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Activity-Based Budgeting

T-FLEx Spring Conference

Las Vegas

April 5, 2006

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DART’s Current Operating Budget Alignment

Horizontal:– Line Items– Object Classes

Vertical:– Cost Centers– Divisions– Departments

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What is the Value of the Current Operating Budget?

To a cost center manager?

To an executive decision maker?

To the Board?

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DART’s Current Operating Budget Alignment – Advantages

Traditional, consistent

Easy to understand, high level of detail

Year-to-year trending data

Departmental line-of-sight

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DART’s Current Operating Budget Alignment – Disadvantages

Limited context information

Lack of visibility– Budget cuts can be arbitrary– Insufficient data to evaluate cost effectiveness or

prioritize expenditures

Weakened inter-departmental communication

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First Step:‘Context’ Information

Direct Service Costs (66%) – Costs directly related to providing transportation service to the customer

Indirect Service Costs (25%) – Costs that are one step removed from direct costs; generally impact service quality

General and Administrative (9%) – Costs not directly related to service but that provide essential business functions

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Next Step:Activity-Based Management

Activity-Based Budgeting (ABB)– Build the Budget

Activity-Based Costing (ABC)– Track Expenditures

Activity-Based Management (ABM)– Prioritize Projects and Processes– Drive Efficiency– Identify Opportunities for Continuous Improvement

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What does Activity Based Budget look like?

Traditional Budget Activity-Based Budget

Salaries & Wages $1,000,000 Maintan Hardware $395,421Benefits $450,000 Maintain Software Applications $864,185Materials & Supplies $250,000 Develop New Applications $266,359Services $100,000 Provide End-User Support $286,094Utilities $50,000 Provide Training Services $187,941Travel & Training $100,000Other $50,000

Total $2,000,000 Total $2,000,000

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Activity Elements

Name Type (process or

project) Description Work Triggers Suppliers Resources

Work Partners Work outputs,

measures, and metrics Cost Drivers Customers/Clients of

Activity

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Why Activity Based Budgeting?

Communication with the Board– Context information– Agency activities >> Board Goals

Internal Communication– Program changes not made in isolation– Break down the silos

Prioritize Activities– Eliminate across-the-board cuts, cut lowest value activities

Identify of areas to target for process reengineering– The “A-Ha Factor”– Understanding the Cost of Quality

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Rapid Prototype Implementation

Quick, highly summarized initial effort Top-Down Approach Promoting Buy-in

– Involves every department– Provides an immediate work product– Avoids “Death by Details”

First model is not an exercise in precise costing

Iterative Process

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ABM Implementation Phasing

FY06 – Phase I– Define Agency activity dictionary (Model Zero), create

draft activity-based budget (information only), begin to evaluate tracking systems requirements

FY07 – Phase II– Reinforce ABM culture, enhance activity list detail,

develop tracking systems, create usable ABB for FY08

FY08 – Phase III– Full implementation, tracking time and expenditures,

system maintenance, identify opportunities for efficiencies and process re-engineering

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Phase I Timeline

Jan-Mar – Develop Model Zero– 6-10 half-day ABM sessions

Agency-wide Team Create Activity List Trace Agency Costs to Activities

Apr-Jun – Review with Management– Departmental Management– ELT / EMT

Jun-Sep – Create and present an Activity- Based Budget

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What Activity-Based Budgeting Isn’t

It is not a control budget– It does not replace the department / line item

budget, it is supplemental information

Activities are owned at the agency level, not the departmental level

It is not a Panacea, it is a tool

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Lessons Learned So Far

Communicate “Why”

Agency-wide inclusiveness vs. isolated department work sessions– Team Members

Top-down vs. Bottom-up approach– Rapid-prototype– # of Activities / Activity Count envy

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Lessons Learned So Far (Cont’d)

Don’t sweat the small stuff

Activity intersections – Project vs. Process?

How much detail do you need?– Cost vs. Benefit