Costing business processes
By Gillian Kerr, RealWorld Systems
The information in this article is current as of June 9, 2004.
Last month an Open
Standards Benchmarking Collaborative was launched by a group of major
international corporations including World Bank and IBM. According to its
sponsor, the American Productivity
and Quality Center, the initiative will "revolutionize how organizations
improve performance by creating a publicly accessible framework for measuring
performance." Over time, they plan to collect a wide range of costs that have
been submitted by members so that organizations can benchmark their own performance
against similar organizations or across other sectors.
These benchmarks have the potential for helping nonprofits to reduce costs
for key business processes by showing them (a) how to measure what they currently
spend, (b) what other similar organizations are spending on the same processes,
and (c) best practices on how to improve their performance. The activities
that will be measured are listed in APQC's Process
Classification Framework, which is described in the appendix below.
Many agencies never examine their processes carefully, resulting in extremely inefficient administrative functions. One agency I knew discovered it was spending about $40 in today's dollars for each invoice that it sent out, because new financial processes just kept growing on old ones without ever being streamlined. They dramatically redesigned their invoicing system. Another agency discovered that it was spending over $50/hour (again in today's dollars) in staff and operational costs for ever single hour of volunteer involvement. In other words, a two-hour advisory meeting of 10 volunteers would cost the agency an average of about $1,000 when all direct and indirect costs were added in. As a result, they began using volunteers much more strategically.
The activity of measuring real costs for activities is a powerful intervention
even without benchmarking. Measuring your own costs almost always leads to
a painful awareness of the ways that processes can be improved as well as
building an almost automatic business case for change. However, it's not necessarily
obvious how much processes should cost, or what they would cost if you were
following 'best practices'. It might be useful to know, for example, that
the
median cost of delivering a paycheck is $6.40 U.S, but that efficient processes
can lower that cost to $3.22. If you're spending $15 to deliver each paycheck,
you might focus change efforts on that process rather than another one where
your costs are closer to the 'best performers'. Here's a longer description
of how
the benchmarking process works.
Mind you, it's rather dangerous to apply benchmarks from other sectors. Nonprofits
have cost structures that are closer to small businesses (usually defined
as having fewer than 50 employees) than to large corporations, and benchmarking
initiatives tend to focus on larger companies. Furthermore, nonprofits aren't
exposed to the same kind of financial competition as market-driven businesses,
and though they do get pressure from funders it may not be based on process
efficiency.
An even bigger danger with benchmarks is that they don't necessarily take account of non-financial costs and benefits. You might be able to deliver a paycheck for $3.00, but in a way that is so unreliable and inconvenient for your employees that they hate to work there. Or you might be able to serve 25 clients per hour, but only by giving them ineffective services. Or you might be able to save money on technology by expecting your staff to pick up their email at home on their own time. Benchmarks must be tied to indicators that show whether you are being successful in terms of your agency's mission and values.
It might be difficult to get access to the benchmarking information that APQC
is collecting, since they are a membership organization. Memberships appear
to start at about $9,000/year according to their site, but they may be open
to providing information to charitable organizations if they are approached
properly. For example, Gartner is a consulting firm that collects benchmark
data and sells it for bundles of money, but they have been working with the
US nonprofit Consortium for School Networking
(CoSN), to provide financial benchmarking information for state school
systems.
In fact, at my request Gartner has provided some information for this article
regarding the total
cost of ownership for computers and technology in public sector (i.e., government)
organizations using their proprietary
TCO methodology. Eric Stegman, Research director of Product Management
at Gartner Consulting, reports that the most recent average cost from their
extensive databases of public sector organizations across North America is
$11,457 US/year per workstation. The costs break down as follows (for definitions
on each cost category, see
my previous Charity Village article or the sample
TCO report provided by Compaq, posted as a Word document):
Costs/year/workstation US$
Hardware & Software: $2,129
Operations: $2,062
Administration: $387
End User Operations: $6,791
Downtime: $88
If translated into Canadian currency, the direct costs for managing technology are over $6,200/year for each workstation, plus indirect costs such as end user training and downtime.
For more information on the background to the study, see
this article, which also describes how TCO for the public sector has dropped
significantly over the past few years due to the pressure for more efficiency.
Eric notes, "These are database averages. Costs can range widely depending
on services delivered, complexity, geography, industry, user profiles etc."
He also points out that TCO analyses should always be used in the context
of the value of their technology investments. For example, Gartner recommends
that organizations define clear performance metrics for their technology services,
and then measure costs against those metrics. Sample
metrics suggested by Gartner include:
- At least 98% availability
- Help desk calls answered in 30 seconds or less
- 80% first-call resolution of reported problems
- Response to hardware problems within one hour
- Hardware returned to service within two hours
- Customer satisfaction rating of 80% or better
There are two important points one could imply from the Gartner data. The first is that government organizations probably spend more on their technology than nonprofits do. The second is that public sector funders who refuse to support a reasonable amount for computing costs in their grants to nonprofits could be challenged to show what they are spending on their own technology. A reasonable amount as far as we’ve been able to gather in our research is about $3,000 workstation/ year for direct costs, versus an average of $6,200 in direct costs for the public sector (in Canadian dollars).
APPENDIX
Process Classification Framework
APQC's Process Classification Framework tries
to describe all of the major business functions and divide them into small enough
pieces that they can be measured and compared between organizations. The top
level comprises 'Categories', which are general areas of organizational activities.
Each category is divided into 'Process Groups' and then each process group is
divided further into individual processes. So for example, developing a disaster
recovery plan for organizational information is a subset of process 7.3.5, "Ensure
business continuity (i.e., disaster/emergency preparedness)", which is a subset
of Process Group 7.3 ("Manage information technology infrastructure/ data center
operations"), which is a subset of category 7 ("Manage information technology
and knowledge"). Together, the categories capture most of the core processes
that organizations are likely to engage in, though some categories don't apply
to every organization. Below is a list of all the categories, and then a sample
of process groups and processes relating to information technology.
Categories:
1.0 Develop vision and strategy
2.0 Design and develop products and services
3.0 Market and sell products and services
4.0 Deliver products and services
5.0 Manage customer service
6.0 Develop and manage human resources (HR)
7.0 Manage information technology and knowledge [details below]
8.0 Manage financial resources
9.0 Acquire, construct and manage property
10.0 Manage environmental health and safety
11.0 Manage external relationships
12.0 Manage improvement and change
Examples of Process Groups:
7.1 Plan for information system management
7.2 Application development and maintenance
7.3 Manage information technology infrastructure/ data center operations [details below]
7.4 Support IT services
7.5 Enable collaborative work
7.6 Implement new technologies using change management principles
Examples of Processes:
7.3.1 Manage centralized information technology assets
7.3.2 Deliver centralized operational services
7.3.3 Deliver and manage distributed information technology assets
7.3.4 Manage information technology network operations
7.3.5 Ensure business continuity (i.e., disaster/emergency preparedness)
7.3.6 Test, evaluate, and deploy information technology infrastructure security and controls
7.3.7 Perform metering/billing
7.3.8 Manage IT inventory and assets
7.3.9 Provide operational support
**********
Gillian Kerr, Ph.D., C.Psych.
RealWorld Systems
gkerr at realworldsystems.net
Read my weblog at http://blog.realworldsystems.net
