Creating Strategy-Focused Public Sector...

October 10-12, 2006 Washington, D.C.

Government Summit 2006

Balanced Scorecard Collaborative/Palladium • 55 Old Bedford Road • Lincoln, MA 01773 • Tel: 781.259.3737 • Fax: 781.259.3389 • bscol.com

Creating Strategy-Focused Public Sector Enterprises

Dr. Robert S. KaplanBaker Foundation ProfessorHarvard Business School

203_061011_GovtSummit_SFO_KaplanR. ©2006 Robert S. Kaplan and Balanced Scorecard Collaborative, a Palladium company • bscol.com

The Balanced Scorecard Model of Value CreationPrivate Sector Organizations

"If we succeed, how will we look to our shareholders?”

Financial Perspective

"To achieve our vision, how must we look to our

customers?”

Customer Perspective

"To satisfy our customers and shareholders, at which processes must we excel?”

Internal Perspective

“How do we align our intangible assets to improve critical processes?”

Learning & Growth

“How do we have a social impact with our citizens/constituents?”

Mission (Customer) Perspective

“How do we attract resources and authorization

for our mission?”

Support Perspective

Public Sector Organizations

“To have a social impact and to attract resources and support, at which processes must we excel?”

Internal (Operational Capacity)

“How do we align our intangible assets to improve critical

processes?”

Learning & Growth

“How should we manage and allocate our resources for maximum social impact?”

Financial


1992 20001996 20041993 2005 2006

A MeasurementSystem

(The BalancedScorecard)

A Performance Management System

(Strategy-FocusedOrganizations)

A Core Competency(Strategy Execution)

The Balanced Scorecard has gone through three distinct cycles of evolution.

http://www.amazon.com/gp/product/images/1591396905/ref=dp_image_0/103-5374003-8048646?%5Fencoding=UTF8&n=507846&s=books


Balanced Scorecard Hall of Fame for Executing Strategy By Industry 2001 – 2006


Most organizations do not know how to execute strategy.

Between 1988 and 1998, only 13% of companies were able to deliver 5.5% annual real earnings growth and deliver returns that covered their cost of capital.

Only 15% of the 794 programs reviewed in Fiscal

2005 were rated effective.

- Fortune Magazine - Barron’s

- Chris Zook, Profit From the Core

Companies on average realize only 60% of the financial performance their strategies promise... more than one-third of executives surveyed placed the figure at less than 50%.

- Harvard Business Review

Less than 10% of strategies effectively formulated are

effectively executed.


According to a recently completed Monitor study, strategy execution is the single most important issue to the executive suite.

"Using a 1-5 scale, please rate the level of interest / concernyou have in the following business issues at present.”

2.953.07

3.263.353.463.513.53

3.703.703.723.733.98

3.78

1

2

3

4

5

Executing the strategy

Markettrends

Regulatory, compliance, and risk management

Growing the top line

Customer service

Forecasting & reporting effectiveness

Product / service fulfillment

HR

Product innovation / time to market

IT capabilities ITO / BPO Investor relations

SCM

All Positions n = 354

Source: Monitor Analysis. Survey of 354 executives; 49% of respondents are C-level and 56% are from companies with revenue greater than $1 billion


Do you have a formal strategy execution process in place?

Describe your organization’s current performance.

Yes No(54%) (46%)

…We have breakthrough results…we are performing better than our peer group

Sub-Total

12%58%70%

7%20%27%

…performing at the same level as our peer group.…performing at a lower level than our peer group…not performing at a sustainable level

Sub-Total

18%9%3%30%

30%27%16%73%

Winners

Losers

Source: BSCol Research (Survey of 143 performance management professionals, drawn from BSCol On-Line Community, March 2006)

Organizations with a formal strategy execution process in place are dramatically outperforming organizations without formal processes.


