92
Tauran^^aCity
Finance and Risk Committee
28 April 2014
Budget Process and Cost Optimisation Assurance Review Status
Update
DC No: 119
Purpose
1.
To update the Finance and Risk Committee as to progress on actions arising from the
KPMG Budget Process and Cost Optimisation Assurance Review presented to the
Finance and Risk Committee in December 2013.
Executive Summary
2.
KPMG were engaged in October 2013 to review the budget and cost optimisation
process at Council. This included the following objectives:
a. Assessing the current budget process
b. Identifying opportunities to enhance the budget process
c. Considering whether the budget process is fit for purpose in delivering cost
optimisation and
d. Assess opportunities to optimise costs
3.
The budget framing was seen to be comprehensive. A number of process
improvement suggestions were made. A copy of the Executive Summary of the report
is attached as Attachment 1.
4.
Attachment 2 presents these process improvement suggestions and provides a status
update.
Recommendation/s
That the Finance and Risk Committee:
a)
Receive report DC119 including the status update provided in Attachment 2.
Discussion
5.
Attachment 1 incorporates the suggested improvement opportunities from KPMG
together with staff responses and action plans presented in December 2013. Further
information is now presented to the Finance and Risk Committee outlining progress
against these action plans.
Consideration
Community
6.
The progress update on the actions arising from the KPMG Review impact on internal
Council operations.
Objective ID: A5485479
4*
q
Tauran^iaOty
Finance and Risk Committee
^
28 April 2 0 1 4
Significance
7.
The progress update on the actions arising from the KPMG Review impact on internal
Council operations and as such are not significant.
General
8.
The recommendations of the KPMG Review have been assessed by staff and are to
be actioned to improve the efficiency of Council's budget and cost optimisation
process. This report provides an update to those actions.
Implementation Issues
9.
Staff resourcing and ICT resourcing impact on the timing of implementation of some
suggested actions.
Attachments
No.
Title
1
KPMG Budget Process and Cost Optimisation Assurance Review Executive Summary
Objectiveiink: http://file.tauranqa.aovt.nz/A5225403
Work Programme and status report
Objective Link: http://file.tauranga.govt.nz/A5478458
Signatories
Authors
Paul Davidson, Financial Controller
Authorisers
Jaine Lovell-Gadd, General Manager Organisational Services
Objective ID: A5485479
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KPMG
247 Cameron Road
Tauranga, 3110
Tel +64 (7) 671 1784
Infemot www.kpmg.oono/nz
18 October 2013
Private and confidentiai
Garry Poole
CEO - Tauranga City Council
Private Bag 12022
Tauranga, 3143
Dear Garry,
Budget process and cost optimisation assurance review
KPMG was engaged in October 2013 to undertake a budget process and cost ootimlsation
revew of Tauranga City Council (TCC). Ourraviewhad s l v e S l o b J e < ^ l ^ L f v l S r a
* Develop an overall understanding of the budget process Induding budgeting tools:
w Review budget setting/framing;
-
Identify key points of interaction between budget owners and thefinanceteam-
^
^"ntrolSm'SSS^^^^^
-
Focus on -other expenses' and assess opportunities to optimise cost components: and
consulted as part of »ie process.
oy i auranga cily Council management and personnel
KPMG bunder no obligation in any clroumstence to update tWsreport.In BRhBrn^i™.,.»«.- «.
occurring after the report has been issued h final fom
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-
The findings in this report have been fonned on the abovo basis.
•ntlrd Pnrty Raftence
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thSn«r
*° you commenting on the effectiveness and appropriateness of
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^ . ^ " ^ ^ ^ * ° ^^^^
''y management to S c S t e ?nS
Identify opportunities for further cost optimisation.
The focus ofthis report is to present ourfindingsfor each of these objectives.
partes s o l e ^ r e s p o l ^ n r i ^ G ^ S r d S S l i v S a ^ ^ w l . ^ " ^ ^ f '
therein because of events and tmnsacttons o c ^ ^ ^ u i J ^ Z ^ ^ ^ ' ^ ^ ^ ^
Se'nT"'"''
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Kind regards
Glenn Keaney
Partner
WWH RMMIoM O m n t a p o m s H n M t n s r x . a r k , ^ ^ .
