1. Output Costing 11 th November 2010 Toby Spanier tspanier@deloitte.co.uk

2. Spending Review Framework “The Government will: strengthen and re-position the role of the departmental finance director as an enabler of informed decision making at Board level, mandating FD approval of new investments and consultation on material business decisions; provide an aligned, long term strategy for financial management across central government... introduce financial performance measures... increase the quality, transparency and accountability of financial information.”

3. Departmental Input Indicators

4. What is Output Costing? Outputs/ Services Resources Activities Outputs/ Services Resources Traditional Product Costing Output Costing Consumed by Functional areas that drive cost are identified, but limited understanding of what areas do to incur these costs Understanding expenses at activity levels provides insight into why these costs are incurred Output Costing provides insight into the reasons why costs have been consumed by specific outputs. This shifts focus from cost recovery to cost management.

5. Why do Output Costing? Unit costs by activity, output and customer Expenses traced to the activity level to identify high-cost activities Identification of controllable vs. non- controllable expenses Classification of the fixed vs. variable portions of expenses Detailed progression of expenses from their entry on the General Ledger to the outputs and services that consume them More accurately allocated shared services cost Transparency Accountability / management buy-in Consistent methodologies and baselines for evaluation User pricing / discounting strategies Capacity planning Resource allocation Identified cost reduction opportunities Typical Outcomes Increased Capabilities The activity layer provides much better management information

6. Issues Cost Reduction Provides visibility of the costs of what people do Identifies areas of ‘high spend’, facilitates cost comparison and identifies subsequent targets for cost reduction Provides a baseline against which to manage costs and measure improvements Provides better decision support information around outputs Can underpin commercial relationships between business units Provides cost data to support outsourcing decisions Improves planning and budgeting process by providing target output costs and associated input costs Provides enhanced understanding of how fixed and variable costs are over time Benefits of Output Costing Unclear Costs Poor Management Information for decision making Ineffective planning and budgeting processes Achieved £100m cost reduction Identified & implementation underway for £200m saving Benefits tracking for major cost reduction project Top quartile user satisfaction for finance Management Information 10% year-on-year saving in IT costs Achievements Issues, Benefits and Achievements

7. Output Costing: Guiding Principles Regardless of the details of a specific Output Costing project, there are similar guiding principles across all cost modeling efforts: Objective Expand the accountability for costs beyond direct expenses to include other types of expenses. Accountability Provide better visibility and understanding of the costs that managers are accountable for. Transparency Business users take ownership of the data and information and use it to make key business decisions. The model is not perceived as a finance tool. Ownership Guiding Principle Methodology and model design should be as simple as possible in order to facilitate use by business owners. Simplicity Strike the balance between the level of granularity required to make informed decisions with the requirement to maintain the model over time. Materiality Cost Influence seeks to differentiate between costs that are controllable and those that are non-controllable. Controllability

8. Output Costing Projects