Government by the Numbers

A once-obscure cost-accounting method is becoming the clearest path to tracking the real costs of delivering services.
by | April 2000

When Indianapolis decided a few years ago to calculate to the penny what the city spent to fill its potholes, it turned to "activity-based costing." Some saw it as the beginning of an accounting revolution. But others scoffed that it was just a revolution in figuring out what it cost to fill potholes in Indianapolis.

Whether the practice would translate to other cities or other program and service areas remained a very large question. After all, breaking down the tab for a government service--the cost of labor, overhead, materials and equipment--wasn't something that many states or localities were remotely close to being able to do. Furthermore, convincing front-line managers that a fine tracking of expenses would help, not hammer them, would be a hard sell.

But as performance management and performance budgeting practices continue to spread, dozens of state and local governments are now homing in on ABC. In this era of government accountability, they see it as a means of tracking the cost of delivering results, whether it is the cost per child of immunization or the cost per mile of cleaning streets. The question is how much reliance should be placed on ABC figures, particularly given the difficulty in calculating overhead costs for a host of government activities and the notion that cost is not the only factor in assessing a service or product.

Still, the basic ABC analysis is now considered a critical management tool. It can help governments gauge efficiency. Managers can see whether services are being delivered in a cost-effective way, both when tracked internally over time and when compared to what similar jurisdictions spend to do the same work. It also allows governments to do up-front calculations of the potential benefits of contracting out. After all, if a government doesn't know what it costs to do something internally, how can it judge whether an outside contractor's bid is going to save money?

Along the same lines, a handful of governments are beginning to temper their inclination to throw every function they can online. Instead they are using ABC to decide whether going the e-commerce route makes financial sense. "You have to make the business case for going online, and you shouldn't do that without analyzing costs and identifying potential hard savings," says Bill Eggers, project director for E-Texas in the Texas Comptroller's office, which just launched an ABC pilot program designed to uncover the costs of government activity in six state agencies.

In many cases, though, governments try ABC because they're just plain tired of flying blind on costs. In San Diego, for instance, the budget system was 25 years old and didn't have the capacity to allow staff to track or identify costs. "We were ball-parking costs and making decisions based on bad information," says Ernie Anderson, head of financial management for the California city. Over the past five years, San Diego has overhauled its accounting software so that it can now track "a gazillion activities," Anderson says.

That, in turn, has changed the basis on which decisions are made. For example, city personnel director Rich Snapper says his shop was routinely offering civil service exams without regard to actual cost and needs. "We knew the paper for each test cost us about 35 cents. But when we figured out that it then cost $20 to process each exam, we decided that maybe we shouldn't be giving so many tests." What the city now does is test only when it needs to, and not on some arbitrary schedule based on history and habit.

But ABC isn't always about saving money. Snapper also uses it to figure out why the cost of doing something might be going up. For instance, his office recently calculated that the average cost of investigating internal equal employment opportunity complaints--one of the department's main jobs--went from $3,655 per case in fiscal 1999 to $5,640 in FY 2000. That sort of leap in expense might lead a crusading comptroller to assume that the personnel office had become a whopping 54 percent less efficient in the course of just a year.

In fact, because of ABC, Snapper says his office was able to figure out that the increased cost was the result of more-complicated cases and employees who are getting much more savvy and insistent in pushing their complaints. And because his department handles only about 30 cases a year, high costs for even a handful can easily drive the average up. Knowing all that, his department may be able to fashion strategies for lowering costs, or it may not. But at least the reason for the increase isn't hidden in the misty obliquity of a line-item budget.

Of course, it's not all that surprising that jurisdictions known for management reform, such as Indianapolis, San Diego and Texas, have embarked on ambitious ABC efforts. What is surprising is the extent to which the practice appears to be spreading to jurisdictions not so synonymous with cutting-edge management, budgeting and accounting practices.

Newark, New Jersey, for example, just launched a four-department ABC pilot program. ABC is being tested in the Neighborhood Services Department, the city purchasing office, the Office of Corporate Counsel and also in one of the mushiest realms of government service imaginable: health and human services. "The director of health and human services actually grabbed us and volunteered for the pilot program," says Danny Hill, director of Newark's Office of Management and Budget.

Breaking a 20-year-old habit of looking at cost in terms of lump-sum grants and line-item budgets hasn't been a breeze, but Catherine Cuomo-Cecere, Newark's health and human services director, sees the growing pains as a positive part of the process. She has helped her staff realize that ABC is not "Big Brother looking over their shoulder," and that it is, simply, a way to deliver services much more effectively. "Once people begin to understand that even your printing expenses impact your overall service delivery budget," she says, "then they can start looking at the real cost of running projects."

She hasn't tried to sell ABC to her staff by criticizing the old way of doing business. In fact, she has taken quite the opposite tack. "It's important to acknowledge that staff has been doing a good job, but that we're offering a way that might help them do the job even better."

There's another selling point. For departments that apply for grants, it is now important to have good information on activities, their cost and what a department is accomplishing through them.

Even as Newark's Health and Human Services Department tries to apply the science of accounting to the frequently messy world of human services and the uncontrollable variables of human behavior, it has been able to calculate the average cost of achieving certain outcomes. The agency knows, for instance, how long it takes to immunize a child and what the advertising, labor and material costs involved are. It also knows how long it takes to get that information into the database and what that costs. With this information in hand, the agency can then look around at other jurisdictions and start benchmarking against an average.

While it all sounds clean and neat, the truth is that, as with any management or accounting practice, looking only at numbers to assess a government service can be a big mistake. "ABC does focus staff on the fact that we have goals, that speed is important and that cost is a factor," says San Diego personnel director Snapper. But he emphasizes that data collected through ABC should not be the bottom line driving how services are delivered.

If it is, the consequences could be very counterproductive. For example, Snapper says he could easily reduce costs in his operation. Personnel staff, for instance, could skimp on background checks or drug tests for new hires. "Yes, it's faster and cheaper, but you end up sacrificing quality," Snapper says. "That's the dilemma of dealing not with potholes but with personnel."

As it turns out, however, potholes can present a similar dilemma. Recently, Indianapolis has been experiencing what officials there describe as "pothole recidivism": Potholes filled to the brim at a carefully calculated cost are starting to un-fill themselves. And so Indianapolis is pondering a new variable in the pothole-filling equation: longevity. And longer-lasting pothole repairs will probably cost more money.

In other words, the age-old balancing act for government of cost versus outcome continues. ABC, say its proponents, can help government operate more efficiently, but ultimately its most significant contribution to public management and budgeting is that it allows government to perform that cost-versus-outcome balancing act in a more informed way.