finance professionals need to be able to understand the issues faced operational managers and
then identify what analysis will yield the information the managers want.
Managers need to make effective use of the analysis of cost information for decisions. The amount of work
required to produce the cost information will need to be balanced against its importance for their decisions. There
will be a tradeoff between accuracy and speed of production for an urgent decision. There will be some limitations
on what it is possible to do, depending on the availability of time, cost and data. There will be a point at which
additional analysis will fail to improve decision taking sufficiently to justify the incremental effort to improve costing,
and the cost of so doing. All these issues need to be discussed between managers and finance professionals.

Basing decisions on sound costing information

Most of the information needed for operational decisions will either exist within an organisations financial or
other management information systems. Where it does not exist in the form required, analysts may need to
conduct analyses or develop models to generate it; for example costing models that help managers understand
their costs, what drives those costs and how they behave.
Identifying the right cost information for the right decision is addressed in the next section of this guide.

Case Study 3: Better practice performance reporting

This case study provides an example of the better practice guidance available to public sector managers on
clarifying responsibilities and accountabilities, developing a culture that has a focus on performance, basing
decisions on financial and non-financial information, and ensuring the reports to managers are based on
sound data and focus on meeting the decision-making needs of managers.
The ANAO Better Practice Guide: Better Practice in Annual Performance Reporting sets out that a robust
performance culture involves the agencys leadership having a strong focus on performance and sound
processes in providing clear accountability for setting and achieving performance targets. Managers and
staff are aware that such a focus is crucial to their success. A performance culture is one in which everyone
knows what they are specifically expected to achieve or what outcome(s) they have to contribute to, and
have the motivation and incentive to do so within a framework of public sector values and ethics.
Various ways to achieve a robust performance culture include:

Full engagement by senior executives. This involves measuring and/or assessing the performance of
critical factors, as agreed between senior executives and managers, making them accountable for the
results achieved, and for the quality of information in their reports
Continued overleaf >

Counting Costs: Creating a Cost Conscious Culture

Executives promote and recognise good performance. Leading by example sends a powerful signal,
as does being clearly accountable for achieving plans and targets

Explicit performance requirements. Performance should be measured against clearly specified

targets, monitored and taken into account in individual performance assessment and linked to
agency performance bonus schemes

A clear line of sight between organisational performance and individual performance requirements.
This provides a clearly understood relationship between what an individual does, their contribution
to the delivery of programmes and outputs, and to the achievement of outcomes

A robust framework for performance evaluation and review. A regular review of performance through
evaluation and review should be an expected, and accepted, element of performance management.

The Better Practice Guide sets out a number of useful checklists that include:

Performance Reporting Framework

Specify desired outcomes (including any intermediate outcomes):

Any shared outcomes and provide information on the agencys contribution
Identify the contributing departmental outputs and administered items (usually programmes) and
assess their contribution to the outcome(s).

Identify measurable performance indicators for effectiveness at the outcome level, and, at the
departmental output and administered item programmes level:
Use valid, accurate and reliable measures and maintain information on methodology and sources
Establish links between financial and non-financial performance information and assess the efficiency
and cost effectiveness of the agency
Use researched and realistic targets, standards and bases for comparison including multi-year
targets where necessary.

Data Measurement and Management

Clear definition of performance indicators

Sound data assurance arrangements

Sound annual report coordination and clearance arrangements

Performance data should be the basis for internal and external reporting, including management
and analysis.

Presentation of Information

Present achievements and analysis of performance

Assess performance against targets or other points of reference

Present trends in performance

Demonstrate that evaluations are conducted and used appropriately

Provide a coherent picture of performance that links to commitments in the agencys Portfolio
Budget Statements and demonstrates consistency between years.

