Costing and Pricing of Services / Funding Models Discussion

Costing and Pricing of Services / Funding Models Discussion July 2005 FOR DISCUSSION PURPOSES ONLY

Table of Contents Introduction Costing and Pricing Overview Shared Services in the GoC Design Principles for Costing and Pricing Costing and Pricing Approaches Shared Services Market Structure and Governance Annexes: I. Overview II. Backup / Additional Slides 1

Introduction This discussion considers the development of a single costing and pricing approach that would support establishing and operating a shared services organization for a Government of Canada enterprise Fundamental challenge with costing and pricing aspects of shared services is that it involves using common infrastructure (e.g., technology, support personnel) to provide a range of services to a range of customers or service consumers Common infrastructure usually requires larger scale, fixed cost investment, which needs to be recovered over an extended period of time Service X Shared Services Infrastructure (e.g., technology, support personnel) Service Y Client A Service Z Client B Client C Department s fair share of Shared Service Infrastructure Cost Client C Client Service B X $ Client Service A X Y $ $ Service Service X Y Z $ $ $ Service Y Z $ $ Service Z $ 2

Costing and Pricing Overview Determining which portion of the costs are attributable to any single service, or any specific consumer or customer, requires some estimation of the appropriate amounts of indirect costs to charge Who pays for how much, what is fair, how is it decided, and is it understood? Given the difficulty in determining true, full costs, the concept of cross-subsidizing needs to be considered carefully What is included in the full cost of providing the product or service Success requires a framework of costing and pricing shared services that works for each of the key stakeholders: Shared Service Provider Service Consumer or client (e.g., departments and agencies), and Government of Canada enterprise as a whole. 3

Costing and Pricing Overview The following represent some of the key terms used in this area: Direct Costs clearly identifiable causal relationship to services performed or the level of services for a group of clients (e.g., salaries, professional services, hardware, software) Indirect Costs cannot be traced directly and in full to services and/or are not directly assignable to activities, because they have been incurred for common purposes (e.g., overhead, accounting and staffing), and are usually allocated to services. Allocated Costs cannot be directly attributed to the production or provision of a good or service such as certain fixed costs and which must be allocated on some other basis such as a predetermined percentage or a standard cost factor applied to an appropriate measure of the activity base. Costs allocated in this way generally include administrative overheads, accommodation, shared capital and shared inventories. (1) Full Cost sum of all costs, direct and indirect, incurred by the government in the supply of a good, service, property, or right or privilege, including: services provided without charge by other departments (e.g., accommodation, employer contributions to insurance plans); costs financed by separate authorities (e.g., some employee benefits); the financing costs of inventories; and annualized capital costs, including financing. (1) Full Costing for products and services, includes: Direct costs directly associated with service, where there is a clear relationship between cost and service Indirect costs indirectly associated with service delivery (e.g., if the service did not exist, these costs would not, however it may not be easy to directly attribute these to a single product or service) Other Costs that may not be currently paid for by Department: Real Property Services, not charged by RPS (e.g., 13% of salary) Personnel benefits, usually paid for centrally by Treasury Board (e.g., 20% to 29% of salary) Corporate Administration Management costs May include other costs not be directly associated with service delivery in the current period R&D for existing and new services for services that do not exist today, there are no service consumers. Capital costs purchased assets and the cost associated with them (e.g., proportional amount of upfront fixed cost) and a cost of using that capital (e.g., financing charges). (1) Source: Guide to the Costing of Output in the Government of Canada, Office of the Comptroller General, February 1989. 4

Shared Services in the GoC Given the prevalence of shared services in the GoC, Costing and Pricing, and the associated funding of these organizations, will become more and more important Future Shared Services Organization (SSO)? Business Process Services Accounting, Banking and Compensation Finance Human Resources Application Development and Maintenance Application Management Services GL/AP/AR Materiel/ Purchasing HR/Payroll Application Hosting and Management Services (AHMS) Mainframe Mid-Range Mainframe Mid-Range IT Infrastructure Mainframe Mid-Range Desktop IT Operations Network Infrastructure Services GOL SCNet Telecom Voice Data Satellite Telecom Data Current ITSB 5

Design Principles for Pricing and Costing Sustainable Individual products and services should be priced at a self-sustaining level that reflects their full costs Ensure full cost is paid by client/service consumer services provided at a reduced or free cost can be abused Minimize complexity - Multiple approaches and systems make it difficult to effectively provide services to clients Fair Charges to one client should not cross subsidize another One product/service should not cross subsidize another There should be no net profit from Service Provider operations, and rational pricing approaches need to be used Transparent Pricing and costing systems should be as simple and clear as possible Provide integrated, transparent solutions Approaches and systems must be easily understood Meaningful Prices should be attached to meaningful outputs Align pricing to business requirements - Use meaningful business drivers for allocating costs to service consumers Efficient from a whole-of-government point of view Prices should provide incentives for clients to be economical in their use of resources, and for SSO to produce products and services efficiently and economically Representative of the GoC Enterprise Appropriate accountability and governance Use a partnering approach, recognizing service provider and service consumer Interests Competitive Common services are usually optional unless reason to be mandatory Internal prices should not undercut private sector by being based on less than full cost 6