Strategy-Focused Organization Best Practices Framework

IV. MOTIVATE TO MAKE STRATEGY EVERYONE’S JOB

I. MOBILIZE CHANGE THROUGH EXECUTIVE LEADERSHIP

III. ALIGN THE ORGANIZATIONTO THE STRATEGY

V. GOVERN TO MAKE STRATEGY A CONTINUAL PROCESS

II. TRANSLATE STRATEGY TO OPERATIONAL TERMS








1.1 Leaders drive strategy execution1.2 Executives make case for change

1.3 Leaders reinforce strategic priorities1.4 Well articulated strategy exists

1.5 Office of Strategy Management established


The Mobilization Phase: Getting Started

A variety of situations suggest the need for a new and better way to manage strategy

Strategic ShiftNew CEO or senior executiveNew strategy

UnderperformingValue gapPoor quality or customer serviceOperational execution

New RegulationsGPRA, CFO ActPresident’s Management Agenda

Triggers of Change

These situations present an opportunity to introduce the Balanced Scorecard / Strategy-Focused Organization framework as a “new way to manage”.

√√

√√

√√√

A successful Balanced Scorecard program starts with a recognition that it is

not a metrics project…

IT’S A CHANGE PROCESS


Why do leaders use strategy maps to create value?

STRATEGY

MAP

EXECUTIVE CONSENSUS AND ACCOUNTABILITY

Building the strategy map eliminates ambiguity and clarifies responsibility.

CREATE ALIGNMENT

Each part of the organization and each individual link their objectives to the strategy map.

EDUCATE AND COMMUNICATE

Communicate and educate the workforce about the strategy.

PROMOTE TRANSPARENCY

Communicate and educate employees, constituents, support authorities, and the public.

9 StratMaps-eab-3.23.04DOCID# ©2004 Balanced Scorecard Collaborative, Inc. • bscol.com

Stak

ehol

der

Inte

rnal

Pro

cess

Lear

ning

& G

row

thRe

sour

ces

Optimize Delivery of Non-Core

Competencies

Improve Business Practices

Leverage Technologies into Key Processes and

Equip Army

Improve Acquisition with

Industries

People

Secure ResourcesPeople, Dollars, Infrastructure, Installations, Institutions(I3) and Time

“Adapt Institutional Army”

Organize the Army

Train the Army

Man the ArmySustain the Army

Equip the Army

ProvideInfrastructure

Ready Force for Today and Tomorrow

“Adapt/Improve Total Army Capabilities”

Mis

sion

Secure Resources

Opportunity for Service

Competitive Standard of Living

Pride and Sense of Belonging

PersonalEnrichment

Leader Training and Leader Development

Communicate across the Army

Essential and Enduring Capabilities

Execute Prompt Response

Mobilize the Army

Conduct Forcible Entry

Shape Security Environment

Sustained Land

DominanceSupport Civil Authorities

Core Competencies

“Provide necessary forces and capabilities to the Combatant Commanders in support of the National Security and Defense Strategies.”Provide Relevant and Ready Land Power Capability to the Combatant Commanders and the Joint Team

Train and Equip Soldiers and Grow Leaders

16 JAN 04

“Develop Joint,Interdependent

Logistics Structure”

“Build theFuture Force”

“Optimize ReserveComponent Contributions”

“Sustain Right All Volunteer Force”

“Support Global Operations”

“Adjust GlobalFootprint”

Army Strategy Map








2.1 Strategy translated in strategy map2.2 Strategy described in Balanced Scorecard

2.3 Targets identified for all measures 2.4 Strategic initiatives rationalized

2.5 Executives accountable for initiatives


#1. The constituent/ support value propositions define the source of value.

#2. Processes create value for the constituent and support authority.

#3. Intangible assets must drive the processes critical for the strategy.

#4. Cause-and-effect relationships define the logic that converts intangible assets to tangible outcomes

#5. Resource management performance enables the agency to maximize the impact from its resources to succeed with its strategy.

Process Perspective

Learning & Growth Perspective

Constituent/ Support Perspectives

Price Quality Time Function Relation Brand

Product/Service Attributes

Operations Management

Processes

Constituent Management

Processes

Resource Management Perspective

Budget Management

Adequate Resources

Relationship Image

Regulatory and Social Processes

Human Capital

Information Capital

Organization Capital

“Support”Management

Processes

The Balanced Scorecard / strategy map framework is based on a simple model of value creation.


But remember, strategy maps are just one element of the complete Balanced Scorecard required to create value.

