Benchmarks And Best Practices- Basic Concepts

Benchmarks and Best Practices – Part-1 by Tarun Das

Benchmarks Setting and Best Practices For Output Costing and Output Budgeting Part-1: Basic Concepts

Prof. Tarun Das1, Ph.D. Glocoms inc. (USA) Strategic Planning Expert ADB Capacity Building Project on Governance Reforms

Government of Mongolia Ministry of Finance 31 December 2007

1

Formerly Economic Adviser, Ministry of Finance and the Planning Commission, Government of India, and Professor (Public Policy), Institute of Integrated Learning in Management, New Delhi, India. For any clarifications contact [email protected].

Ministry of Finance

1

Glocoms Inc. (USA)

Benchmarks and Best Practices – Part-1 by Tarun Das

Benchmarks Setting and Best Practices For Output Costing and Output Budgeting Part-1: Basic Concepts

Contents Benchmarks and Benchmarking What is a Benchmark? Benefits of Benchmarking The Gap analysis and Activity Modeling Benchmarks Setting Benchmarks for unit costs Unit cost goals Ideal characteristics of benchmarks Broad types of benchmarks Benchmarks setting- issues and options 2.5.1 Stringency for benchmarks: Free riders and rewarded options 2.5.2 How aggregates should benchmarks are? 2.5.3 Benchmarks basis an data survey 2.5.4 Trend lines versus recent averages 2.5.5 Boundaries for benchmarks 2.5.6 Cost of benchmark development Steps involved in benchmark setting Mathematical Models on Benchmarks Best Practices for Cost Management Total Cost Management (TCM) Philosophy TCM Tools for strategic control of business Policies and Measures for Cost Reduction SELECTED REFERENCES GLOSSARY

Ministry of Finance

2

Glocoms Inc. (USA)

Benchmarks and Best Practices – Part-1 by Tarun Das

Benchmarks Setting and Best Practices For Output Costing and Output Budgeting Part-2: Applications for Mongolia Practical Examples of Benchmarks Benchmarks for Program Budget of MOECS Preschool education services 24-hour kindergarten services Preschool education services in rural areas Cost, Efficiency and Quality Benchmarks 5.2.1 Cost dimensions benchmarks 5.2.2 Quality dimensions benchmarks 5.2.3 Better practice benchmarks 5.2.4 Efficiency dimension benchmarks 5.2.5 Fixed assets activity benchmark Benchmarks for composition of cost 5.3.1 Benchmarks on the basis of cross section data 5.3.2 Time series data on the composition of current expenditure Benchmarks on salaries and wages Benchmarks for headquarter current expenditure Administrative expenditure at the national level Administrative expenditure in line ministries Workforce Employment Model

SELECTED REFERENCES

Ministry of Finance

3

Glocoms Inc. (USA)

Benchmarks and Best Practices – Part-1 by Tarun Das

Benchmarks Setting and Best Practices For Output Costing and Output Budgeting Part-1: Basic Concepts

1. Benchmarks and Benchmarking 1.1 What is a Benchmark? Benchmark is an indicator for performance measurement. In the case of output costing and budgeting, benchmarks imply some standard norms for unit output costs or input-output ratios in order to minimize costs. Benchmarks can also be specified for cost escalation factors for some cost items in order to take care of the impact of inflation on output cost in future. Benchmarking is a tool that helps to improve the efficiency of business processes or to reduce the output costs. Benchmarking is a highly respected practice in the business world and any business process can be benchmarked. It is an exercise that looks outward to find out who is the very best, who sets the standard and what that standard is. Then it measures actual business operations against those goals. However, many people make mistakes when they limit their benchmarking endeavors within their own agency and try to specify some activity as benchmark within it. This does not help much because the organization already knows enough about itself and probably knows what works and what doesn't. Some people make another mistake. They think they must take their competitor as benchmark. This may not help much because the competitor may be worse than the agency under study. Instead, one should benchmark oneself to a company that is well known for being a good model, sometimes referred to as Best Practices, Exemplary Practices or Centre of Business Excellence. By Benchmarking an organization can find;  Who performs the business process very well and has process practices that are adaptable to the organization under study?  Who is the most compatible agency for benchmarking? It is necessary to conduct a comprehensive benchmark study. Once one decides what to benchmark and how to measure it, the object is to figure out how the winner got to be the best and to determine what one has to do to get there. Benchmarking is usually part of a larger effort and usually combines a Process Re-engineering and Quality Improvement initiatives. It is, in fact, closely related to the exercises and measures on the Total Productivity Management (TPM), Ministry of Finance

4

Glocoms Inc. (USA)

Benchmarks and Best Practices – Part-1 by Tarun Das Total Cost Management (TCM) and Total Quality Management (TQM). Most of the early work in the area of benchmarking was done in manufacturing. Now benchmarking is a management tool that is being applied almost anywhere. 1.2 Benefits of Benchmarking As a financial management improvement strategy, benchmarking helps organizations identify standards of performance in other organizations and to import them successfully to their own. It allows organizations to discover where they stand in relation to others in respect of unit costs and productivity. By identifying, understanding and comparing the best practices and processes of other organizations with its own, an organization can target problem areas and develop solutions to achieve best levels of performance. A public-sector organization can borrow the best practices of the private sector, and vice versa. Benchmarking for best practices allows organizations to: • • • • • • • •

Determine the criteria underlying performance Identify specific problem areas for performance Improve on the delivery and quality of services. Make better-informed decisions Expose to innovations and breakthroughs Deal with a cost reduction or productivity improvement methodology See beyond the barriers, embrace change, and think "outside the box" Prepare an action plan for accelerating, implementing, and managing change.

As it has an outward view, benchmarking can have a powerful impact on organizations. When conducted regularly, it can reduce waste, improve operational efficiency, and support many organizational processes, from budgeting to strategic planning. Benchmarking looks beyond performance measures and cost ratios. It considers the total organizational impact and helps an organization to: • • •

Determine how leading organizations perform specific process(es) Compare their activities and processes with its own, and Use the information to improve upon or completely change its processes.