Source: Australian National Audit Office, Better Practice Guide: Better Practice in Annual Performance Reporting,
Commonwealth of Australia, Canberra, 2004

Counting Costs: Creating a Cost Conscious Culture

understanding of costs include:

Planning the future, for example strategic budget-planning decisions
Deciding whether to proceed with strategic projects, for example investments in
public assets

The right cost information for the

right
decision
Monitoring
and control
of activity and budgets in year

Deciding whether to implement new policies and services or withdraw from activities

ChoosingLeaders
between
alternative
ways
of providing
services,
including
to Some
and senior
managers make
different
kinds of decisions
at different
points in thewhether
business cycle.
decisions
are
made
regularly
in
the
business
cycle;
others
fall
within
no
particular
time
horizon
or
are
ongoing.
outsource or provide in-house
Common decisions that should be supported by a good understanding of costs include:

Planning
the future,
for example
strategic
decisions or how to improve
Decidingon
activity
levels,
the mix
andbudget-planning
design of services
efficiency and
productivity
Deciding
whether to proceed with strategic projects, for example investments in public assets

Deciding whether to implement new policies and services or withdraw from activities

Choosing between alternative ways of providing services, including whether to outsource or provide in-house

Deciding on activity levels, the mix and design of services or how to improve efficiency and productivity

Reviewing
and setting charges for services to users and customers
Monitoring and control of activity and budgets in year
Responding to unexpected events, for example natural disasters.

Reviewing and setting charges for services to users and customers

NSERT FIGURE
1 FROM CIPFA BRIEFING NOTE 1 COUNTING
Responding to unexpected events, for example natural disasters.
OSTS - MAKING COSTING COUNT: IMPROVEMENT ACTIONS
FOR COUNCIL
MANAGERS, PAGE 3 AS PER BELOW
Figure 1: Decision points in the business management cycle

1: Decision points in the business management cycle

y of these decisions to be well-founded, the information to support them has to be

nt, of high quality and well presented:
Relevance: decision takers need cost information that covers all the significant cost
factors that might influence the decision. Relevant cost information will have the right
level of aggregation
for the decision (for example geography,
time
frame
type
of Culture

Counting
Costs:
Creatingor
a Cost
Conscious
cost information)

For any of these decisions to be well-founded, the information to support them has to be relevant, of high quality
and well presented:

Relevance: decision takers need cost information that covers all the significant cost factors that might
influence the decision. Relevant cost information will have the right level of aggregation for the decision
(for example geography, time frame or type of cost information)
Quality: cost information needs to be transparent in its accuracy, validity, reliability, timeliness and completeness
Presentation: managers should present information to decision takers clearly so they can understand both
the information itself and the story the information tells. They need to tailor the presentation to the particular
preferences of a decision taker.

What these characteristics of cost information mean in practice varies both by decision and by decision taker.
Clearly, the same cost information is not relevant to all decisions, nor is the same presentation of cost data right
for a financial analyst and a member of the organisations Executive. The first step in providing the right cost
information is to understand what decision it is to support.
Table 1, below, summarises relevant cost information managers are likely to need for some of these decisions.
The table shows that it is impossible to make a well-founded decision without understanding some aspects of cost.
It also illustrates how the cost information needed to support decisions at each point in the business management
cycle can differ.

Table 1: Relevant cost information for different types of decisions

Type of decision

Strategic

Taken by

Priority
setting

Investment

Alternative
service
provision

Leaders

Leaders

Leaders

10 Counting Costs: Creating a Cost Conscious Culture

Example
decisions

Should we
change the level
of entitlement
of a program
or service?

Should we
invest to save?

Should we
outsource,
use shared
services or
deliver in-house?

Relevant cost information

What is the full cost of providing the current service?

How does it vary by service user?

What does each part of the current service cost?

What are the cost drivers for this service?

How would costs change if ?

What are the costs and benefits attributable to the

investment through its life?

Do we understand the impact on costs and benefits

of changes in the timeline?

Do we understand the forecasting assumptions for

the movement of cost elements and accuracy limits
on forecasts?

Are any residual costs clear?

Will there be cost impacts on other departments,

or partner organisations?

What are the relevant stand-alone costs of the service?

Which costs are saveable?

Which will remain with the organisation?

What are the contract management costs?

What is the impact on fixed asset/property costs?

Type of decision

Operational

Taken by

Efficiency
improvements

Managing
budgets

Procurement

Senior
managers

Senior
managers

Senior
managers

Example
decisions

Relevant cost information

How do our cost profiles compare with other

organisations?

What are the cost drivers in our high cost areas?

What costs do we incur on each activity and how

do they break down by category (staffing, contracted
services, property, ICT)?

