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IDENTIFYING THE COST PER TRANSACTION: By Jeff Sade, Pat Louthan, and Kathleen Sharman Much is made of efforts designed to help companies gauge the cost of their performance. The problem is that typical studies of this nature gather metrics at a high level – the cost of a violation, the margin of an AVI transaction, etc. – but lack the details to give validity and meaning to the comparisons between agencies that could be used in benchmarking. In fact, most benchmark comparisons generate more questions than provide insights and answers. But does it have to be this way? What if the Toll Industry could identify costs in such a manner that benchmarks for key transaction types could be created and processes and activities could be compared more easily? And if possible, would this provide executives with the information needed to make critical strategic and operational decisions with profound positive impacts to the future of the agency? What is driving the Toll Industry need for identifying transaction costs? The Toll Industry is facing a series of events whose combined effect creates the need for a better understanding of what the basic costs are for transaction types, processes, and activities. Among the recent events are:
With all of these dynamic changes taking place at the same time, a set of questions are being asked in executive offices and at industry meetings that we would like to address here:
Having an understanding of the costs for different transaction types, processes, and specific activities can play a significant role in senior management’s ability to address these questions. What has kept the industry from Determining the cost per toll transaction has long been a topic of conversation amongst IBTTA members and was specifically addressed during a workshop at the IBTTA Organizational Management Workshop held from April 8-12, 2006 in Seattle Washington. During this workshop a major challenge quickly surfaced as the single biggest barrier to developing consensus on what constituted the cost elements of an ETC transaction. During the costing exercise, it quickly became apparent that people had very different ideas about what costs should or should not be allocated to each type of transaction. The major issues identified were:
In addition to the purely financial aspects above, other industry reservations were identified such as: Who would have access to the data? Will the data generate answers or more questions? Will this data be used for industry benchmarking and is this good or is this bad. TABLE 1: Summary of Challenges
The Workshop Results. The challenges identified above and summarized in Table 1 are common to benchmarking efforts and create frustration due to the inability to address pressing information needs. The lack of visibility into a specific methodology that generates a benchmark number turns the focus away from taking action into a never ending spiral of questions aimed at determining if there are truly apples-to-apples comparisons being made. If these challenges are to be overcome, the Toll Industry has several factors working in its favor that place it in a unique position to make use of benchmarking as a key tool in the future. These factors include the community of agencies that are well connected through IBTTA, common vendors and a common set of core processes and activities that are shared across all agencies within the industry. Overcoming the Challenges Activity Based Costing Is An Answer. The principles contained in Activity-Based Costing (ABC) provide the answer to the challenges discussed above and identified in Table 1. Resources (expenses) are assigned to activities, then activities are assigned to cost objects based on their use. Activity-based costing recognizes the causal relationships of cost drivers to activities and uses a precise method of allocation that is applied across any like entities. A basic ABC structure is illustrated in the following example.
Bottoms-Up Approach and Layered Costing. Using an ABC approach creates a foundation that forces a “bottoms-up” approach. It starts by building costs at a detailed activity level and builds the activities up into processes that then support certain transaction types. It is important for agencies to have information in this detailed form in order to make critical business decisions regarding internal policies and well as providing services to other agencies. For example, an agency needs to know how much to charge another agency in order to process an ETC transaction on its behalf. Additionally, This approach can also help support the development of an industry standard process classification taxonomy, or a common set of processes and activities along with standard allocation methods that are applicable across any toll entity. Tollroad Categorization Schema. A standard Toll Industry activity categorization schema is essential to creating usable and comparable benchmarks. Without this standard breakdown of activities, the benchmarking quickly becomes a discussion about apples and oranges. Leveraging work done at previous agencies, Agnitio Group and Louthan Consulting have developed a dictionary of Toll Industry activities that is robust enough to account for subtle and not so subtle differences between the operations of various agencies. This categorization schema enables rapid development of ABC models, and therefore valid comparisons, by accelerating the data collection process and standardizing what activities are called across agencies while providing the flexibility to accommodate unique agency-specific activities through the use of classification placeholders. The Power of Attribution. Proper attribution of the model is the key to creating powerful results that enable analysis and pro forma model development. Attributes such as Fixed/Variable; Direct/Overhead; Project/Recurring; Labor/Non-labor; Department; Line Item; Cost Type (Fund); Process and Activity allow for innumerable ways to slice and dice the data to get to the information needed to make decisions. The following example illustrates attributing.