A 1995 research study conducted by the International Benchmarking Clearinghouse of the American Productivity and Quality Center (APQC) demonstrated significant leverage obtained from the benchmarks. More than 30 organizations reported an average $76 million first-year payback from their most successful benchmarking project. Among the most experienced benchmarkers, the average payback increased to $189 million.

Ministry of Finance

5

Glocoms Inc. (USA)

Benchmarks and Best Practices – Part-1 by Tarun Das

The study identified several differences that characterized the most experienced benchmarkers. These factors included senior management's strong support of benchmarking and a culture that generally encouraged teams to seek out and adapt ideas originating outside the organization. The study found that the most experienced benchmarkers often made a business case (cost/benefit projection) before implementing benchmarking findings. They also followed up projects by measuring the operational and financial results of implementation. These measurements give a company greater leverage to spread a successful implementation throughout the enterprise and to promote more extensive use of benchmarking. Benchmarking's positive influence extends beyond improving a particular business process. It promotes the emergence and evolution of a "learning culture" throughout the enterprise-a key to continuous improvement, total quality, and competitiveness over the long term. Senior management is challenged more than ever by issues of quality, costs, competitiveness, rapid change, old culture, new technology, and-in some casesthe need to reinvent the enterprise. Strategic initiatives dot the corporate landscape. A common theme is the need to make better-informed decisions by improving the management information system (MIS). Various questions may be raised by the top management: How do we restructure accounts payable to reduce days outstanding? Why do we still get so many stakeholders’ complaints? How can we improve service delivery without increasing costs? Why do competitors beat us in the market? How do we further improve product or service quality? 1.3 The ‘Gap Analysis’ and ‘Activity Modeling’ In order to specify benchmarks, it is necessary to gain a clear understanding of the scope of the projects of the competitors, the methodology they used, the critical success factors they identified, the challenges and opportunities they faced in implementation, and the important lessons they learned. This is known as the best practices review (detailed discussions are given in the next section). When examining the best practices of others and drawing lessons, an organization often performs what is called a "gap analysis." This is a way to identify the performance and operational differences between an agency and that of the benchmarking partners, and to understand why the differences exist. One way to identify these gaps is through a technique called "activity modeling," a useful method for understanding how a business process really works by first describing how things are ("as-is" modeling), and then by specifying how they ought to be ("to-be" modeling).

Ministry of Finance

6

Glocoms Inc. (USA)

Benchmarks and Best Practices – Part-1 by Tarun Das 2. Benchmarks Setting 2.1 Benchmarks and Unit Costs Benchmarks set the standard, or point of comparison against which a measure could be assessed. Often this standard for an output is the unit cost by comparable agencies or the best result achieved over a period of time. Unit cost is the "average total cost" of producing one unit of output. It is calculated by dividing the total cost of production by the total number of units of output produced. For example, if an automobile manufacturer produces 50 vehicles for a total cost of $1,250,000, then the cost per unit (vehicle) is $25,000.

The Activity Based Cost (ABC) system uses cost drivers to assign the costs of resources to activities. ABC can use unit cost as a way of measuring an output cost. It includes direct and indirect costs for labour, plant and machinery, goods and services.

Ministry of Finance

7

Glocoms Inc. (USA)

Benchmarks and Best Practices – Part-1 by Tarun Das

2.2 Unit Cost Goals Unit cost goal is a financial benchmark which represents the maximum allowable total cost incurred in the production of an output, based on the approved budget. Though the goal is stated on a per output basis (i.e., cost per direct labor hour or cost per dollar of sales), a business area's achievement of the goal is measured on total costs compared to total output. For example, in the area of Depot Maintenance, a unit cost goal might be to not exceed a cost of $85 per direct labor hour. At the end of the fiscal year, if the direct labor hours worked were 1,750,000, then costs should not exceed $148,750,000 which equals 1,750,000 direct labor hours x $85 = (total output) x (unit cost goal) = total costs allowed . The Manager develops and issues unit cost goals at the component level for each support area. These goals are based on historical data and adjusted for known and anticipated changes in the budget year. Factors that can impact these goals include: • •

expected increases in the purchase prices of inputs; increased productivity based on improved processes; and so on.

Benchmarks could also be specified for these factors, as indicated below: • If the purchase price of an input (i) increases by R%, escalation factor for the rise of production cost would be Ri X Wi • where Ri = WPI inflation rare for the input i, and Wi = Share of the input cost in total production cost. It is important to distinguish between unit cost and a unit cost goal. Unit cost is the actual direct labor and other direct costs plus an allocated amount of actual indirect and overheads costs for producing an output. The unit cost goal is a fiscal target of the estimated unit costs based on norms and benchmarks. 2.3 Ideal Characteristics of Benchmarks Benchmarks must satisfy the following criteria: 1. Credible – to ensure that benchmarks satisfy basic costing principles, 2. Transparent – to ensure that assumptions on the basis of which benchmarks are specified are explicit and well-vetted, and 3. Practical – to ensure that undue transaction costs and time are not incurred to collect basic data.