How do costs in different areas of the organisation

relate to one another?

How can
we react to
unexpected
overspends?

What drives cost in relevant areas?

What external changes might be giving rise to

overspends? Are they likely to continue?

Will reductions in activity in one area increase

costs in another?

What can we
do to reduce
our spend on
procured goods
and services?

How does what we pay compare with what other

similar organisations pay for these services?

Is there a range of prices paid for similar goods

or services across our organisation?

Do we have good market intelligence on supplier

input prices?

Are we gold-plating our requirements?

Are we smart negotiators?

Are we getting volume or other discounts?

What does our procurement function cost?

Can better procurement and contract management

processes reduce the cost to service our
organisation?

Would joint buying arrangements increase our

buying power and reduce our unit costs?

When did we last test the market?

Where and how

should we seek
to reduce costs?

Counting Costs: Creating a Cost Conscious Culture 11

What cost information can tell managers

High performing organisations have identified two key aspects of providing cost information to managers:

That the cost information and analysis conducted needs to be tailored to the decision it is designed to support

That the cost information required for the right cost analysis does not necessarily need to be laboriously or
expensively collected; it is often available to decision takers or analysts.

Specifying and using the right information for a decision is not always straightforward. Costs can be analysed
in a variety of ways. Table 2 shows examples of how different questions about cost can lead to different insights
into cost and different supporting analyses.
Leaders and senior managers will require more than basic financial information to conduct effective cost analysis.
While the financial management information system and general ledger is the basic source of data on costs, other
corporate information systems and resources will need to be called upon. Depending upon the decision to be made,
these information systems and resources may include:

Customer, client and recipient databases: these can provide information on different customer, client and recipient
groups, often by age, gender, disability, ethnicity, services and location. Where smartcards or similar systems
are used, the information gathered from them can be useful for cost or market analysis, or to understand the cost
implications of providing grants, benefits and subsidies to selected groups of customers, clients and recipients

Human Resource databases with information on staff numbers, grades, entitlements, staff turnover and absence.
This information can help cost operations, service delivery and support activities

Land and property databases with information on the age and condition of properties, the running costs, market
value, and opportunities to share under-occupied premises. Comparative benchmarking data on property costs
may also be available.

Many organisations and their management teams do not exploit fully all the cost and other data they already hold.
Although the necessary data exists, managers do not always know what analysis to do on the data and they
may be unable to do it themselves. Finance professionals with a good understanding of cost centres and cost
categories can advise on how to manipulate the data in different ways to answer specific questions. Discussion
between service managers and finance professionals should tease out what would be the right analysis for the
particular decision.

12 Counting Costs: Creating a Cost Conscious Culture

Table 2: Questions for management about cost, the insights gained and possible supporting analyses
Questions for management

Insights gained into cost

What is the composition

of the cost of the
service?

What is the service to be costed?

Cost per unit of service analysis

What costs categories are incurred

to deliver the service?

Actual to budget and variance analysis

Common size (relative proportion) analysis

by cost centre, service type, against
budget or by geographic region

How does the balance of fixed and

variable costs change with different
patterns of in-house or contracted delivery?

Procurement options for facilities and

equipment; whether to lease or buy,
capacity, reliability, energy efficiency

Identify the events that drive the variable

costs, eg service demand, frequency of
service interactions, projections of service
demand growth from changing economic
conditions, promotion and take-up

Identifying and understanding the

drivers of cost

Modelling of costs associated with

different service delivery methods
and frequencies

Can we change the

balance of fixed and
variable costs of the
service?

Can we reduce costs by

changing the method
or timing of service
delivery?

Can we reduce the

costs of components
(people, property,
facilities, equipment, IT
and support) or change
the balance of them to
reduce overall costs?

Are the costs direct or indirect costs?

What is the key cost driver for the

service?

What is the time frame for fixed costs?

What is driving the variable costs?

Supporting analyses

How do service delivery methods

(face-to-face, telephone, internet)
affect costs?

How does the timing or frequency

of service affect costs?

What are the key processes that

affect costs?

Process and workflow mapping and

analysis

How do governance and compliance

arrangements affect costs?