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^Pon and its
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Wis
:
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1. Introduction
Objectives and approach
Executive summary
3
4
Staff interviewed
Budget owner responses to questions asked
2. Budget setting process and tools
General Manager expenditure review
Budget framing in the context ofthe 10 year plan
Timeline of the budget process
Budget tools and key interaction between Finance and budget owners
Procurement process
3. Budges sufture
Summary of findings
Budget owner responses to budget questions
4. Management steps to optimise costs
•;a
e
11
Overview
Cost optimisation opportunities
1,2
' Summary of key initiatives undertaken and recommended next steps
17
19
21
22
24
!L0
J'ntroductJcr
m Objectives and approach
2. Assess budget cufture
TGC haverecenUyundergone a significant reorganisation, including changes to Itey
senior staff. The 2014/15 budget process is similar to prior years but the first for the new
management team.
n Conduct interviews with a cross section of TCC staff including; budget owners
C^neral Managers and other cross-organisational staff to gauge their under^ndinq
of, and accountability for, the budget process and results
Objectives
3. Review management steps talcen to optimise costs
KPMG was engaged by TCC in October 2013 toreviewthe budget and cost optimisation
process.
-
The objective of this engagement is to assist TCC with:
w Review the procurement strategy and its effectiveness within TCC.
-
Assessing the current budget process;
•
-
Identifying opportunities to enhance the budget process;
Considering whether the budget process is fit for puroose in delivering cost
opfimisation; and
-
Assess opportunities to optimise costs.
Analyse actual 2012/13 results against Budget 2012/13 for the category of "other
expenses" to assess accuracy of previous budget round vs actual.
Assess the opportunities to ftjrther optimise expenditure.
Scope
"^-^
jr Other expense - Focus of review. Represents a spend of $53.8m out of $154.4m
-
Depreciation - Out of scope, linlced to CAPEX programme
^
Interest expense - Out of scope, liniced to CAPEX programme
~ Staff expense - Previousiy reviewed by
Our approach comprises three phases:
1. Understanding the budget process and tools
Develop an understanding of the budget process In temis of its constmction and
reference to the 10 year plan.
extemal consultants GHD and CEO Le
Auton
Revenue - Previously reviewed by TCC
Review the appropriateness of the budget guidance issued to TCC and assess
opportunities to improve the budget process.
r
Review the Corporate Planning (LIPS) system and budget input process.
Assess the effectiveness of the interface between budget owners and finance
including a review ofthe key reporting.
Totai operational
costs for 2012/13
totalled $154.4m
Introdiiclion
Executive summary
Considerations
Key Observations
Understanding the
budget process and
1.
Review management
steps taiten to optimise
Budget culture
improvement Opportunity
The maao budget framing is comprehensive and exercises good
discipline within the parameter of the agreed 10 year plan
The budget timefl-ame is protracted, there is a feeling one budget cycle
seamlessly rolls into the next.
^
^
Within the budget tool, the ftjture years budget by default references
r^wnn' ^ ^ T . S^^' ^'^
nscessarily the most accurate or best
reference ftjr the fiiture years budget.
Staff attempt to defer the timing of CAPEX as much as possible to
save expenditure however, there is Iimited analysis of how the CAPEX
decis on mpacts OPEX expenditure eg maintenance cost, and Ifthe
daclsion to defer CAPEX is optimal.
S S f n ^ ^ * ® ^ ' * ' ' ^ ' " ' ^ ' ^ ^ * ' " " ® ° " budgetinitfattves atthe beginning
a°n?gSng'S:S^^^^
Build some flexibility into the timeframe with the objective of startlna 3
monttis later This will give some space between b i d g r c ^ d e s and
free fime for m.tiative to be discussed ahead of the budget p r o i s s
areas taking into account historical expenditure fronds. This will Sso
support tfie process of ftinding new "Innovative" initiatives
^""f
^ " ^ ^ ^ ^ which analyses tfie increased cost of
maintaining capital assete when ttie useftjl life Is extended.
Many of the executive management have been recently appointed As
such, they do not yet have a detailed understanding of all their
e^nditure items and some, therefore, refened us to delegated staff
The greatest opportunity to optimise cost sits within prxscuremsnt TCC
has recently reviewed its procurement strategy and identified several
initiatives to improve the effectiveness and efficiency of the ftjnction
Generally staff within TCC have strong awareness and appreciation of
the need to exercise care and diligence when it comes to spending
public money and budget disciplines.
The ellminafion offinancepositions ftom the business has not been
wellreceivedand as a result we anticipate there vnll be less critical
assessment of budgets priorto submission.
Finance staff are consumed with productionresponsibilitiesand have
little or no time to analyse and interpret data trends. Without additional
I ? H l ^ " ' ^ f . ! T ^ ?^ *® recommendations discussed in this report will
be difficult to implement.
10 While staff feel accountableft>rtheir budgets there is a lack of
While procurement is Identified as an Important consideration and can
result in cost optimisation, there is currentiy no fomial way to measure
and report tfie benefite from procurement or feed benefifs in?oTe
budget processes. This is being considered by staff
^
Procuiiement is led by ttie procurement specialist recentiy recmlted ^
We note ttiat tfiis is a 4'H tier level, to elevate procurement Z^oss TCC
Review ttie number of expense Items in ttie chart of accounte. many
are not in use. reducing the chart of accounte will simplify budqet and
accounting processes.