Ministry of Finance

8

Glocoms Inc. (USA)

Benchmarks and Best Practices – Part-1 by Tarun Das

Benchmarks can be created at various levels of aggregation (e.g., broad output groups, individual outputs or individual programs). Benchmarks can be aggregate (as opposed to project-specific). The aggregate benchmark approach seeks to apply a benchmark across a number of projects. Disaggregation might lead to greater accuracy and more credibility, but greater development cost. Aggregation also implies a different institutional process for constructing benchmarks compared to project-specific benchmarks, and implies a more harmonized, vetted, and transparent methodology. 2.4 Broad Types of Benchmarks Benchmarks can be grouped in two broad categories. 1. Standardized or Uniform- For a particular output (or group of outputs),

benchmarks hold goods for all line ministries, agencies and all regions 2. Unstandardized or Non-Uniform- For a particular output (or group of

outputs), benchmarks vary among line ministries, agencies and regions At one extreme, benchmarks for an output (or group of outputs) can be standardized i.e. uniform across all ministries, agencies and Aimags e.g., we can set a uniform benchmark for the share of compensation of labor in total current expenditure for all budget entities. Similarly, we can have the same teacher/ student ratio for all primary schools irrespective their locations. Such a benchmark is presumed to hold good for the whole family of homogeneous outputs or the same type of outputs. At the other extreme, unstandardized benchmarks can be specified for each output group or for each line ministry. Benchmarks can also be project-specific or area-specific depending on the unique technical, economic and political context of the project. This approach is unstandardized in the sense that it uses areaspecific and program-specific information, analyses and assessments to judge the appropriate baseline estimate of costs without being constrained by standard assumptions that are supposed to apply across different projects. Each of these two types of approaches has its strengths and weaknesses as shown in Table-1 with respect to the three above criteria viz. credibility, transparency, and practicality.

Ministry of Finance

9

Glocoms Inc. (USA)

Benchmarks and Best Practices – Part-1 by Tarun Das

Table-1: Relative Merits of Standardized and Unstandardized Benchmarks Standardized Benchmarks

Unstandardized Benchmarks

Uniform and rigid benchmark for all line ministries Based on output-category-wide information Credible for family of projects

Different and flexible benchmarks for line ministries Based on ministry-specific information

Transparent; simplified review process

Not transparent; cumbersome review process High transaction costs and more time for benchmarks setting Rewards any program that has lower costs compared to the average of benchmarks

Lower transaction costs and less time for benchmarks setting Rewards any program that has lower costs compared to benchmarks

Credible for individual projects

2.5 Benchmark Setting- Issues and Options As with program-specific baselines, there is no single or objective procedure for

establishing a benchmark. Instead, there is a series of alternative methodological options that can be considered for setting benchmarks: 1. Benchmarks can differ based on the availability and source of data. They can rely on historical data on past performance of existing outputs and costs within a sector. Or, they can rely on Projections of future behavior in the light of emerging changes in demand, market responses to resource prices, capital stock turnover, sector restructuring, availability of capital, and public policies. 2.

Benchmarks can differ depending on the sample population on which they are based. They can be based on information of all programs in a given ministry.

3.

Benchmarks can differ based on their stringency of setting. They can be set to reflect the average (or median) value of the use of programs under the same ministry. They can also be set at the better-than average value relative to the sample population to ensure some improvements in efficiency.

4.

H  ybrid approaches that adopt average value for some outputs and better-than average value for other outputs, because a uniform approach for benchmark setting may not be appropriate for all output groups due to variations in technology and input-mix.

Ministry of Finance

10

Glocoms Inc. (USA)

Benchmarks and Best Practices – Part-1 by Tarun Das

5.

Benchmarks can also be set on the basis of expert judgment and stakeholder processes, which are less empirically based.

6. Time-varying behavior- Again adopting the same benchmarks over time even for the same output group may not be appropriate because it presumes that there is no scope for improvement in productivity. There may also be variations in input costs due to unforeseen events such as energy price shocks, new resource discoveries, technological innovations, changes in public policy and regulations etc. Therefore, frequent benchmark updates may be needed to respond to ongoing evolution in both domestic and external markets. Once benchmarks are set, an agency can develop a system of rewarding the activities that significantly improve upon their peers. At first sight, average benchmarks might appear to be more “empirical” and “objective,” while betterthan-average benchmarks might appear to be subjective because they rely on choosing an “arbitrary” threshold. However, the average (or median, etc.) value is also equally arbitrary threshold for setting a benchmark, because an average value conceals more than it reveals. 2.5.1 The stringency of benchmarks: Free-riders or rewarded options Neither standardized benchmarks nor program-specific nor output-specific benchmarks can be exactly precise. All benchmarks introduce some amount of free-riders and missed opportunities. In an ideal case, program-specific benchmarks avoid these problems by accurately reflecting the efficiency in planning and implementation. In reality, however, such perfect insight is impossible. The scenario developed under a program-specific approach may change due to random and unforeseen events.

The accuracy and credibility of benchmarks can be assessed on an aggregate level across the entire agency or line ministry, rather than for individual programs. With an average/ median value benchmark, any program with lowerthan-average value of the benchmark cost would qualify for rewards. By definition, this allows approximately half of the existing programs in the sector to qualify for rewards. Better-than-average benchmarks, by establishing better rather than average or median behavior as the threshold, reduces the number of projects to be rewarded. It also increases the likelihood of unrewarded programs that are missed because the benchmark provides insufficient incentive. The better-thanaverage benchmark approach thus requires an institutional process for considering these tradeoffs. There are several better-than-average approaches that could be followed: percentile methods based on historical experience, and performance standards based on judgment.

Ministry of Finance

11

Glocoms Inc. (USA)

Benchmarks and Best Practices – Part-1 by Tarun Das

2.5.2 How aggregate should benchmarks be? When activities for a given category of outputs or programs differ significantly due to technical reasons, it may not be appropriate to estimate unique aggregate benchmarks. However, a single aggregated sector-wide benchmark would be appropriate in those line ministries or agencies which have limited opportunities to switch to less input intensive techniques of production and so have less variations in input-output coefficients. A single benchmark based on a sectorwide aggregation would provide incentives to the individual programs having costs less than benchmarks. 2.5.3 Benchmark basis and data sources As the basis for benchmark setting, historical performance data are more promising than projections. Projections of input-output coefficients are highly subjective and depend on assumptions. Detailed and comprehensive projections of input intensities even by the competent experts can differ considerably and imply significantly different benchmarks. It is, therefore, preferable to adopt either a time series or cross-section data or pooled data combining both the time series and cross-section data. 2.5.4 Trend lines versus recent averages Benchmarks can also be constructed based on a linear regression trend line that reflects the observed (or projected) evolution of the sector over time (generally declining trend implying increase in productivity), or on a simple recent average over an appropriate period of time (single-value baseline). Trend lines are appropriate when there is some understanding of the underlying cause of the trend and reason to believe that extrapolating the trend will adequately characterize future behavior. Where there is not a statistically discernible trend, or no basis for believing that an existing trend will persist, it might be more suitable to choose a single-value average over a suitable period of time. 2.5.5 Boundaries for benchmarks Benchmarks are influenced by various factors such as project lifetime, economies of scale and full business cycle accounting. Sometimes it may be appropriate to set a range for a benchmark rather than indicating a unique value. This is necessary when a project has a long gestation period and is going through different phases of the business cycles or there is scope for economies of scale in future by expanding capacities.