Addressing the cost of red-tape

Control risk analysis

What can we do to reduce the costs of

each component, e.g. increasing labour
efficiency, transferring contractors to
staff, buying contracted services more
economically, changing maintenance
schedules, using shared services,
applying market testing?

Analysis of drivers of staff costs

staffing levels and structures, absence,
shift patterns

Analysis of managers spans of control

(ratio of managers to staff)

Examination of contract positions

Can spending more in one area give

rise to greater savings in another?

Analysis of property, facilities, equipment

and IT buying options

Analysis of property maintenance, energy,

efficiency and repair costs and the links
between them

Analysis of additional staff training

and impacts on turnover, IT help desk
and support costs, process efficiency
improvements and enhanced compliance

Continued overleaf >

Counting Costs: Creating a Cost Conscious Culture 13

Questions for management

Insights gained into cost

What is the most cost

effective way of delivering
services to customers,
clients and recipients?

What do different approaches to

collection cost in different geographic
areas?

Analysis of costs of service delivery

by service type types, geography and
customer, client and recipient

What if we partnered with other

organisations delivering to the same
customers, clients and recipients?

Examination of connected service

delivery for common customers, clients
and recipients

How do different approaches to

service delivery affect program
objectives and outcomes?

Evaluation of impact of different service

delivery methods on program objectives
and outcomes

How do take-up volumes affect

service delivery costs?

Is there over-utilised or under-utilised

capacity for service delivery?

Analysis of capacity constraints and

utilisation by service type, geography
and customer, client and recipient

Do service delivery processes need to

be re-designed in order to be more cost
effective?

Standard costs, average cost and

time-based activity cost analysis

Analysis of what drives variation in each

component of cost (case mix, complexity,
service standards, quality standards,
timeliness, staff skills, geography)

Analysis of past changes in workload

and capacity

Analysis of the cost of different options

for managing workload peaks and growth

Process mapping and analysis and

costs to identify the cost of the
administrative support

Benchmarking of costs and performance

(quality, safety, timeliness) standards

Analysis of the historic financial records

to identify trends in costs (by service
type, customer, client and recipient group,
or geography)

Analysis of the components of cost to

identify the causes of those trends

Analysis of non-financial data on trends

and resource requirements (demand
levels, staffing requirements, locations)

Analysis of the links between the costs

of different processes?

Modelling the cost implications of different

approaches to staffing and service delivery

What is the cost of

delivering an additional
service?

Is there a standard cost, average cost

or acceptable cost range for different
service delivery methods?

What is the marginal cost of service

delivery?

What is the cost per unit or cost per

hour of service delivery? How does
this compare to benchmark of better
practice? If we are not comparable.
What actions would be needed to
achieve better practice costs?

How and why have costs

changed over time? What
have we done or can we
do about it?

What proportion of cost is administrative

support? Is that percentage appropriate
or reasonable?

How has the average or unit cost of

delivering service changed in recent
years?

What costs are incurred for processes

and activities that do not enhance
service delivery?

Which components of costs have

changed and why (increased demand
and volume of service, increased
unit costs)?

What options have we for reducing

costs or avoiding cost increases?

14 Counting Costs: Creating a Cost Conscious Culture

Supporting analyses

Case Study 4: A
 pplying analysis to a program and achieving cost management
improvements
This case study provides a useful example of the application of cost analysis and benchmarks to a program
and the way in which program managers can then redesign a program and achieve cost management
improvements.
A Review of Program Performance of the Strategic Indigenous Housing and Infrastructure Program (SIHIP)
was published in August 2009. The Review was commissioned by the Commonwealth Minister for Families,
Housing, Community Services and Indigenous Affairs, the Hon Jenny Macklin and the Chief Minister of the
Northern Territory, the Hon Paul Henderson, in order to assess how to improve the SIHIP.
The Review analysed the performance of the program, particularly in response to Australian Government
and public concerns that:

The program has been slow to deliver housing (timing)

The governance of the program is overly bureaucratic (governance)

The program is too costly (total cost), including that the costs of houses under the program (unit cost)
and program administration (administrative cost) are too high.