What the strategy is trying to achieve

Train Units and Leaders

Balanced Scorecard

Objective

Percent trained

How performance against the objective is quantified

Measure

80%

The level of performance

or rate of improvement

needed

Target

Analysis of training needs

Processes and programs

required to reach the

target

Initiative

$XXX

Budget

Action Plan

Strategic Theme Readiness

Inte

rnal

Lear

ning

Res

ourc

esSt

akeh

olde

r

Train Units and

Leaders

Improve Leaders

Development

Secure Resources

Man critical positions

Provide trained Forces

Develop Training

Requirements


Vision: Become the Premier Standard Bearer for Domestic Economic Development

Mission: To help our partners across the nation create wealth and minimize poverty by promoting a favorable business environment to attract private capital investment and jobs

Financial

Stakeholder-Become an effective, efficient, results-oriented agency

TaxpayersWhite House/OMBCongressDept of Commerce

Customer

Internal

Learning & Growth

Be Knowledgeable &Prompt Economic

Development Advisors

AdvanceAdministration’s

DomesticAgenda

Show VisibleResults

Maximize EDAImpact onDistressed

Communities

MaximizeAdministrativeEfficiency &

Effectiveness

MaximizePrivate Sector

Leverage

Maximize HigherSkill / HigherWage Jobs

Provide aTransparent &Responsive

Process

ProvideInformation &

TechnicalAssistance

Policy Leadership High Impact Investment Organizational ExcellenceUpdate &Expand

InvestmentPolicyProvide

PolicyOptions

EnhanceResearchCapability

Enhance DueDiligence

Expand Deal Flow(Invest with New

Partners)

EmphasizeFundingPriorities

ImproveCommunication

StrategyStandardizeProcesses

Align Resourceswith Strategic

Priorities

TechnologyEnable KeyBusiness

Processes

ImproveAnalytical

Skills

Attract TopTalent

DevelopTechnologyProficiency

EstablishEnterprise

Information SystemEstablish

PerformanceCulture

Make Investmentsthat are Engines of

Growth

Distressed CommunitiesInvestment PartnersPrivate Sector

Enhance PostApproval

Monitoring

Public Sector: US Economic Development Administration


EXCELLENCE IN INTEGRATED POLICING

Safe homes, safe communities

OPERATIONSBRIDGE-BUILDING

Contribute valued public policy advice

Be community

leaders

Communicate our vision

I.5

I.4

I.2

Build strategic alliances

I.3

Ensure leadership for

the future

Pride & commitment to

service

HR policies & practices to

support strategy

Positive & healthy work environmentL.2 L.3 L.4

Provide enabling equipment & technologyL.1 L.5

Be the best managed organization in

government

Live core values that make us a trusted

partner

Excel at leading-edge policing

WORLD-CLASS POLICE SERVICE (CLIENTS, PARTNERS AND STAKEHOLDERS)

C.3

Assure accountability at

all levels

Exemplify modern

management principles &

practices

MANAGEMENT EXCELLENCE

Excel at resource management

Reduce the threat & impact

of Organized

Crime

Prevent & reduce youth involvement in crime as victims and offenders

Reduce the threat of terrorist

activity in Canada and

abroad

Effective Support of International

Operations/Initiatives

Safer and healthier Aboriginal communities

I.6

I.8

I.7

C.2C.1

PEOPLE, LEARNING & INNOVATION

Maximize Use of the Operations

ModelI.1

Royal Canadian Mounted Police


Project Overview: Developing a Strategy for Rio Grande do Sul Province, Brazil

“Measures, Targets, Projects”July 11th Workshop

Future VisionMeeting “O Rio Grande que Queremos”

(March 8th and 9th)

The Strategy“Strategy Map of RS”

April 26th Workshop

11 Thematic Forums (examples)

“Governance Model – Strategic Agenda”August 9th Workshop

Rio Grande do Sul 2020Alignment of societal

interests for a common vision

Translate the future vision into strategic objectives

Creation of a results monitoring system and definition of proposals

to reach the objectives

Proposal validation by the thematic forums

Guarantee the continuity of the Strategic Agenda until 2020

(from project to process)

Infra-structure Education

Market Develop-

ment

Environ-ment


Activities done

— State diagnosis;

— Shared future vision;