Ministry of Finance

12

Glocoms Inc. (USA)

Benchmarks and Best Practices – Part-1 by Tarun Das

Thus we have different options for benchmarks as indicated in Table-2. Ideally benchmarks should be stringent (having better than value) and dynamic (updated over time), but unique and fixed for an output (or group of output) based on historical and aggregate values. Table-2 Types of Benchmarks Options Items

Alternative-1

Alternative-2

Source of Data

Historical (on the basis of past values)

Type of data

Time series ( data for the same output group over time)

Population / Sample

All projects (old and new)

Projection by fitting trends and extrapolating for future Cross section ( data for the same output for different agencies in a given year) Only new projects

Aggregation

Sector-wide average value (mean or median) adopted for the output for all agencies Average value (mean or median)

Disaggregated (different benchmarks for the same output in different agencies) Better-than-average value

Fixed over time

Updated over time

Stringency Dynamics

2.5.6 Costs of benchmark development It is not possible to draw firm conclusions regarding the comparative cost of single aggregated sector-wide benchmarks versus project-specific benchmarks. The relative cost depends on the precise benchmarking approach to be followed, the extent to which it relies upon historical data, projections of major parameters, related modeling efforts, and the degree to which economies of scale can be exploited (i.e., the number of projects subject to aggregate benchmark). If benchmarks are based on historical performance data within a sector, it is important to ensure the availability of appropriate time series and cross-section data. In some sectors (e.g., industry, buildings), this may require some additional data collection efforts because such data may be subject to proprietary or confidentiality concerns. So, it is important to ensure effective cooperation of agencies for data reporting, and provide some incentives e.g., the Ministry of Finance may make full reporting a prerequisite for benchmark eligibility and a part of performance criterion for budget allocation.

Ministry of Finance

13

Glocoms Inc. (USA)

Benchmarks and Best Practices – Part-1 by Tarun Das

2.6 Steps involved in benchmarks setting Different steps in benchmarks setting are summarized below: a) Identify and describe key factors of production for an output or output group. b) Calculate the input-output coefficients. c) Establish theoretical benchmark metrics and classify candidate benchmark types in the light of: • heterogeneity of feedstocks/inputs and products/outputs • level of standardization and aggregation of outputs • geographical aggregation. d) Assess data requirements and availability of time series and cross section data for an output (or group of outputs) e) Estimate indicative benchmarks f) Evaluate impact of different benchmarks on output cost In Part-2 of this paper, we provide some practical examples of Benchmarks for the Mongolian budget such as benchmarks for composition of output cost, benchmarks for salaries and wages, benchmarks for administrative and headquarter expenditure, and escalation factors for different components of output cost. We also discuss various types of benchmarks such as cost dimensions benchmarks, quality dimensions benchmarks, better practice benchmarks, efficiency dimension benchmarks and fixed assets activity benchmark. Part-2 also deals with the Workforce Employment Model used by the Australian budget entities. All these methods can also be used for Mongolia, provided necessary data and information are available for this purpose. 3 Mathematical Models on Benchmarks Best example of the use of a mathematical model to determine benchmarks is to fit hedonic regression equations. The method is generally used where the products are heterogeneous and have wider variations in qualities. This is true for buildings and houses whose prices depend on size, structure, location and many other characteristics. Housing mortgage companies in Canada, UK and USA use hedonic model to determine housing prices while providing mortgage finance to their clients. The model is described below.

Ministry of Finance

14

Glocoms Inc. (USA)

Benchmarks and Best Practices – Part-1 by Tarun Das

A. Hedonic Model Suppose, our objective is to estimate the construction cost of school buildings. Instead of using engineering approach with detailed costs of manpower, raw materials etc. which require huge data base, a hedonic model can be used to estimate the approximate cost of a new school building. As the time, location, size, types etc of building projects are different, they must be adjusted for while making the cost estimate. Under the hedonic approach, a multi-variable hedonic regression equation is estimated by regressing building prices on various characteristics of buildings: Ln (BPit) = β

0

+ ∑ β i ln (Xit) + uit

This equation is a simple lognormal hedonic function, where Ln stands for natural logarithms, and BPit Xit

= Building prices for unit-i in time t, and = Different building characteristics as given below.

(1) Land area (2) Tenure of land: freehold, leasehold, public. (3) Type of building: Single storey, multistoried (4) Number of storey (5) Floor size (square feet) (6) Number of rooms: class rooms, common rooms, canteens, stores, auditoriums, laboratories, libraries, sports rooms, bathrooms/ toilets (7) Number of garages and garage spaces/ No garage or parking spaces (8) Age of the property. (9) Central heating: none, full, partial. (10) Garden, playground (11) Location (region) can be represented by dummy variables (12) Location in relation to bus-stops, railway stations, hospitals, public parks, eating places, shopping centres etc. can be represented by dummy variables. In the above equation, β i is the elasticity of the building cost (or price) with respect to the respective characteristics i.e. β i = δln (BPit) / δln (Xit) for all i = 1, 2, 3, …………….k These β i's can be taken as benchmarks for adjusting buildings costs for variations in characteristic of houses and apartments.