^ "uagei ana
8.
10,
Procurement initiatives are generally part of staff personal objectives
however, there is currentiy no way of accurately rSeasuring outSm^s
A process to fomially freck and monitor procurement will shamen
accountability and allow TCC to celebrate successes
Future resource requiremente will need to be assessed In tenns of the
n f o ' T ' . r t ^ " ' ' '^^"'^^ quality/quantity offinanceoutputs
Ltee^of rolling forecaste may improve visibility of perfom,anc;agalnst
'H^n^T
^Z
" " ^ ^ ^ " ^ *° incentivise perfomiance against 11,
budget or to rewanj cost optimisation.
Imptement KPI's and design a mettiod of measuring pertbnnancA
Attachment 2
93
Attachment 2 - Progress update on KPMG action items
Improvement
Opportunity
Staff comment
and action
Proposed
timeframe
Progress update
April 2014
Currently
budgets are
based upon
adopted
strategies and
these linkages
are captured in
the Corporate
Planning
system. The
development
and review of
strategies,
aligned with the
new vision,
leading into the
LTP will ensure
these strategic
discussions
form the basis of
budget
development.
First quarter
2014/15 financial
year
The initial
discussions on the
2015/25 Long
Term Plan (LTP)
begin in late April.
This will outline the
process for the
development of the
LTP and the
process of strategic
conversations that
will take place as
part of the LTP
development.
This will be
difficult to
achieve given
the public
consultation
requirements of
the Local
Government
Act.
Review for the
development of
the Long Term
Plan commencing
late in the
2013/14 financial
year.
Understanding
the budget
process and
tools
1. Begin the
strategic
conversations on
budget initiatives
at the beginning
of the budget
process rather
than the end.
This will prioritise
initiatives and
guide budget
owners.
2. Build some
flexibility into the
timeframe with
the objective of
starting three
months later.
This will give
some space
between budget
cycles and free
time for initiative
to be discussed
ahead of the
budget process.
The timeframe
will however be
reviewed for
opportunities
including
moving away
from a short
fixed budget
input period to
more of a rolling
Work on the City
Vision
development is
continuing.
Given the amount
of work required,
the level of
strategic
conversations and
the public
consultation
requirements of a
LTP it is not
recommended to
delay the start of
the process.
Rather the process
has been reviewed
to ensure sufficient
strategic
conversations are
held early in the
process as noted in
point 1.
Objective ID: A5478458
00
Improvement
Opportunity
3. Consider setting
"top down"
budget targets
for each activity
taking into
account historical
expenditure
trends. This will
also support the
process of
funding new
"innovative"
initiatives.
Staff comment
and action
budget input
model. This will
provide staff
efficiencies in
terms of budget
input and higher
quality by
capturing
budget matters
on an on going
basis.
Proposed
timeframe
In the past
capital
expenditure
targets have
been set by
activity with
overall targets
being set for
operational
expenditure
such as zero
percent
increases as a
starting point.
2015/25 Long
Term Plan
process.
Reviews will be
undertaken in the
first and second
quarters of the
2014/15 financial
year.
Going forward it
is intended
however to put
more focus on a
robust project
evaluation
model to
improve the
prioritisation
process and
ensure greater
value for money
occurs.
This approach
ensures a more
balanced and
better value
expenditure
programme
which delivers
on Council
Progress update
April 2014
In addition the
corporate planning
system will be
made available
earlier in the
process to enable
a more rolling data
input process.
This will be
discussed with
Elected Members
early in the LTP
development
commencing in
April.
Given the
discussions
required
surrounding the
City Vision and the
achievement of
strategic objectives
the appropriate
level of top down
target setting
needs to be
carefully balanced
with the
achievement of
strategic
objectives. This
needs to be
addressed in
conjunction with
conversations
surrounding
Council's fiscal
strategy.
A robust business
case methodology
is currently being
developed and will
be utilised as part
Objective ID: A5478458
10
Improvement
Opportunity
Staff comment
and action
strategies
aligned with the
vision.
Proposed
timeframe
It is also confirmed
that using actual
expenditure as a
starting point for
future budgets is
not appropriate.
Budgets will be
critically analysed
to ensure
efficiencies are
incorporated where
possible.
The suggestion
of using prior
year actual
results as the
starting point for
future years
budgets is not
considered
appropriate.
This approach
builds in one off
costs and more
importantly may
lead to an
approach of
spend it or lose
it. The
approach
suggested is to
continue with
the prior year
budget as the
starting point.
Finance staff will
continue with a
quality
assurance
process to
critically query
items where
budgets exceed
prior year actual
expenditure.