— Main challenges to overcome

Participants— More than 850 people representing

major stakeholders

The Future Vision“O Rio Grande que Queremos” Meeting

(March 8th and 9th)

Future Vision Search – March 8th and 9th


Future Vision Search – Pictures


Society in general –Ample survey

Management Forum –Interviews

• Societal involvement:5,000 people200 municipalities(40% of the total);Segments not representedon March 8th and 9th

• 70 interviews with leaders of various segments of society:

Systemic vision of the State via the Strategy Map

Results are consolidated and validated on April 26th

Strategy Map Workshop

The Strategy“Strategic Map of RS“

Workshop of April 26th


Survey - Pictures


HealthEducation

Com

petit

ive

Diff

eren

tials

Gro

wth

Axi

sSo

ciet

yD

evel

opm

ent

Foun

datio

ns

Public adminis-tration

Market development

Innovation and

technology

Regional development

Infrastructure

Institutional and regulatory

environmentEnvironmentCitizenship and

social responsibility

Financial resources availability

The best state to live and work

Economic Growth Quality of LifeSocial and Regional Equality

Benchmark in innovation and

technology

Benchmark in human capital

The best state to do business


So

ciet

y

Benchmark in innovation and technology


Economic Growth Quality of LifeSocial and Regional Equality


Com

petit

ive

Diff

eren

tials

The best state to live and work

Gro

wth

Axi

sD

evel

opm

ent F

ound

atio

ns

Public Administration

Environment

Market Development Innovation and Technology

Regional Development

Health

Citizenship and Social Responsibility

Infrastructure

Integrate companies, research institutes, universities and the Government in leading edge

technology efforts

Promote technology centers that are aligned with a state plan

Establish and execute investment policies and stimulus for innovation

and technology

Modernize and enhance the efficiency of the public administration, including a size

adjustment

Augment the State’s investment capacity through fiscal equilibrium

Guarantee transparency in public administration via a societal monitoring

system

Balance environmental preservation with

development, through clear and stable rules and greater

efficiency of regulating bodies

Promote society's

environmental commitment

through environmental

education

Attract and strengthen companies in strategic sectors, diversifying the regions´

production matrix

Capacitate for entrepreneurship, management and quality, and innovation

and technology

Stimulate exports with a focus on value added activities

Incent and guarantee means of societal

participation in public administration

Guarantee a regional and

integrated strategic plan with social

participation, assuring the

continuity of public policies

Promote family planning and infant mortality reduction

initiatives

Promote health through

preventive actions

Amplify the effectiveness of the health network with

service quality improvement

Implement an integrated transportation logistics network with a focus on greater

efficiency

Establish public-private partnerships and concessions with guaranteed

contractual assurances

Institutional and Regulatory Environment

Education

Financial Resources Availability

Expand the network of full-day schools Define and implement

an educational model focused on qualityInvest in teacher

qualification

Capacitate for the market and citizenship, with the help of

universities and colleges, schools, NGOs, and government and

amplifying professional teaching

Guarantee public safety and trust in institutions Guarantee the stability

and execution of rules

Facilitate credit access

with better orientation

Incent the formation of public and

private savings

Combat informality, piracy and tax evasion

Reduce the State’s tax burden

Promote social responsibility

Guarantee the efficient use and availability of energy at

competitive prices


Economic Growth

Quality of Life

Social and RegionalEquality

2020 Targets for Rio Grande do Sul

% GDP c.a.g.r.

1,09

3,30 2,21

Rio Grandecurrent situation

Target2020(1)

Challenge

0,198

0,330

0,528


Meta desejada2020(2)

Challenge

0,8140,901 0,087


Target2020(3)

Challenge

GINI indicator

(1) Taxa de crescimento anual do PIB real per capita do Chile (média 1994-2004)

(2) Parâmetro do índice de GINI entre Alemanha e Irlanda (2004)

Index of Human Development – IDH (United Nations)

(3) Parâmetro do IDH da Coréia do Sul (2004)


Benchmark in innovationand technology



Average adult population school rate (years)


Target2020(1)

Challenge Rio Grandecurrent situation

Target2020(2)

Challenge

% of adult population with high education

(1) Parâmetro da média de escolaridade da populaçãoadulta dos EUA e Coréia do Sul (2000)