Ministry of Finance

15

Glocoms Inc. (USA)

Benchmarks and Best Practices – Part-1 by Tarun Das

B. Straight forward mathematical models Some common and straight forward mathematical approaches to estimate buildings costs are described below. 1) Adjustment for Location Equation (1) is to be used to adjust the previous projects cost data for the City Cost Index. CA = CN (IA / IN)

(1)

Where CA = cost in dollars for city A; CN = national average cost in dollars; IA = index for city A; IN = index based on the major city. 2) Adjustment for Time (to consider the impact of inflation) We can use equation (2), which uses the change in value of an index between two years, to calculate an equivalent interest rate. Icurrent / Ireference = (1 + R )ª

(2)

Where a = number of years between current year and reference year; Icurrent = Index for current year; Ireference = index for reference year; R = interest rate 3) Adjustment for Size The use of cost information from a previous project to forecast the cost of future projects has to be adjusted for the difference in size between two projects. Simplest method is to use a linear formula. However, there are complex methodologies suggested by Peurifoy and Oberlender (2002). 4) Adjustment for Height, Exterior Wall and Structure Type Optional parameters can be estimated to account for these variations in engineering and structural characteristics. Various engineering studies such as by and Meyer and Burns (1999) can be consulted for making these adjustments. Such parameters can enhance the accuracy and efficiency of the cost estimate for the proposed project.

Ministry of Finance

16

Glocoms Inc. (USA)

Benchmarks and Best Practices – Part-1 by Tarun Das

(5) Life Cycle Cost (LCC) computing The various components of building costs include construction cost, overheads and maintenance (O&M) cost and disposal cost or their cost element through further breakdown. Mathematic model of LCC computing has been developed by many scholars. Here we use the model by Kishk. and Al-Hajj (2000).

Ministry of Finance

17

Glocoms Inc. (USA)

Benchmarks and Best Practices – Part-1 by Tarun Das

4. Best Practices for Management of Cost and Productivity Benchmarks are norms for rationalism of costs and optimization of production. However, agencies need to adopt policies and measures to enhance productivity and efficiency and to minimize production and delivery cost of output. Some of the well established methods and best practices for management of cost and productivity are described below. 4.1 TCM philosophy Total Cost Management (TCM) is a management planning and control system adopted by an agency to enable it enhance its competitiveness. It involves the following tasks: • Identifying and measuring the cost of resources consumed in performing the significant activities of the agency. • Determining the efficiency and effectiveness of the activities performed. • Identifying, evaluating and implementing the most appropriate methodologies to enhance the competitiveness of the agency. 4.2 TCM tools for strategy control of a business There are various TCM tools which are applied in managing strategies such as: target cost management; vendor cost analysis; total cost of purchases, customer/market segment profitability; channel profitability; and product line profitability management. There are also various TCM tools which are deployed for operational control. These include: activity management; cost-driver analysis; cost of quality; support tool for TCM/TPM; and performance measurement at business process level. It is not necessary that an agency uses all the TCM tools. The selection of the tool depends upon the needs of the strategy. TCM tools can be easily integrated with TQM (total quality management) and TPM (total productivity management) tools. TCM can also provide an ideal support for policy deployment in the domain of resource planning and its accountability in utilization. TCM cannot be implemented overnight. In the initial stages, pilot projects can be completed to test the model and to formalize the conceptual framework. Gradually over time, the cost information system should become an integral form of the value system along with quality, time, safety and environment. Initially TCM can be implemented without software support. But, as the agency gains maturity in the medium term, software support will be needed to sustain the value system created and move towards advanced stages of maturity.

Ministry of Finance

18

Glocoms Inc. (USA)

Benchmarks and Best Practices – Part-1 by Tarun Das 4.3 Cost reduction policies and measures It is necessary to adopt various policies and measures to rationalize output costs. Best practices for improving productivity and reducing cost are summarized in Table-3 below. Table-3 Cost reduction policies and measures Policies

Measures

Ensure that work practices are aligned with the vision, mission and objectives specified in the Strategic Business Plan and Master Plan of the Ministry

• Continue inclusion of values in the performance parameters • Enhance existing learning and development programs • Align recruitment and selection policies and practices

Improve transparency and consistency of decision making

• Develop management structure to enhance transparency in decision making. • Develop procedures to ensure enforcement actions are consistent and appropriate. • Review implementation of the management framework with overall objectives of the agency.

Improve enforcement regime

• Review enforcement rules and procedures and suggest changes for improvement. • Establish effective analytical methods for assessing enforcement strategies.

Develop and strengthen risk management strategy as an integral part of operational and business strategies

• Expand and improve risk management framework for identification, mitigation and control of risks and contingent liabilities

Engage cooperatively with all stakeholders

• Enhance consultation activities with stakeholders

Increase overall efficiency by optimal use of all resources – man, materials, machines and services

• Enhance cost consciousness of all staff • Have an action plan for cost efficiency for the short and medium term

Ministry of Finance

19

Glocoms Inc. (USA)

Benchmarks and Best Practices – Part-1 by Tarun Das

Formulate policies and set up institutes Following measures may be taken as a for purchase, sale and maintenance of package for efficient asset management: both financial and non-financial assets. • Integrated Planning - Asset management decisions are integrated with strategic planning. • Acquisition Planning - Asset planning decisions are based on an evaluation of alternatives to ownership, including non-asset solutions and demand management. The evaluations should include a comparison of life-cycle costs, benefits and risks. •

Accountability - An effective framework is established to identify accountability for asset conditions, use and performance.