While the Reviewers determined that the overall program design was sound, they also found:

Delays in the original timeframe were largely due to underestimates by the Integrated Program Team
of the time required to develop the initial packages of works

That there have been unresolved leadership and capacity issues in the delivery of the program

That the layers of management should be reduced from six to three

That the estimated unit cost target set at the start of the program was an ambitious target

That the unit costs need to be reduced (and established a revised unit cost is $450,000 per new house)
while still ensuring that all houses built under SIHIP comply with the Building Code of Australia and the
National Indigenous Housing Guide

That program administration costs were running at 11.4% of program budget and this needed to be
reduced to 8%, largely by replacing some contractors with government staff, simplifying package
development processes and streamlining the governance of program delivery

That, over the life of the program for every $11.50 spent on the delivery of capital works, one dollar
will be spent on managing the program.

In December 2009, a Post Review Assessment (PRA) was commissioned by the Australian Government to
report against the recommendations made in the Review and to advise on issues relevant to achieving the
SIHIP targets.
The PRA found that all of the changes and recommendations arising from the Review have been, or are being,
implemented and that immediate improvements are visible as a result. In particular, program management
costs have been reduced from 11.4% of total program outlays to below 8% and are budgeted to remain so.
Sources: Department of Families, Housing Community Services and Indigenous Affairs and Northern Territory Government, Strategic
Indigenous Housing and Infrastructure Program Review of Program Performance, Commonwealth of Australia, Canberra, 2009
Donald, O. & Canty-Waldron, J., Strategic Indigenous Housing Infrastructure Program (SIHIP): Post Review Assessment,
Commonwealth of Australia, Canberra, 2010

Counting Costs: Creating a Cost Conscious Culture 15

Begin with the end in mind

Cost analysis is not an end in itself; it simply serves a purpose, in providing information to influence decision taking.
Taking time to study and understand cost allows people to make better decisions. Finance professionals need to
bring relevant, high-quality cost and performance information together for decision takers and present this in an
easy to understand form.
Leaders and senior managers should begin by being clear about what decision they want to take, identify the cost
information they will need to know for this decision, and then take steps to secure it through an appropriate analysis.

Figure 2: Begin with the end in mind

Know what decision

you need to take

Identify the right

cost information

Secure the right

cost analysis

Organisations that invest time and effort to understand their costs fully can achieve tighter financial control, secure
greater choice in allocating resources and make better decisions. Every manager in the public service should
recognise that understanding and controlling costs is part of their responsibility.
Changing an organisations culture such that cost considerations automatically feature in everyones actions across
the organisation is an urgent priority for public sector organisations needing to better manage costs or achieve
savings. The actions described in this briefing are not complicated, but are not easy either.
The challenge for leaders and senior managers within public sector organisations is to create the conditions
where cost information is afforded a high priority and is seen as an integral part of driving performance and
operational management.
Appendix A summarises the broad themes leaders and senior managers will need to address. Appendix B
provides one example of a short-term program designed to have an immediate impact on an organisations
costs and change its culture at the same time.

16 Counting Costs: Creating a Cost Conscious Culture

Appendix A:
A road map for improvement key steps to start on the road
to creating a cost conscious culture
Communication
1. Get the message out that costs matter
2. Create a communications process on cost management
3. Use it to share good practice and success

Make sure roles and responsibilities are clear to all

4. Clarify each managers responsibility to manage costs

Create the environment for dialogue between finance and operational managers
5. Encourage each manager to challenge finance to provide the information they want
6. Get finance professionals involved in the operational and program areas
7. Jointly find out what information exists
8. Identify knowledge gaps that will give new insights
9. Develop an understanding of cost drivers and cost behaviours

Ensure decisions are based on sound costing information

10. Know your baseline and benchmarks
11. Set cost targets
12. Know your early warning indicators and limits
13. Ensure all decision reports are based on sound costing information.