(2) Parâmetro da média de população adulta comcurso superior de EUA e Coréia do Sul (2000)

6,80

11,00 4,20

(3) Parâmetro: Irlanda (2004)

21,65%30,85%

9,20%

Índice Geral

Força de Trabalho

Conhecimento e Inovação

Infra-estrutura

SP 1 1 1 2RJ 2 2 2 1RS 3 3 3 4PR 4 4 4 3SC 5 5 6 5

Desafio3%

34% 31%


Target2020(3)

Challenge

2020 Targets for Rio Grado do Sul

Hi Tech exports (%)Ranking of state competitiveness






3.1 Corporate contribution to strategy defined

3.2 Enterprise scorecard guides business units

3.3 Enterprise scorecard guides support units

3.4 Scorecards align suppliers and/or customers

3.5 Scorecard reports to board and/or shareholders




Alignment in Action


Cascading the BSC supports alignment and makes the scorecard part of the organization’s day-to-day operations.

EDA HQ

Regions

Departments

Employees

• Cascading the BSC through the organization ensures strategic focus downward and activity alignment upward.

• Additionally, cascading sets up a dialog within the organization that allows best practices to be shared, support functions to focus on high value activities, synergies to be exploited, and, most importantly, strategic learning to take place.


EDA Will Cascade Quickly into the Regions

Cascading Considerations:What is the cascading ‘philosophy’?

— Cascading will apply a ‘shared’ approach—one that seeks to align regional maps as closely with headquarters as possible to ensure consistency of the strategy.

Who will drive and own the cascading process?— The cascading process will be driven by the headquarters core team (Danette and Sandy). They—with

the participation of regional representatives—will rollout the strategy thru EDA.

Who will participate? How will it work?— Each region will provide two representatives: the Director and a supporting staff member. They will work

with the headquarters representatives over the design period to complete their BSCs. They will participate in three meetings: a strategy mapping workshop, a measures workshop and a deployment workshop.

What is the time-frame for overall completion? In a multi-tier cascade, what is the time frame by level?

— The pace is rapid. Cascading will start in August and is expected to be completed by the start of the next fiscal year (October)


Financial

Stakeholder-Become an effective, efficient, results-oriented agency

TaxpayersCongressEDA Headquarters

Customer

Internal

Learning & Growth

Knowledgeable & Prompt Econ. Dev.

Advisors & Practitioners

Advance DOC/EDA

PolicyShow Visible

Results

Maximize EDA Impact on Distressed

Communities

Maximize Administrative

Efficiency & Effectiveness

Maximize Private Sector

Leverage

Maximize Higher Skill / Higher Wage Jobs

Provide a Transparent &

Responsive Process

Provide Information &

Technical Assistance

High Impact Investments Portfolio Management Organizational Excellence

Implement Investment

PolicyGuidelines

Emphasize Funding Priorities

Enhance Due Diligence

Practice Creative and Resourceful Management

Enhance Records

Management

Align Resources w/Strategic Priorities

Attract Top Talent

Develop Technology Proficiency

Establish Performance

Culture

Make Investments that are Engines

of Growth

Distressed CommunitiesInvestment PartnersPrivate SectorEconomic Development

Community

Enhance Post Approval

Monitoring

EDA BSC REGIONAL STRATEGY MAP: SECOND QUARTER FY 2004 COMPREHENSIVE

ImproveProfessional Development

Enhance Communication

Expand Deal Flow


Communities



Responsive Process






Culture



Communities



Responsive Process






Culture



Organized Crime

Terrorism

Aboriginal

International

Youth

RCMP: 5 Strategic Priorities Maps


RCMP Strategic FrameworkSafe homes, safe communitiesCLIENTS, PARTNERS AND STAKEHOLDERS

