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CAUSE97 Pre-Conference Seminar December 2, 1997 Understanding, Modeling and Managing the Cost of Information Technology: The Activity-Based Costing Approach Laurie G. Antolovic’ Chief Financial Officer Office of the Vice President for Information Technology Indiana University E-mail: [email protected] Points to Cover What is Activity-Based Costing? Why should you implement Activity-Based Costing? What are the benefits of using ActivityBased Costing How do you implement Activity-Based Costing? Sharing the Indiana University Experience What is ABC? ABM? 1 ABC: Focus on accurate information about the true cost of products, services, processes, activities, distribution channels, customer segments, contracts and projects ABM: makes ABC information useful by providing value analysis, cost drivers and performance measures to initiate, drive, or support improvement efforts and to improve decisionmaking. Why ABC/M? Rising cost of information technology (IT) Constrained resources Rising demand for IT services Demand for greater accountability Ramifications of distributed computing External Requirements: compliance with the federal government’s Cost Accounting Standards (CAS) The total cost of ownership (TOC) concept What benefits did Indiana University gain? Enhanced understanding of IT costs (by the IT organization, the customers and university administration Proof of accountability (benchmarks, measurements, customer satisfaction, business value) Understanding the value chain (process improvement, new service and funding models, partnerships and collaborations) Begin assessing the impact of IT on the university’s core business What are the uses of ABC? 2 to determine product/service cost to improve performance of processes and activities to benchmark to support improvement initiatives evaluate outsourcing of activities to focus improvement efforts by identifying the “biggest bang for the buck..” What are the uses of ABC? (continued) to drive a cultural change toward accountability and responsibility for the activities and processes of the business to effect strategy deployment to improve performance measurement system to determine value-added/non-value-added activity costs and ratios What are the uses of ABC? (continued) to cut cost/downsize to budget to determine and optimize activity capacity to isolate/eliminate cost drivers to charge intercompany cost for support services performed to kick start dead total quality initiatives What are the uses of ABC? (continued) to set target costs to quantify the result of improvement initiatives to estimate/bid on customer work to manage projects and contracts to consolidate operations to evaluate acquisition candidates How do you implement ABC? A. Design Guidelines 3 1. Simplicity is the key. “Far better an approximate answer to the right question, which is often vague, than the exact answer to the wrong question, which can always be made precise.” (John Tukey, Princeton University.) How do you implement ABC? A. Design Guidelines (continued) 2. Remember that every organization is different. The nature of costs varies widely from organization to organization. As such, cost drivers should be different. How do you implement ABC? A. Design Guidelines (continued) 3. Understand the objectives you want your cost system to support Implementation at Indiana University - IT Unit A. July, The Impetus 1995 - A new CIO position (full Vice Presidency) was just created. Indiana University wanted an analysis of existing IT budget and projection of future funding requirements. B. Environmental Scan IT Budget has been flat for 10 years Demand for IT services has skyrocketed Distributed computing: “Why do we a need a central IT unit?” Constrained resources: “What do we get out of our tax assessments for IT?” B. Environmental Scan (cont.) IU’s Strategic Directions Charter: circulating in draft mode but contained a goal of increasing accountability through implementation of ABC Responsibility Center Management IT unit was organized around service delivery B. Environmental Scan (cont.) IT budget authority was distributed; thus various activity centers already had their direct costs identified (e.g. Help DeskWalk In; Help Desk- Phone-in; Help Desk E-mail; Help Desk - KnowledgeBase) Annual User Surveys C. The Process Senior IT staff met with University Budget Director to clarify the charge and the goals Senior IT staff decided on new approach to presenting IT costs IT CFO designed implementation plan IT CFO served as project leader Involved all staff who have budget authority D. The Implementation IT CFO conducted series of meetings with budget managers to articulate the goals, outline the steps, outline the finished product, and set completion date Decision made to report costs based on services to IT customers Decision made to initially use measures or activity levels already being captured D. The Implementation (continued) Project calendar, budgets, templates and instructions distributed to budget managers CFO and staff coached and assisted managers every inch of the way ABC project completed in 10 weeks Report submitted to IU administration included ABC report and 5-year projection of additional funding required Notes: 1 Miller, John A. Implementing Activity-Based Management in Daily Operations, New York: Wiley, 1996. 