Government often lacks the information it needs to reach important decisions about the use of public funds. To succeed in developing a smaller, smarter government, the state needs to develop better ways of identifying the true costs of the products and services it purchases and provides. This task, however, is becoming easier, thanks to new management tools designed to help organizations better understand their business activities and costs.
Activity-based costing (ABC) and activity-based management (ABM) are among the most promising of these new tools. ABC can help agencies identify the true costs of services and programs in all areas of government. ABM draws on ABC to make business processes more effective and efficient and to enhance management decision-making.
Using the information generated by ABC analyses, organizations can compare their own business processes with those of high-performing, best-practice organizations, and determine whether they are adequately recovering the costs of the services they provide. For example, ABC can be used to map a complete business process and determine the total costs of each activity it involves. With this information, agencies can focus reengineering efforts on activities offering the greatest opportunities for improved efficiency, cost reductions and increased customer satisfaction.
Opportunities for improvements in state government from ABC analyses were identified in the Comptrollers 1999 Texas Performance Review report, Challenging the Status Quo: Toward Smaller, Smarter Government. In response to recommendations in that report, the 1999 Legislature adopted Article IX, Section 9-6.43 of the General Appropriations Act, which required the Comptroller to administer the project with the assistance of an ABC project management team comprised of representatives from the Governors Office of Budget and Planning, State Auditors Office, Legislative Budget Board and the Comptrollers office. This team oversaw a broad and ambitious effort to put ABC into place in the five agencies named in Article IX, General Services Commission, Texas Water Development Board, Texas Workforce Commission, Texas Department of Economic Development and Texas Cosmetology Commission, as well as two volunteer agencies, the Texas Department of Transportation and the Texas Comptroller of Public Accounts. Through a competitive process, the team selected a nationally recognized consulting firm to train employees in ABC techniques and conduct ABC/ABM work sessions.
The business services selected for the pilot project ranged from state leasing operations to business machine repairs to revenue processing. The project was intended to determine the true costs of delivering each service, identify activities that do not add value to the organization, highlight savings opportunities, and evaluate the merits of adopting ABC throughout state government as a management and cost accounting tool.
The pilot involved 16 major programs or agency divisions encompassing hundreds of business activities in the seven agencies. Agency employees documented their current business processes, estimated the time and resources needed to carry them out, and distinguished between activities that contribute to their organizations missions and those that do not. As a result, the management team was able to identify a number of useful improvements to current processes.
The success of ABC and ABM depends mostly upon the willingness of participants to explore the strengths and weaknesses of their current processes; the availability of consultants or in-house experts to coach work teams in the ABC/ABM process; the availability of adequate information regarding expenditures and resources; and the leadership needed to execute any worthwhile ideas generated through the process.
The pilot project was completed in Fall 2000. In assessing its results, the management team reached the following conclusions:
- While ABC/ABM studies can be costly in terms of time and other resources, the net return on such an investment in Texas could be considerable.
- To realize the greatest impact per dollar spent on ABC/ABM, the state should target its use, rather than requiring its widespread application across all government activities.
- State agencies should consider using an ABC study to estimate the true cost of any activities under review. This will enable them to pursue reengineering opportunities and benchmark their operations against other public and private organizations.
- The ultimate success of ABC/ABM depends on how agencies use the study results. The ABC/ABM pilot project is only the beginning of a more detailed process that agencies must go through to realize results and cost savings.
- Many of the savings identified in this report represent savings in productivity, which are not always easily translatable into hard dollars.
- Many opportunities for improvement identified in the pilot project would require an investment in new technologies.
- Participating agencies sometimes found that, to achieve the full benefits of ABC/ABM, they would need the cooperation of other agencies or amendments to existing legislation.
In conclusion, ABC/ABM holds great promise for improving the efficiency of state government, but it is not a panacea. An ABC/ABM study can be costly and time-consuming, and requires significant training, expertise and information. Furthermore, many improvements to business processes identified through ABC/ABM may require up-front investments before savings can be achieved. As with any other management tool, managers must decide when and where ABC should be used to support decision-making. Nevertheless, the benefits of this tool, when applied wisely, far outweigh any potential disadvantages.