OPERATIONS MANAGEMENT EXCELLENCEBRIDGE BUILDING

PEOPLE, LEARNING, & INNOVATION

Invest in/ optimize research for policy

development

I-2CCAPS

Promote use of Restorative processes

I-5

CCAPSImproved service

delivery within Aboriginal Policing

Safer and healthier Aboriginal communities

Provide a culturally

sensitive police service

I-6 CCAPSDemonstrate value for

serviceI-7

CCAPS

Ensure data quality/integrityI-3

OPSBuild new

and strengthen

existing partnershipsI-8

CCAPS

Strategically allocate resources

I-12

OMB

Sound and rigorous stewardshipof RCMP Resources

I-11

CM&C

Build operational capacity and competency

Optimize enabling science &

technology

Recruit, develop and retain the right

people

Communicate effectively

Improve planning and Performance

Management

L-1

I-10

L-3L-2

I-1

HRHR CIO/NPS/

Tech. Ops

SD

Influence public policy

I-9

SD

SD

EXCELLENCE IN INTEGRATED POLICING

I-4

CCAPS

C-1

Aboriginal Strategy Map

CCAPS


Clients, Partners and Stakeholders

Innovation and Excellence in PolicingExcellence in Operations Bridge Building Management Excellence

Be innovative in our useof technology

L2

Educate employees aboutthe implications of

FAS / FAE

L3

Ensure members receiverelevant and timely,operational training

L1

Foster and Recruit employees, with emphasis on

aboriginal recruitmentL4

Maximize officer safety,employee wellness and

development

L5

Be intelligence led I 10

Develop and facilitate implementation of

Restorative JusticeI 3

People, Learning, Growth and Technology

Market NWT Division internally and externallyI 1

Excel in the modern comptrollership

I 8

Instill commitment, support and understanding for the need for

accountability at all levelsI 9

Provide accurate, timelycommunication and reporting to our clients, partners, and stakeholders

I 7

Establish Diamond Protection Service as an

international centre of excellence

I 2

Expand and Strategically use Traffic

ServicesI 4

Clarify our role,and actively participate in

FAS preventionI 6

Reduce violence & victimization throughprevention, education and enforcement

I 5

outstanding contributionsto the safety, health and well being of

the peopleC 2

quality proactive police servicesfor the needs of the NWT

C 1 C 4

valued strategic partner in protecting Canada’s security and sovereignty in the

north

Provide a culturally sensitive police

serviceI-6

Safe homes, safe communities

Safer and healthier Aboriginal

communities

Northwest Territory Division Strategy Map

C 3


Survey of Canadians’ View of RCM Police Services

Canadians' satisfaction level from 2003 to 2005 (% agree):

40

50

60

70

80

90

The RCMP issensitive

to/adapts todifferent cultures

& groups

The RCMP issensitive to/ has a

valued roleregarding

Aboriginal issues

The RCMPprovidesadequate

information aboutits work

RCMP staff gavetimely service

RCMP staff wentthe extra mile

RCMP staff gaveall the information

I needed

2003 2004 2005

Results - RCMP


May 2006








A. RESOURCE MANAGEMENT5.1 Budget is driven by strategy

5.2 Planning for HR/IT linked to strategy5.3 Portfolio of strategic initiatives aligned to themes

B. KEY PROCESS MANAGEMENT

5.4 Process improvement aligned to strategy5.5 Best practice sharing in place

C. LEARNING & CONTROL

5.6 Strategic performance information guides decision making

5.7 Strategy reviewed on regular basis


City of Indianapolis: Activity-Based Costing of Public Services

Mayor Stephen Goldsmith guest column, The Indianapolis Business Journal, August 1992.

Government should be measured the same way every other enterprise is measured: By its results.

We shouldn’t talk in terms of programs funded or salaries paid, but rather in terms of neighborhoods protected and workers trained. If people aren’t getting a dollar’s worth of service for every dollar they pay in taxes, then government isn’t helping them out—it’s ripping them off.


