Deciding factors

11 Jul 11
The public sector cuts have put the spotlight on costs, requiring a fresh focus on data and a big culture change to go with it. Accountants hold the key
By Nigel Hiller | 1 July 2011

The public sector cuts have put the spotlight on costs, requiring a fresh focus on data and a big culture change to go with it. Accountants hold the key

Driving down costs; making cost savings; cost-efficiencies – these phrases feature in everything we read about the public services these days. The current financial climate has moved understanding costs centre stage and challenges all public sector managers to probe their spending more deeply than ever before.

Finance professionals have a central role to play in analysing and explaining costs to decision-makers. They must be able to advise on the relevant information needed for different decisions, know the appropriate technique to apply, and ensure that data sources and the costing process are robust and reliable.

They will also have to convince their organisations of the need for a cost-conscious culture. Some senior staff believe that managing cost is difficult or the province of the finance department. This view has to be overturned and a culture promoted where it is seen as central to all managers’ responsibilities.

To get this in place, organisation heads must lead by example and get the message out that cost matters at all times and at all levels throughout the organisation. This message has to be consistent and reiterated at every opportunity.

Organisations will need to set up supportive systems to build good relationships between operational managers and finance professionals. It is essential that each recognises the contribution and expertise of the other in ensuring that the decision-making process is supported with robust costing information and analysis.

Another way to spread the message is to share examples of how an understanding of costs has brought benefits. To this end, CIPFA has published a briefing on creating a cost-conscious culture, Counting costs: understanding and using costing information to make better decisions. It includes guidance for managers and  examples of using costing information to support better decision-making.

As tough budget targets have been set across public service bodies, organisations now have to deliver on these. The starting point has to be a sound knowledge of the baseline against which managers can check their progress in driving down costs and driving up productivity. Organisations need to develop ownership of costs and expert knowledge of cost behaviours – not only horizontally within services but in categories across the organisation.

The middle manager is vital in making this change happen and must understand the importance of it. If staff at this level are to actively manage and control costs, they need to know how costs behave, what events cause them to change and what are the ‘cost drivers’.

A second CIPFA briefing on improvement actions includes case studies from some private companies, whose lessons might be usefully transferred to the public sector. Many of the private sector’s most successful companies routinely study their costs in detail. It is this meticulous analysis that allows them to pinpoint areas where they can improve cost control, find savings and redirect spending to priority areas.

The case studies reveal two important lessons. One is that analyses of costs need to be tailored to the decision they are designed to support. The second is that the information required does not need to be laboriously or expensively collected. It is often already available to the analysts in customer, HR and land and property databases alongside the general financial ledger, which is the basic source on past spending. Public sector bodies need to fully exploit the cost data they already hold.

It is important to remember that cost analysis is not an end in itself, it simply provides information to support decision-making. Costing techniques are tools to help decision-takers and the choice of technique is not governed by an absolute set of rules covering every eventuality.

Accountants will need to select and apply costing techniques and explain which are best suited to giving decision-takers the information they need. This is an opportunity for finance professionals to demonstrate their skills and the value they bring to the business. They need to bring high-quality cost and performance information together for decision-takers and present this in an easy-to-understand form.

There are three clear steps: know what decision you need to take; identify the right cost information; then secure the right cost analysis.

The challenge for public bodies is to create the conditions where costing information is afforded a high priority and is seen as an integral part of improving performance and operational management.
Finance professionals can help make this happen.

Nigel Hiller is chair of CIPFA’s financial management panel. Counting costs includes downloadable briefings for the wider management and leadership teamTransparent

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