Costing and Pricing Approaches Implement a consistent product and service pricing approach, which prices all service delivery to clients For example, use Full Costing for products and services, which includes all direct and indirect costs involved in providing service, and costs currently not paid for by department Costs need to be traced to products and services Full costs including indirect costs and costs paid for by other departments (e.g., if RPS and benefits are not paid by SSO) Use memo or notional billing in the short term if required. Transparency should be ensured Full Costing is used as a basis to determine price market comparators are also used where available Develop or obtain appropriate benchmarking information If costs are higher than market prices, consider charging market prices on a interim basis with cost reduction targets to service providers Align with GoC Policy and Guidelines. For example: TBS OCG Guide to the Costing of Outputs in the Government of Canada Proposed PWGSC Cost Management Framework Funding mechanisms In theory, no A-Base clients pay for all services Consider revolving fund 7

Costing and Pricing Approaches Approaches need to balance accuracy/completeness of information with level of effort Cost information generally provided to enable decisions In the GoC, financial information is required for fiduciary responsibilities, decision making, and reporting to Parliament, central agencies, departmental management, external stakeholders Manage and track material amounts only SSO requires cost methodologies that attribute costs to products/services to support product/services management There are different approaches to the extent of detail and effort in costing and cost allocation Activity Based Costing (ABC) should be used to attribute costs with an appropriate ABC approach and methodology, and other related systems to support data capture and allocation Develop SLA s for all client service consumers Standard services as base, uniform pricing, and unique exceptions would cost more (e.g., due to additional complexity, difficulty) 8

Shared Services Market Structure and Governance The chosen market structure for shared services needs to: Motivate the service provider to focus on: Efficiency leading to savings Appropriate customer service Continuous improvements Motivate the customer to: Use SSO resources economically Emphasize effectiveness and value for money Keep in mind Speed of decision making Complexity of governance system Requirements to have stakeholders buy in to shared service approach 9

Shared Services Market Structure and Governance Optional Services Little additional governance is needed beyond normal public service processes Performance management and SLAs less important Pricing Options include: Prices set by SSO (with a partial appropriation); Prices set by SSO (without an appropriation); Prices set by a regulator (e.g., TBS) OPEN COMPETITIVE MARKET Mandatory Services Price setting and adjudication is important Oversight and accountability, stakeholder input, play key roles Performance management and SLAs very important Pricing Options include: No chargeback (full coverage by appropriation); Priced by SSO; Cooperative pricing; Priced by a regulator (e.g., TBS) MONOPOLY MARKET Optional services with prices set by SSO Need to allow SSO to control its own destiny May result in a smaller but more efficient SSO Optional services with prices set by SSO Some services mandatory where usage has generally made it so. Some client departments or clusters receive mandatory services for a period of time by agreement with prices set by SSO, others remain optional 10 Some services mandatory with prices set by regulator or cooperative, other services remain optional Mandatory services with regulatory or cooperative pricing Consolidations savings substantial Monopoly could create inefficiencies over time Cooperative or regulatory Confluence pricing Consulting could offset

Annex I Overview

The Coming Together of Ideas Bringing together people, process, technology, and strategy for results Our Firm is a public sector focused management consulting firm specializing in the design of business and technology solutions for government organizations. We believe that government is about effective service delivery to citizens and businesses, and about the successful implementation of supporting policy. Achieving these objectives requires an integrated view of the enterprise, and a broad understanding of the interaction between people, process, technology, and the information connecting them. Our Approach We understand that all of these perspectives must be carefully considered for change to be successful. We help organizations through change by providing superior consulting services from a team of Confluence consultants that have a unique mix of skills in a broad range of these important areas, combined with a consulting style that will engage your people, and give you the results you're looking for. Our consulting approach is honest and open. We will engage and work with your people to develop solutions that are right for your organization. Our Service Lines We focus on the design of solutions and approaches to address complex management and service delivery challenges. We provide clients with integrated support in areas such as: Strategy and Solution Design Business Strategy and Governance Feasibility and Business Case Analysis Service Delivery Models Information Management / Information Technology Strategy Operations / Program Review Solution Realization Business Process Design Requirements Analysis and Architecture Implementation Management Continuous Learning / Leadership Coaching Our Capabilities We provide this support across a broad range of competencies, including: Program and Project Management; Financial Management and Reporting; Performance Management and Measurement; Process Transformation; Information Technology; and, Change Leadership, Human Resource Management, Training, and Communication Planning. Our firm has a core set of practitioners and an extensive network of associates that provides us the ability to bring the right team to almost any type of challenge our clients are facing. Our team has years of experience working together successfully on a range of engagements. www.confluence.ca