Indianapolis: Processes Performed by Transportation Department

Maintenance Section (9)Snow controlCurb repairGuardrail repairCrack sealingStrip patchingSpecial maintenanceMowing & brush cuttingAlley repairDrainage repair

Asset Management Division (10)Bridge repairBridge replacementIntersection improvementsRoad wideningStreet reconstructionStreet repairSignal interconnectsSignal upgradesResurfacingCurbs and sidewalks

Traffic Management (11)Pavement markingsSign installationSign repairSignal installationSignal maintenanceStreet cleaningSidewalk repairBerm repairPothole patchingStreet pavingSidewalk paving

Parking Management Division (5)Administration and planningParking lot and garage operationsParking meter enforcementCollectionsAdjudications


Calculating departmental and process costs

Cost elements include:Direct employees: salaries, wages, payroll taxes, fringe benefits

Supervision: salaries, wages, payroll taxes, fringe benefits

Departmental indirect labor

Traceable equipment and technology (computers, telecommunications, physical capital)

Occupancy (space charges including depreciation, housekeeping, utilities, taxes, insurance)

Indirect and support departments ⎯ HR, IT, finance ⎯ based on actual quantity of resources used from these departments


Unit Cost = Cost of capacity suppliedPractical capacity of resources supplied

Departmental cost = $72,000 per month (salaries, payroll taxes, supervision, assigned equipment, such as trucks, assigned support costs)

20 employees do the front-line work (filling potholes, repaving roads, …). Each employee works 20 days per month (after weekends, holidays, and

vacations), 7.5 hours per day, and 60 minutes per hour, or 9,000 minutes per month

The practical capacity of an employee: after breaks and training, produces outputs for 6 hours day (80% of theoretical capacity) or 7,200 minutes per employee.

Unit Cost = $72,000 = $0.50 per minute7,200 * 20 = 144,000 minutes

R. S. Kaplan and S. Anderson, “Time-Driven Activity-Based Costing,” Harvard Business Review (November 2004)

Time-Driven Activity-Based Costing! First, calculate the cost per unit time of supplying capacity in processes or departments.


Estimate the time required by each type of work performed:

Fill pothole 150 minutesPave 100 meters of road 500 minutesInstall traffic sign 90 minutes

Second, calculate the time used to accomplish each unit of work by the department’s resources.


Calculation of department’s actual costs for work performed

Fill pothole 150*$0.50 $75/potholePave 100 meters of road 500*$0.50 $250/100 meters

repavedInstall traffic sign 90*$0.50 $45/sign installed

Third, calculate the department’s cost to accomplish work: Multiply capacity cost rates by standard (or actual) times.


Actions Taken by Indianapolis with Activity-Based Costs of City’s Processes

1. Establish Competition for Provision of City Services— City employees bid for future work against private sector contractors— Compare city department’s costs against private sector bids

2. Encourage Process Improvements— City employees attempt to reduce cost per minute of supplying their services (eliminate

excess supervisors, fewer trucks, reduce truck maintenance costs – the $85 oil change)

— City employees reduce the time required to perform work (better scheduling of work tasks, reduced idle time between jobs, continuous improvement of work processes)

— In six weeks, city employees reduced the cost of filling potholes by 35%


Indianapolis: Impact of Costing and Competing City Services

Union wins pothole filling contract (more experienced than private contractors)

After three years: 66 Competitive Projects— Private Sector: 37 wins (capital and technology intensive: wastewater

treatment plant, airport operations, I/T services)— City Workers: 29 wins (labor intensive: street repair, trash pickup)

Productivity Enhancements— Trash Crew: From 680 homes/day to 1,200 — Street Repair: Private $1,500/mile => City workers: $1,000/mile => Private:

$950/mile => City workers: $850/mile

Penalty for cost over-runs: Excess rolled into next bid

Reward for work under bid: Bonus checks to city employees

Three consecutive years of reductions in motor vehicle fleet and inventory 40% reduction in non-public safety employees: 2,425 => 1,484


$200

$250

$300

$350

$400

$450

$500

$550

82 84 86 88 90 92 94 96

Calendar Year

Mill

ions

of T

hen-

Yea

r Dol

lars

$529 M

$439 M

$283 M

1983-92 Trendline

Source: City of Indianapolis

Impact of Using ABC for Competition in the City of Indianapolis


Mayor Stephen Goldsmith on the impact of using activity-based costing and competition for city services.

“There’s a sense or reality now. City employees have redesigned their tools and their teams to think in different ways, and they win. People who aren’t competitive are moved out or their departments are eliminated. The ones that are left are convinced that they are good at what they do. They have a sense of pride that they are better than the private sector. That makes a big difference in their whole attitude towards work, the quality of the work they do, and, frankly, how the rest of the citizens think today about their city workers.”

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