For example, having the ability to separate out fixed costs from variable has allowed our customers to determine what the next phone call in their call center truly costs, how increased AVI lanes (with the associated violation increases) impact overall margin and whether their non-head count costs are comparable to agencies in other geographies. The Benefits of Activity Based Costing The Power of Knowledge. As knowledge of a subject increases, the ability to make consistently effective decisions on that subject also increases. This is the primary use of benchmarking studies. If we can determine what the industry average and range of costs are for a particular activity or transaction type, it enables executives to make informed decisions. Depending upon where an agency is currently performing in relation to the processes and activities within the broader industry group, the information can support effective strategic and operational decisions. For example, poor performance against an industry average may lead to process changes, technology improvement and outsourcing opportunities to shore up the weakness. Good performance against a metric may lead to in-sourcing opportunities and, redefined operational focus on other areas that need improvement. It is also important to remember that while cost is an important part of the decision process, it can be dangerous to make decisions based solely on cost without the context of quality, time and/or other agency objectives. The perfect example of this was the general finding that ACM transactions, while highly profitable per transaction, are not as efficient as other means of toll collection with respect to overall traffic flow. Benchmarking. Currently a few agencies are participating in a study focused solely on benchmarking the costs of customer service in the Toll Industry. Having an independent third party develop the benchmark metrics keeps proprietary data proprietary while providing visibility into how each agency measures up to the industry’s performance. The independent party can accomplish this by limiting access to the data to participating agencies; masking the agency name on any specific data; presenting data as ranges, averages and statistical measures; etc. With the conclusion of this initial pilot benchmarking study, an effort will begin to expand the metrics to encompass other aspects of toll operations. By having this level of detail about multiple agencies created using the same ABC approach and standard categorization, an apples-to-apples comparison can be performed across transaction types, processes, and activities. The true power of this approach is that, in addition to producing the basis for benchmarks across agencies, it provides agencies with valuable analytical information on which to base operational decisions. A Big Picture View Supports Strategic Decisions. Having an understanding of the true costs of a transaction type allows executives to make informed strategic decisions. This is especially powerful when coupled with revenue data to identify high and low margin transaction types. Example: An agency was supporting the back office function of a neighboring toll facility with a contract based on a percentage of revenue. The results of the costing study clearly demonstrated that the agency was significantly undercharging the other authority for the support services being provided. Flexibility to Layer. As discussed earlier, highly attributed cost allocations allow for analysis along multiple dimensions. Being able to look at information from its component parts allows visibility into discreet activities that make up a process, as well as the ability to sum up multiple activities into a process. This flexibility to slice and dice the data into multiple layers of costs and include or exclude various attributes (e.g. labor/non-labor, fixed/variable, overhead/direct etc.) supports a wide variety of analysis. Example: An agency felt that their support services (call center, storefront, Internet, email and paper correspondence) were being operated sub-optimally. The costing model was used to analyze customer service channels (storefront vs. Call Center vs. Internet vs. Mail) leading to new programs that drive customers to the lower cost channel Trending over Time. Using this modeling approach also allows an agency to perform internal benchmarking; accomplished by developing cost trends over time. This allows an agency to measure the effectiveness of policy decisions and other changes that naturally occur within an organization. As changes are made and decisions are taken, the effectiveness of those actions will show as an adjustment to the financial trend. Example: An agency was able to view cost trends over time to determine the impact of major construction on traffic volume and revenue as well as identify extraordinary activities that impacted the system during these events. This led to several major policy Pro-Forma Analysis. Pro-forma modeling utilizing the many attributes of the data allowed agency participants to measure the effectiveness of their decisions before they were made. Pro-forma models have answered questions like: Example: An agency, discovering that their violation policy was creating significant negative margins, was able to do ‘what if’ on various alternative policy changes to determine which changes optimized their financials while meeting their patron quality goals. The end result was less violators and a break even Pulling It All Together. Activity based models provide a rich source of data to mine for key indicators of performance for an agency. It allows for the creation of performance scorecards by selecting metrics that highlight those areas of most interest to the agency executives. A scorecard can be established with a focus on the agency’s strategy and linked through select initiatives that have the full support of the executives and governing board. A scorecard can then measure the progress and effectiveness of initiatives that drive efficiency and overall performance improvement. What Does All This Mean?Is it possible to derive meaningful transaction cost elements that address the concerns raised at the Seattle Organization Management Workshop meeting? YES! It is accomplished through the application of a well attributed activity based cost model that maintains the visibility of costs down to the activity level and uses a consistent method and categorization to assign costs. This model creates visibility into discreet activities that make up a process, as well as the ability to sum up multiple activities into a process enabling agencies to make important decisions. (Internal Benchmarking) This model also can create visibility of industry metrics at a low enough level to provide apples-to-apples comparisons in certain areas.(External Benchmarking) Internal Benchmarking can be just as important as external benchmarking. The process of obtaining the benchmark data at any one specific agency leads to an in-depth understanding of the costs for that agency and opens up a powerful set of tools that can be used to support strategic and operational decision-making. Identifying cost per transaction valuable tool or waste of time? We believe the increased analytical capability resulting from the activity based cost model approach described above can provide agencies with another valuable tool to better understand their transaction costs as well as other processes, thus enhancing decision making and improving service for their customers.
About the Authors: Jeffrey Sade is a management consultant with the Agnitio Group. He has over 20 years of consulting experience helping executives understand their operations and implement solutions to accelerate profitability and hold down costs. Most recently, Jeff has been working with Pat Louthan in support of the Toll Industry to help clients understand their cost structures and tune their organizations strategically and operationally. He can be reached at jsade@AgnitioGroup.com. Pat Louthan is the President of Louthan Consulting. He has over 20 years consulting experience performing cost, process improvement, and performance management studies for various private companies and government agencies. Over the past three years he has focused on the toll industry and assisted his clients in the understanding of their transaction and activity costs and the ways this data can be leveraged to reduce costs, increase revenues, and improve throughout. He may be reached at pat@louthanllp.com Kathleen M. Sharman, CPA is the Chief Financial Officer for the South Jersey Transportation Authority. She has over twenty years in senior financial management experience, both public and private sector, in the solid waste, real estate and transportation industries. Over the last several years she has held various leadership positions in transportation associations including IBTTA. Kathleen developed and presented the workshop session at the April 2006 IBTTA workshop in Seattle entitled “What is the real cost of ETC” which sparked tremendous interest in this subject.
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