• Disposal Planning - A framework for the disposal process is in place indicating methods to achieve the best net return. • Control Framework - An effective internal asset control mechanism is established for formulation of asset policies and procedures and use of appropriate information systems. • Improve quality and delivery of public goods and services

Continuous improvement in the agencies services, processes, techniques, systems, knowledge and information management

• Establish world-class works culture for clients’ satisfaction • Upgrade technology to achieve efficiencies

Ministry of Finance

20

Glocoms Inc. (USA)

Benchmarks and Best Practices – Part-1 by Tarun Das

• Maintain sound and cordial working relationships with the Minister, and all Ministries, Aimags and other Agencies

Maintain a high level awareness and compliance of government policy directions

• Support the timely implementation of all government directives • Support the Medium Term Expenditure Policy and Framework of the Ministry of Finance Create a work environment that attracts and develops motivated, capable and high-performing officials

• Develop a more flexible employment framework • Develop and embed a high performance culture • Develop a workforce plan and systems with rewards for best performers and punishments for poor performers • Continuously improve the quality of monitoring, reviewing and reporting

Deliver enhanced level of organisational integrity, ethics, probity, governance and accountability

• Establish and implement appropriate fraud, ethics and privacy awareness policies, rules and procedures • Establish and ensure effective and efficient operation of the Audit and Risk Committee

Ministry of Finance

21

Glocoms Inc. (USA)

Benchmarks and Best Practices – Part-1 by Tarun Das

Selected references American Productivity and Quality Center (APQC) (1995) Organizing & Managing Benchmarking Final Report, the International Benchmarking Clearinghouse of the Houston, Texas, 1995. American Productivity and Quality Center (APQC) (1999) Benchmarking: Leveraging Best-Practice Strategies, An APQC White Paper for Senior Management, APQC, Houston, Texas, USA. Australian National Audit. Office (2000) Benchmarking the Finance Function, The Auditor General Audit. Report No. 25 2000–2001, Commonwealth of Australia 2000. Bogan, Christopher E. and English, Michael J. (1995) Benchmarking for Best Practices, McGraw Hill Inc., New York. Borins, Sandford F. and Alan D. Altshuler (1998) Innovating with Integrity: How Local Heroes are Transforming American Government. Bureau of the Budget (BOB) Budget Modernization Program (1999) Report of Graham Scot and Lewis Hakwe, Sector Experts, Office of the Civil Service Commission Pilot Project, Thailand, Bangkok. Commonwealth Competitive Neutrality Complains Office (CCNCO) (1998) Cost Allocation and Pricing, CCNCO Research Paper, Commonwealth of Australia, Canberra, October 1998. Camp, Robert C. (1989) Benchmarking: The Search for Industry Best Practices that Lead to Superior Performance, ASQC Quality Press, Milwaukee, Wisconsin. Camp, Robert C. (1995) Business Process Benchmarking, ASQC Quality Press, Milwaukee, Wisconsin. Confederation of Indian Industry (CII) (2005) Understanding Total Cost Management — A Primer, released by CII (Southern Region) at the Fourth International Cost Congress held on December 19-20, 2005 in Chennai, India. Cullen, Michael (2003) Setting the benchmark for public management, Media Statement by the Honorable Finance Minister Michael Cullen, Government of New Zealand, 3 December 2003. Czarnecki, Mark T. (1999) Managing by Measuring: How to Improve Your Organization’s Performance Through Effective Benchmarking.

Ministry of Finance

22

Glocoms Inc. (USA)

Benchmarks and Best Practices – Part-1 by Tarun Das Das, Tarun (2006) Housing Price Indices- International Best Practices and An Operational Housing Price Index for India, pp.44-54, Bima Vidya, Journal of the Management Development Centre, Borivili West, Mumbai-400003, March 2006. Das, Tarun (2007) Services Production Price Indices- Conceptual Issues, International Practices and Lessons for India, pp.1-24, Working Paper, Institute for Integrated Learning in Management, New Delhi, February 2007.

Das, Tarun and E. Sandagdorj (2007a) Preparation of Strategic Business Plans- Guidelines and Suggestions for Improvement, ADB Capacity Building Project on Governance Reforms, Ministry of Finance, Government of Mongolia, Ulaanbaatar, August 2007. Das, Tarun and E. Sandagdorj (2007b) Output Costing and Output Budgeting, ADB Capacity Building Project on Governance Reforms, Ministry of Finance, Government of Mongolia, Ulaanbaatar, October 2007. Das, Tarun and E. Sandagdorj (2007c) Accrual Accounting and Accrual Budgeting, ADB Capacity Building Project on Governance Reforms, Ministry of Finance, Government of Mongolia, Ulaanbaatar, October 2007. Department of Treasury and Finance (2006) Costing Fees and Charges: Guidelines for Use by Agencies, Government of Australia, December 2006. Department of Treasury and Finance (2007) Costing and Pricing of Government Services- Guidelines for Use by Agencies in the Western Australian Public Sector, Fifth Edition, Government of Western Australia, April 2007.

Gilbert, Lester (2007) Preparing a ‘Full Economic Costing’ Budget for a JISC Research and Development Proposal, Learning Societies Lab, Electronics and Computer Science, University of Southampton. Government of Australia, Council on the Cost and Quality of Government (2001) Annual Report 2001, NSW Premier's Department, GPO BOX 5341, Sydney, NSW 2001. Keehley, Patricia (1996) Edited. Benchmarking for Best Practices in the Public Sector: Achieving Performance Breakthroughs in Federal, State, and Local Agencies, Jossey-Bass series. Kishk, M. and A. Al-Hajj (2000) A fuzzy model and algorithm to handle subjectivity in life cycle costing based decision making, Journal of Financial Management of Property and Construction, 5(1-2): 93-104, 2000. Kren, Leslie and Thomas Tyson (2003) Distinguishing Unit-level and Higherlevel Resources: Adding a Strategic Dimension to the Traditional Activity Hierarchy, University of Wisconsin–Milwaukee.

