Cutting Cost Effectively Using Strategic
Cost Management
It’s hard to keep producing results when budgets keep getting cut.
But that’s what government agencies are being asked to do. Agencies
are struggling to do more with less or at least the right less with
less. Grant Thornton can help agencies with its innovative cost
management approach, which differs from other methods in that we
ensure our clients cut costs where it will have the least impact and
help them reinvest savings to enhance performance.
Grant Thornton’s cost management services can help agencies:
• Develop a rigorous, defensible fee structure to support the
recovery of fees adequate to meet program funding needs and
withstand the scrutiny of oversight bodies such as the Congress,
GAO and OMB;
• Optimize working capital fund operations to fully realize the
expected benefits of customer-supplier model;
• Improve budgeting/cost estimation practices to better predict
the resources required to achieve performance targets;
• Better manage IT investments, reduce your IT footprint and
establish chargeback mechanisms to promote transparency and
accountability;
• Leverage strategic sourcing strategies to meet agency needs at the
lowest Total Cost of Ownership;
• Employ predictive analytics to support agency management
decision making, especially rated to cost.
Agencies always need to understand where their money is going
and what they are getting for their investments. When budgets are
shrinking this becomes more important than ever. Understanding
costs helps agencies get the most for their money, eliminate
inefficiencies and find funding for higher priority uses.
Need for managing cost in any environment, especially
the current one
Because of the current budget climate, Federal agencies are being
asked to meet goals faster, better and cheaper. They’re under
increasing pressure to justify program costs and reduce budgets
across the board. The paradigm has shifted to accomplishing more
or slightly less with significantly fewer resources. To accomplish
this objective, Federal financial and program managers must reduce
cost while preserving core mission programs. A leading business
management practice, Strategic Cost Management (SCM), can help
agencies deliver in an environment of diminishing budgets.
Unfortunately, instead of cutting costs strategically, agencies (and
Congress) often take the time-honored shortcut of chopping a
percentage off the budget of some or all operations - one of the
worst ways to economize. Such budget cuts do nothing to improve
Results can be achieved quickly and easily with existing
information and infrastructure
SCM combines existing financial accounting, workload, and work
measurement information to produce useful, timely, and relevant
information for decision makers. SCM employs cause-effect
relationships to assign direct, indirect, and overhead resources to
business activities. It then assigns these activity costs to products
and services, again on a cause-effect basis. As a result, it yields both
accurate, defensible assessments of full program cost and insight
into the relationship between inputs (i.e., resources) and outputs by
inefficient processes and services that deliver low value for the
resources they consume or are not aligned to the mission of the
organization. Worse, the chopper method fails to distinguish between
high and low value, so that some high value operations lose resources
they need to stay that way and low value ones simply become worse.
More sophisticated Federal financial and program managers surgically
trim their budgets while preserving or investing in effective, core
mission programs. While agencies have used a number of methods
to measure and manage their costs, SCM has proven to be a powerful
strategic decision management tool that can help by identifying the
drivers of cost and by driving efficiencies in mission and support
offices and thus, reduce program costs.
Strategic Cost Management can drive significant cost
savings
By definition, SCM is the process of identifying, accumulating,
measuring, analyzing, interpreting, and reporting cost information
useful to both internal and external groups concerned with the way in
which an organization uses its resources to meet its objectives. SCM
provides a structured means to calculate the cost of major business
processes by individual activity and product/service (e.g., outputs).
quantifying work performed (activities).
SCM drives efficiency and effectiveness in an organization by
integrating cost information in ongoing initiatives and applying the
information in a variety of decision scenarios. These SCM tools
and techniques can help solve point problems quickly and can be
integrated with other agency initiatives such as managerial cost
accounting, value analysis, business process reengineering, analysis of
alternatives, and Lean Six Sigma.
A leading practice for strategic decision-making
Unfortunately, most agencies do not have access to key cost and
performance data to support required analysis and inform strategic
and operational decision making. SCM gives agencies access to such
data by leveraging existing, disparate legacy data sources. And it
provides managers the information in such a way to facilitate better
decision making. SCM can answer business questions such as:
• Are there activities of limited value in supporting an objective? If so, can resources be reassigned to more productive work?
• What would be the impact on achieving strategic goals if that activity were not performed?
• Where do we have opportunities to consolidate similar support and
in some cases mission functions and remove duplication and achieve economies of scale?
• Does it make economic sense to migrate IT services to the cloud? Are there IT licensing efficiencies we can capture?
• What can be done to improve the customer-supplier dynamics in my Working Capital Fund?
• What is the optimal mix of my workforce to manage cost and capacity?
SCM also provides operational managers and decision makers with
crucial historical cost information and an understanding of the
drivers of cost to more precisely estimate future needs. It provides a
foundation to document the full cost of ongoing operations, as well
as the impact of resource and operational decisions. When integrated
with organizational processes, SCM is designed to support cost
reduction / cost management, budget formulation, cost estimation,
fee-setting, shared services and working capital fund optimization,
capacity management, process improvements, and performance
management. Furthermore, it provides a justifiable, defensible means
of equitably distributing indirect and overhead costs to mission
programs. Finally, SCM can provide both mission and mission
support business managers with insight into the causes of costs and
help them incorporate cost analysis into their decision-making.
Agencies should have relevant financial information on demand to
support and enable managerial decision-making at all levels, from
front-line managers to senior officials. Obligation-based data available
in most Federal agencies does not readily support this type of
reporting because there is often little correlation between an agency’s
budget structure and how much it costs to run a particular program.
Without a structured, cost-based approach, Federal managers cannot
easily determine, much less report, how much it costs to provide a
product or service to their customers, how well they are managing the
resources they have, or how a future event will impact a program’s
operations.
Several Federal agencies have implemented or are planning to
implement Enterprise Resource Planning (ERP) -type financial
systems, whether in house or at a shared service. These systems have
make possible more timely and accurate completion of year-end
financial statements and more recently, quarterly interim statements. But they have yet to provide most agencies a full range of financial
and performance data. Agencies need to take one step further and
transform their financial data into a tool that managers and other
decision makers can use to enhance the efforts of program officials
to deliver better, more cost-effective results to the public. SCM can
play a key role in enabling agencies to better manage performance and
cost.
Implementation strategy for success
The degree to which an agency can achieve the benefits of SCM
depends largely on the implementation strategy. While design
considerations such as scale and level of detail are important, they
do not ensure the long term sustainment of the cost accounting
capability. Simply providing cost and performance reports to
managers will not result in cost savings or process optimization, and
training is not enough by itself for SCM to take hold or be sustained.
Management processes and accountability structures need to change
to incorporate cost information into key formal decision-making
processes. To do so, the agency will require appropriate incentives
(and disincentives) and management motivation (and vigilance) to
promote the use of cost information in areas such as budgeting,
resource allocation, business process reengineering, operational
management, and procurement decisions. But making the investment
will produce returns not only in cost savings, but also in improved
performance.
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For more information on the topics
covered in this publication, please contact
Grant Thornton’s Global Public Sector
through:
Shiva Verma, Principal
T 703.373.8740
E [email protected]
www.GrantThornton.com/publicsector
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