2 Miller, John A. Implementing Activity-Based Management in Daily Operations, New York: Wiley, 1996. 3 O’Guin, Michael C. The Complete Guide to Activity-Based Costing, New Jersey: PrenticeHall, 1991. Fast Track ABC: “From the Experience of Indiana University Bloomington Information Technology Unit” Fast Track ABC: Where do you start? 1. Decide on the information you want. of your customers: they don’t really care about your “activities” but they do care about your “output” (the services they receive). Your activities and associated costs are important to your organization for internal review, process improvement, etc. Think Fast Track ABC: 2. Identify your business processes -Use information that is already available University Information Technology Unit Applications Services (write/select, test, modify, run software) Data Center (test, select and operate systems) Networks (Data, Voice, Video) (test, select, operate systems) FastTrack ABC: 2. Identify your business processes (cont.) Customer Support (answer help desk phone lines, walk-in consultations, advise on hardware/software acquisition, etc.) Administrative/Sustaining (Accounting, Payroll, Human Resources, Building Services) Fast Track ABC: 3. Identify the activities/services Example: Support Customers Maintain KnowledgeBase Answer help desk phone lines Provide walk-in consulting Fast Track ABC: How do you gather information? Use historical records and documents (budget document, general ledger, org charts) ** Interview senior and line managers Interview staff Review time sheets or logs Brainstorming session with managers ** Fast Track ABC: 4. List ALL your services/activities and distribute to ALL involved in the analysis. Also provide complete financial information, templates, clear instructions and insure assistance from finance office staff Fast Track ABC: 5. Identify costs of business processes or areas. Use your budget to obtain the following breakdown: Personnel Hardware and Software Maintenance Data Lines Inventory for Resale Administrative/Sustaining Fast Track ABC: 6. Allocate the cost of every business process or operational unit to services/activities. 7. Aggregate your cost of services/activities by process unit, operational unit, funding source, and entire organization) Fast Track ABC: 8. Share your results with managers and senior staff. Ask for their reactions. If they question the results, ask them to work with you in reviewing and validating the analysis. (This exercise emphasizes the operational unit’s ownership of a service/activity.) Fast Track ABC: 9. Incorporate output or activity levels that are already being captured for various purposes. Calculate unit costs. Ask managers to react. Solicit their input on more appropriate measurements. Ask them to help you capture those measurements. Fast Track ABC: 10. Incorporate customer satisfaction ratings from your survey. Modify your survey if necessary to assure alignment with the services identified. Fast Track ABC: 11. Make your results available to the university community. Analyze the impact of your IT investments. 12. Use your analysis in your budget process. At the end of the fiscal period, validate your costs and measurements. The Indiana Experience: Lessons Learned Because many university IT services are not directly billed, it is difficult to come up with a list of services or relevant activities (rule: where the rubber meets the road) Combined bottom up and top down approaches are effective. (If you want a group of managers to come up with your list of services, give them a preliminary list to work from) The Indiana Experience: Lessons Learned Breaking the rule sometimes pays off: Do not blindly follow the textbook rule on cost drivers. IT organizations have large nonpersonnel costs that cannot simply be allocated based on percentage of personnel activity! The Indiana Experience: Lessons Learned The results of this exercise are quite eyeopening! List your services in descending order according to cost. Graph your results. What services consume the biggest chunk of your IT dollars? See what your customer tells you about those services. The Indiana Experience: Lessons Learned Begin to look at assessing the impact of IT on your organization. Start by looking at how much of your IT dollars go to computerizing overhead operations (e.g. accounting) versus those that have economic value added to your customers (e.g. student computing)