Ministry of Finance

23

Glocoms Inc. (USA)

Benchmarks and Best Practices – Part-1 by Tarun Das

Lazarus, Michael, Sivan Kartha, Michael Ruth, Steve Bernow and Carolyn Dunmire (1999) Evaluation of Benchmarking as an Approach for Establishing Clean Development Mechanism Baselines, Tellus Institute and Stockholm Environment Institute, Boston, October 1999. Meyer, R. E. and J. T. Burns (1999) Facility Parametric Cost Estimating, Transaction of the AACE 43rd Annual Meeting, June 1999. Monahan, Kathleen E. (2000) Balanced Measures for Strategic Planning: A Public Sector Handbook. O’Ryan, Stephen and Tony Lansdell (2000) Benchmarking for the Judiciary, Family Court of Australia, Darwin, July 2000. Peurifoy, L. and G. D. Oberlender (2002) Estimating Construction Costs, 5th Edition, McGraw-Hill Companies, 2002. Ren, Guoqiang and Qianying Zhang (2006) Benchmarking the Life Cycle Cost Management of Building Project, Management School, Tianjin University of Technology, Tianjin 300384，P.R.China. United States General Accounting Office (GAO) (1995) Best Practices Methodology: A New Approach for Managing Government Operations, GAO/NSIAD-95-154, National Security and International Affairs Division, Washington D.C., May 1995. United States General Accounting Office (GAO) (2002) Best Practices: Taking a Strategic Approach Could Improve DoD’s Acquisition of Services. GAO-02-230, Washington D.C., Jan 2002. Victorian Government Department of Human Services (2007) Costing and Pricing Guide, Office for Children, State of Victoria, Department of Human Services, Melbourne, Victoria, Australia February 2007. Wargo, Richard A. (1995) How to avoid the traps of benchmarking customer satisfaction," Continuous Journey (APQC periodical), American Productivity and Quality Center, Houston, Texas, USA, Summer 1995.

Ministry of Finance

24

Glocoms Inc. (USA)

Benchmarks and Best Practices – Part-1 by Tarun Das Glossary of Benchmarking, Best Practices and Costing Terms Activity A series of transactions that translates inputs into outputs using resources as per strategic business plan. Benchmark A measured, "best-in-class" achievement; a reference, a norm or measurement standard for comparison; this performance level is recognized as the standard of excellence for a specific business process or activity. Benchmarking The process of identifying, learning, and adapting outstanding practices and processes from any organization, anywhere in the world, to help an organization improve its performance. Benchmarking gathers the tacit knowledge--the know-how, judgments, and enablers--that explicit knowledge may often miss. There are various interpretations of benchmarking as reproduced below. Benchmarking is the process of improving performance by continuously identifying, understanding, and adapting outstanding practices and processes found inside and outside the organization. Benchmarking focuses on how to improve any given business process by exploiting "best practices" rather than merely measuring the best performance. Best practices are the cause of best performance. Studying best practices provides the greatest opportunity for gaining a strategic, operational, and financial advantage. Benchmarking A tool that helps to improve the efficiency of business processes or to reduce the output costs. Any business process can be benchmarked. Benchmarking An activity that looks outward to find who is the very best, who sets the standard, and what that standard is. Then it measures actual business operations against those goals. Benchmarking gap: The difference in performance between the benchmark for a particular activity and other companies in the comparison; the measured leadership advantage of the benchmark organization over other organizations. Best-in-class Outstanding process performance within an industry; has the same connotation as best practice and best-of-breed. Best-of-breed Outstanding process performance within an industry; has the same connotation as best practice and best-in-class. Best practice Outstanding process performance within an industry; has the same connotation as best-of-breed and best-in-class. There is no single "best practice" because best is not best for everyone. Every organization is different in many ways such as different missions, cultures, environments, technologies, Ministry of Finance

25

Glocoms Inc. (USA)

Benchmarks and Best Practices – Part-1 by Tarun Das input-mix and product-mix. What is meant by "best" are those practices that have been known to produce superior results; selected by a systematic process; and judged as exemplary, good, or successfully demonstrated. Best practices are then adapted to fit a particular organization. Capability mapping The analysis of the business infrastructure of an organization to determine unique abilities and potential. Code of conduct A behavioral convention that describes the protocol of behaviors--the set of conventions prescribing correct etiquette and procedures to be used in a common activity. Common interest group A network of individuals who share a mutual interest in a specific subject and have agreed to share their own experiences. Competitive analysis Analyzing the magnitude and rationale for the gap between one's own organizational performance measures and the performance measures of competing organizations. Competitive A measure of organizational performance compared against benchmarking competing organizations. Continuous process Ongoing improvement of business processes in terms of productivity, efficiency, quality, cost, or cycle time. Core competencies Strategic business capabilities that provide a company with a marketplace advantage. Cost driver Any factor that causes a change in the cost of a function or output. Costing Process used to identify, describe and assign costs to help determine the cost of goods and services and to develop a unit cost. Costing framework Costing model and methodology. Critical success factors Quantitative measures f or effectiveness, economy, and efficiency; those few areas where satisfactory performance is essential in order for a business to succeed; characteristics, conditions, or variables that have a direct influence on a customer's satisfaction with a specific business process; the set of things that must be done right if a vision is to be achieved. Customer advocate The role played by a member of some teams where that individual pleads the case of the customer and calls the team's attention to issues that would concern the customer.

Ministry of Finance

26

Glocoms Inc. (USA)

Benchmarks and Best Practices – Part-1 by Tarun Das Customer analysis The evaluation of a customer's conditions and trends relative to a particular product or service of a business--tools include customer focus groups, field trial testing, customer satisfaction measurement, customer feedback systems, and the use of various types of questionnaires and survey instruments. Direct cost Costs that can directly be attributed to providing a service. Effective service hours Total work hours for the year, less recreational leave, medical leave, training and public holidays. Reflects the direct service hours per annum. Takes into account that employees are unable to work effectively for 100 per cent of the time and may work at maximum 80 per cent of the time. Enabler Those processes, practices, or methods that facilitate the implementation of a best practice and help to meet a critical success factor; enablers help to explain the reasons behind the performance indicated by a benchmark. Entitlement The best that can be achieved in process performance using current resources to eliminate waste and improve cycle time; obvious improvements that are identified during the process of benchmarking and that may be accomplished as short-term goals. Etiquette The conduct or procedure required to be observed in social or official life. Exchange The act of giving or taking one thing in return for another. Executive champion An executive supporter who serves as an advocate of a particular civil right or activity. Expert An individual whose knowledge of the content of a particular subject is considered to be exceptional. Fixed cost A cost or expense that does not vary in the short run with the quantity of output produced. Full-time equivalent (FTE) The basis on which staff productivity is measured and used in determining costs. For example, two staff who work for half-time would be the full-time equivalent of a full-time employee. Functional benchmarking Process benchmarking that compares a particular business benchmarking function at two or more companies. Generic benchmarking Process benchmarking that compares a particular business function at two or more companies independent of their industries.