Financial Management and Reporting Over the past few years, organizations have made significant investments in technology related to financial management and reporting, only to discover that the returns on the investment were not as good as expected. Many are experiencing data integrity issues, a proliferation of stand-alone black book systems, and a lack of timely and integrated management information. Modern Comptrollership is about bringing operational and financial data together in a manner that is supportive of management decision-making. To accomplish this vision, a blend of information technology systems and sound financial business processes are required. We have consultants who can review current financial processes and assess whether they are truly accrual-based, both from the actual recording through to the budgeting perspective. We can review how business processes are making use of current investments in information technology, such as enterprise resource planning (ERP) systems, assessing the success of operations, and making recommendations for improvement as required. can develop activity based costing models to help determine if overhead resources are appropriate, and supportive of business lines. We also have experience developing a wide range of chargeback mechanisms and funding models. We can build on this information help you fully understand your cost of service delivery, and to determine whether such things as user fees are appropriate. Our firm can provide a range of complementary financial services. We can design pragmatic business processes that reduce the administrative burden of providing timely, accurate, and complete management information to your organization s decision makers. Our staff includes accountants capable of doing the analytical and quantitative analysis that can be required in complex revenue and costing projects. Information Technology Services Our IT Services approach is based on determining an organization s technology requirements from a business view point. We understand that technology is a business enabler, not something that exists in its own right. has the capability to support an organization from the original concept through to business strategy, to procurement and IT development and implementation. Our approach begins with a solid understanding of the business strategy, organization, governance, and business processes. This information, along with an understanding of an organization s current technology architecture and application suites, will allow us to provide sound advice regarding the art of the possible for enabling technologies for your business. Everyone understands the importance of making IT investment decisions based on business requirements. We can help organizations develop requirements based on lines of business, incorporating industry best practices and benchmarks. We can help develop sound business and technical requirements to support the entire IT life cycle, and supplement this with solid project management expertise. And, because we are independent and not affiliated with any specific technology products or companies, our recommendations will be impartial. www.confluence.ca

Business Process Improvement Process Transformation involves the redesigning of a business process to enable process improvement efficiencies, systems implementation, resource leveling, or all three. It is a key step in all organizational change initiatives. All information systems, organizational structures, change leadership initiatives should be about supporting the best business processes. Business process maps are a useful tool for analyzing business processes for improvement. Mapping the current business processes in sufficient detail is the first step in process improvement. Good process maps and the related analysis include: Roles: who performs what Activities: in enough detail to be meaningful; Decision points: with both the yes and no flows from the decision; System points: to show where in the process the roles interact with what systems; and Control points: parts of the process that must be there from a legislative or financial management perspective. With the current-state process maps completed and a list of opportunities for improvement collected, the processes can be improved and redesigned. These redesigned business process maps can form the basis for process improvements and technology implementation. The revised process maps also make good training and reference materials that can be used to help the organization through the transition. All of our practitioners are experienced in business process improvement. A next step in organizational improvement is developing a balanced performance measurement system. We can help you determine what measures you need, where you can feasibly gather the information, and how to report it to your stakeholders. A balanced scorecard will allow your senior managers to have at a glance information on the organization s performance, and their decisions will be supported by information. With a balanced scorecard in place, your organization s continuous improvement will be enabled. The Learning Division s belief in Learning is so strong that it has established a Learning Division. Our Learning Division offers a wide range of public sector focused professional development courses and develops custom learning programs. Our courses draw upon our public sector experience and relevant commercial best practices. As a result the course material includes useful and topical viewpoints and sets of pertinent public sector examples, to enhance the quality of your learning experience. Our courseware knowledgebase is constantly growing and learners are always kept current. We believe 's Learning Division is unique in its marketplace, and that our success factors include: Leveraging Practical Business Experience will not only bring valuable training experience to your organization, but it will also bring decades of practical consulting experience in relevant areas. In fact, most of our courseware designers and trainers are still actively consulting in their respective areas. Relevant and Topical Courseware We are constantly in the process of developing new and enhancing our existing curriculum of government courses it is up to date and focused on the public sector. It considers current and topical issues that the government is facing, and is kept up to date based on our continually growing knowledge base developed through real life experience. Experienced Faculty Our faculty are experienced instructors, who have ongoing interactions with our consulting business, such that the reality of the work to be done, and the challenges faced by your staff are understood and appreciated by our team. Our team is knowledgeable about the public sector and committed to it. www.confluence.ca