Counting Costs: Creating a Cost Conscious Culture 17

Appendix B:
A road map for improvement setting up a strategic approach
to cost management
Generate insights including quick win opportunities

Generate insights into efficient use of resources

and sustainable savings

1 - 2 Weeks

4 8 Weeks

2 8 Weeks

Open ended driven by budget cycle

Mobilise and Plan

Gain Cost Visibility

Gain Cost
Understanding

Negotiate Budgets
and KPIs

Monitor

Agree scope

Examine financial
systems and
accounts

Review current
analyses and
apply additional
analysis methods
to gain further
understanding

Recalculate budget
based on new
baseline and costs
targets

Monitor cost targets

alongside KPIs

Establish project
team and/or
steering group

Identify data gaps

and inconsistencies

Benchmark
appropriate cost
levels to set new
budget baseline

Consider phased
introduction of
zero-based or
activity-based budget

Track variance
between budget
baseline and actuals

Confirm Leadership
endorsement

Identify key cost

categories

Set top-down
cost category
targets

Analyse drivers of
cost to identify more
detailed savings

Monitor and
evaluate trends in
drivers of cost and
performance

Analyse current
approach to cost
management

Map division/
branch/program /
service costs
against cost
categories define
who spends how
much and on what

Agree
responsibility
and policies to
support cost
targets

Identify early warning

indicators and limits

Use early warning

indicators to trigger
early action to
address areas of
over- or under-spend

Communicate start early, report successes widely, provide clarity on each step to employees and stakeholders
Keep it simple analysis for each step of the process can be done using simple spreadsheet tools such as Excel
Assess skills pinpoint skills gaps for both financial and non-financial staff, e.g. finance staff understanding of programs
and services, or non-financial managers level of financial literacy

18 Counting Costs: Creating a Cost Conscious Culture

About us: CIPFA, ICAA and NZICA

Chartered Institute of Public Finance and Accountancy (CIPFA)
CIPFA is the professional body for people in public finance. Our 14,000 members work
throughout the public services, in national audit agencies, in major accountancy firms,
and in other bodies where public money needs to be effectively and efficiently managed.
Our portfolio of qualifications is the foundation for a career in public finance, and we
champion high performance in public services by translating our experience and insight
into clear advice and practical services.
As the worlds only professional accountancy body to specialise in public services,
CIPFA stands up for sound public financial management and good governance around
the world.

The Institute of Chartered Accountants in Australia (ICAA)

ICAA is the professional body representing Chartered Accountants in Australia.
Our reach extends to more than 67,000 of todays and tomorrows business leaders,
representing more than 55,000 Chartered Accountants and 12,000 of Australias best
accounting graduates currently enrolled in our world-class Chartered Accountants
postgraduate program.
We work in the public interest, aiming to lead the profession by delivering visionary
leadership projects, setting the benchmark for the highest ethical, professional and
educational standards, and enhancing and promoting the Chartered Accountants
brand. We draw on the experience of our members to work with government, industry,
academia and local and international bodies on public policy, government legislation
and regulatory issues.

New Zealand Institute of Chartered Accountants (NZICA)

NZICA is the membership body of choice for over 33,000 accounting and business
professionals, working around New Zealand and across the globe. Our members hold
one of three prestigious professional accountancy designations: Chartered Accountant
(CA), Associate Chartered Accountant (ACA) or Accounting Technician (AT) and work
in public practice, the public sector, educational institutions, and in corporate and
not-for-profit organisations.
As an organisation NZICA is focused on championing the accounting profession and
nurturing the next generation of business leaders. We act in the public interest by
advocating sound public policy in financial, regulatory and taxation areas, delivering
training and continuing professional development, regulating the profession, and
promoting quality, integrity and expertise.

Counting Costs: Creating a Cost Conscious Culture 19

Registered office:
Chartered Institute of Public Finance and Accountancy
3 Robert Street, London WC2N 6RL
T: +44 20 7543 5600
F: +44 20 7543 5700
www.cipfa.org.uk
CIPFA Business Limited, the trading arm of CIPFA that provides a range of
services to public sector clients. Registered in England and Wales no. 2376684

Registered office:
The Institute of Chartered Accountants in Australia
33 Erskine Street, Sydney, NSW 2000
GPO Box 9985, Sydney NSW 2001
T: +61 2 9290 1344
F: +61 2 9262 1512
www.charteredaccountants.com.au

Registered office:
New Zealand Institute of Chartered Accountants
Tower Building
50 Customhouse Quay, Wellington 6011
PO Box 11342, Wellington 6142
T: +64 4 474 7840
F: +64 4 499 8033
www.nzica.com