Ministry of Finance

27

Glocoms Inc. (USA)

Benchmarks and Best Practices – Part-1 by Tarun Das

Global benchmarking The application and extension of strategic benchmarking to a global scale. Goals The numerical target value or observed performance that indicates the strategic direction of an organization. Implementation Specific tasks that will make a strategy into a reality. Indirect cost Materials or service which cannot be easily identified with a specific unit and may be associated with more than one unit. Internal benchmarking Process benchmarking that is performed within an organization by comparing similar business units or business processes. Key business process Those processes that influence the customer's perception of your business. Leadership goal A goal whose achievement will place an organization in a leadership position among similar organizations. Long-term goal A goal that may be accomplished in a longer term, usually one to five years. Market-based pricing Pricing methodology using demand for a product or service to determine its price. Milestone A mark of a significant point in development or achievement. Model An approximation to reality with major characteristic features. A description, representation, or analogy that is used to help visualize something that cannot be directly understood. Networking A decentralized organization of independent participants who develop a degree of interdependence and share a coherent set of values and interests. Objective The set of results to be achieved that will deploy a vision into reality. Outcome The long term impact of a program on the economy. Output Any product or service generated from the consumption of resources. An output is an intermediate or final result of a program and must be quantifiable. Parity goal A goal whose achievement will place an organization at an equal position among similar organizations.

Ministry of Finance

28

Glocoms Inc. (USA)

Benchmarks and Best Practices – Part-1 by Tarun Das

Partner To form relationship between two parties who are associates or colleagues involving close cooperation and implying joint rights and responsibilities. Performance Measurement of the performance of one company's product benchmarking against that of another company. Pricing Pricing is the process of applying prices to services. Process A series of interrelated activities that convert inputs into results (outputs); processes consume resources and require standards for repeatable performance; processes respond to control systems that direct the quality, rate, and cost of performance. Process benchmarking The measurement of discrete process performance and functionality against organizations that are excellent in those processes. Process owner The individual who exercises the possession or control over a process. Process stakeholder An individual who has an interest in the conduct of a particular process. Program/ activity A service or system of services intended to meet the needs under a departmental policy. Project facilitator The individual who focuses on the process of benchmarking and makes that process easier for the team. Project sponsor The individual who provides the financial support for a benchmarking project; an individual who plans and carries out a project or activity; one who assumes the responsibility for a project. Protocol A set of conventions governing the actions of individuals, organizations, or nations as specified by a written agreement; a code prescribing adherence to correct etiquette. Questionnaire A set of questions for obtaining statistically useful process or personal information. Recalibration To readjust the calibration of a measure; to standardize by determining the deviation from a measure against a standard. Recycling To reprocess in order to gain additional information; to return to an earlier condition so that the operation can begin again.

Ministry of Finance

29

Glocoms Inc. (USA)

Benchmarks and Best Practices – Part-1 by Tarun Das

Reengineering The radical redesign of business processes, organizational structures, management systems, and values of an organization to achieve breakthroughs in business performance. Reverse engineering A comparison of the product characteristics, functionality, and performance with similar products made by competitors. Root cause The fundamental causal reason for a particular observation. Salary oncost Expenses associated with employees in addition to their salary. For example, superannuation, long service leave, and leave loading. Secondary research The practice of searching for information about a particular subject area from indirect sources. Service Service provided by community service organisations which is funded by the department. Short-term goal Goal that may be accomplished within a short time frame, usually less than one year. Strategy The plans and means to achieve the goal for a particular objective. Strategic alliance A strategic bond or connection between organizations with common interests; an association to further the common interests of its participants. Strategic benchmarking A systematic business process for evaluating alternatives, implementing strategies, and improving performance by understanding and adapting successful strategies from external partners who participate in an ongoing strategic alliance. Strategic intent A statement of the persistent ambitions of a company that helps to guide its decisions for resource allocation and goal setting. Strategic planning A road map to gain competitive advantage by achieving goals that define business objectives for critical success factors. Survey To query individuals in order to collect data for the purpose of analyzing some group or sample of a population. Target A mark to shoot for; a goal to be achieved. Team leader An individual who participates on a team and takes on the leadership role for that team.

Ministry of Finance

30

Glocoms Inc. (USA)

Benchmarks and Best Practices – Part-1 by Tarun Das

Team member An individual who participates on a team and may take on one or more roles with respect to that team. Thesaurus A book of words and their synonyms. Total Cost Management (TCM) A management planning and control system to be adopted by a firm to enable it enhance its competitiveness and to rationalise components of cost. Total Productivity Management (TPM) A management planning and control system to be adopted by a firm to enable it enhance its competitiveness and to improve factor productivities. Total quality A customer-focused management philosophy and strategy management that seeks continuous improvement in business processes using analytical tools and teamwork that encompasses the participation of all employees. Total Quality Management (TQM) A management planning and control system to be adopted by a firm to enable it enhance its competitiveness and to improve qualities of goods and services produced or provided by it. Unit cost The unit cost of a service being the average cost of producing a single unit of that service over a particular time period. The calculation for estimating the unit cost is the total expenditure of the service divided by the total units of service. Unit of service One hour of direct service with the client and includes time spent travelling to and from clients Vision The achievable dream of what an organization wants to do and where it wants to go. Workforce model Used to illustrate the number of FTEs, and the award rate they are paid, costs are attributed according to the workforce model

Ministry of Finance

31

Glocoms Inc. (USA)