Implement a
financial
framework which
analyses the
increased cost of
maintaining
capital assets
when the useful
live is extended.
The full
implementation
of a new Asset
Management
System over the
next 12 months
will assist in
being able to do
more analysis of
the optimal
replacement
time of assets.
Progress update
April 2014
of the LTP
development.
First quarter
2014/15 financial
year in
preparation for
the Long Term
Plan (staged role
out of different
asset classes so
not all classes will
be available
initially)
Asset Management
Plans will be
presented to
Elected Members
in July of this year.
These plans will
show the
methodology used
in replacing assets
to ensure the
correct balance of
asset replacement
Objective ID: A5478458
102
Improvement
Opportunity
Staff comment
and action
Proposed
timeframe
Progress update
April 2014
and the cost of
asset maintenance
is achieved.
A procurement
strategy is
currently being
prepared which
aims to provide
further value
through the
procurement
function.
Work has
commenced to be
completed prior to
the development
of the LTP.
A procurement
strategy is currently
being formulated.
This will form the
basis for future
procurement
initiatives. Whilst it
is always difficult to
assess the direct
value of such
initiatives the
objective is to
ensure the greatest
value for money
procurement.
Ongoing
This is being
reviewed however
it should be noted
that it is the
procurement
function and its
operation that is
considered critical
not the level of the
position in the
organisation.
Review
management
steps taken to
optimise costs
5. Whilst
procurement is
identified as an
important
consideration
and can result in
cost optimisation,
there is currently
no formal way to
measure and
report the
benefits from
procurement or
feed benefits into
the budget
process. This is
being considered
by staff.
6. Procurement is
led by the
procurement
specialist
recently
recruited. We
note that this is a
fourth tier level,
to elevate
procurement
across TCC
increasing the
seniority of the
position would
help improve the
influence and
collaboration.
The direct
reporting of
benefits relating
to procurement
is difficult to
achieve. Staff
are working on
the development
of a business
case model that
may assist with
the reporting of
benefits.
This is a new
position recently
introduced
which needs
more time to be
further
evaluated.
Objective ID: A5478458
103
Improvement
Opportunity
Staff comment
and action
Proposed
timeframe
Progress update
April 2014
This is currently
on the finance
work
programme and
will be
addressed when
resources allow.
2014/15 financial
year.
This continues to
be planned to be
reviewed in the
2014/15 financial
year.
Budget culture
7. Review the
number of
expense items in
the chart of
accounts, many
are not in use,
reducing the
chart of accounts
will simplify
budget and
accounting
processes.
Whilst it is
acknowledged
that the
streamlining of
the ledger may
assist in the
production of
accounting
documents it is
not seen as a
major
opportunity for
cost reduction.
Procurement
initiatives are
generally part of
staff personal
objectives
however, there is
currently no way
of accurately
measuring
outcomes. A
process to
formally track
and monitor
procurement will
sharpen
accountability
and allow TCC to
celebrate
successes.
The extent of
Subject to the
any staff
outcomes of point
objective
5 above.
development will
be dependant
upon the
outcome of point
5 above.
As per point 5
above. The
organisation is
currently working
strongly on its
culture and
recognising how
best to celebrate
success.
Future resource
requirements will
need to be
assessed in
terms of the
A reassessment
of the structure
of the finance
team has been
prepared and
Additional
resources have
been approved in
order to address
finance resources.
Third quarter
2013/14 financial
year.
Objective ID: A5478458
104
improvement
Opportunity
business need
and desired
quality/quantity of
financial outputs.
10. Use of rolling
forecasts may
improve visibility
of performance
against budget
Staff comment Proposed
timeframe
and action
will be trialled in
the new year to
deliver a greater
value service to
the organisation.
Progress update
April 2014
These will be
recruited in the
near future. The
impacts of these
additional
resources will be
visible in the
2014/15 year.
This is on the
finance work
programme.
Currently high
level forecasts
are undertaken.
In order to
further develop
forecasting
some further
investment in
software
development is
required to
ensure this
process is
efficient.
This will be
assisted by the
additional
resourcing
approved. The
next steps will be
to fully define
forecasting
requirements and
identify
opportunities to
address these
requirements.
Third quarter
2013/14 financial
year.
Establishing a
forecasting
methodology within
the business is
also being worked
on albeit this is
currently a manual
process.
This will be
specified to our
software
providers for
further
development.
11. Implement KPI's
and design a
method of
measuring
performance
against these
goals. Success
should be
celebrated and
shared across
the organisation.
Refer to points 8
and 5 above.
Management
and staff are
working on a
major culture
project which
will include the
celebration of
success.
Subject to the
outcomes of point
5 above.
The culture
programme
continues and
ways to measure
performance and
celebrate success
continue to be
worked on.
Objective ID: A5478458