FullCost: Frequently asked questions, with short essays on governance
FREQUENTLY ASKED QUESTIONS
WITH ESSAYS ON GOVERNANCE
What?
1. What is FullCost?
2. What is investment-based budgeting?
Why?
3. Why are people interested in FullCost?
4. What are the financial benefits of FullCost?
5. What are the transformational benefits of FullCost?
Methods and Processes
6. Why should business planning and budgeting be an integrated process?
7. Why should budgeting and rate setting be an integrated process?
8. Should a product/service cost model be built in the planning tool or the accounting/invoicing system?
9. How is FullCost related to portfolio management and demand management?
10. What's the difference between FullCost and show-backs?
11. How is FullCost related to ITIL?
12. How does FullCost help me implement activity-based budgeting?
Related Systems
13. What's the difference between FullCost and corporate budget systems?
14. How is FullCost related to our existing accounting systems?
Alternatives
15. How is FullCost related to our existing budget spreadsheets?
16. What's the difference between FullCost and cost-modelling tools?
17. What's the difference between FullCost and the "budget modules" in financial accounting and invoicing systems?
18. Why FullCost is better than its competition?
When?
19. Don't we need to get our historic data in better shape first before we attempt FullCost?
20. How long does it take to implement FullCost?
21. How much time must our managers invest in implementing FullCost?
What?
1. What is FullCost?
FullCost is an integrated business and budget planning process, enabled by Excel®-based software, that helps an enterprise or shared-services department determine the full cost of all its products and services.
FullCost is used to develop your annual business plan and budget submission. It produces a budget for your products and services (as well as the traditional expense codes by cost center) -- ie, it implements investment-based budgeting.
FullCost also calculate rates for chargebacks, show-backs, business-driven governance, and benchmarking.
More....
2. What is investment-based budgeting?
Investment-based budget means submitting a budget that forecasts the costs of your products and services (as well as the traditional expense codes by cost center). It puts forward the full cost of the products and services you propose to "sell," as distinct from a traditional budget which only forecasts what you'd like to spend.
An investment-based budget allows you to negotiate your budget based on the needs of the business and the investment opportunities at hand.
Clients defend their projects and services, and enterprise-good activities can be separated from rates.
Budget decisions are better. Everyone understands the value to be delivered for a given level of budget. And everyone understands what can be expected of your organization for a given level of funding.
Essay: Why budget for products and services (investment-based budgeting), not just what you plan to spend?....
<A HREF="fc-5512.htm">FullCost: Why budget for products and services?
Essay: Why budgeting and rate setting should be an integrated process....
Why?
3. Why are people interested in FullCost?
FullCost solves pressing problems such as managing expectations, strategic cost cutting, and funding for infrastructure and innovation.
What problems can FullCost solve?....
FullCost also provides a basis for business-driven governance, demand management, and a service catalog.
FullCost also calculates product/service rates, the basis for chargebacks, show-backs, business-driven governance, and benchmarking.
Quick list of the benefits of investment-based budgeting....
Essay: Top ten reasons why internal service providers need to know the full cost of their products/services....
4. What are the financial benefits of FullCost?
FullCost forecasts the true cost of an organization's products and services. This has many far-reaching financial benefits:
First and foremost, budget decisions can be based on the investment opportunities at hand (not arbitrary benchmarks like "last year plus or minus a few percent"). Client executives can choose what they will and won't buy from IT. This improves the ROI on the entire IT budget.
With deliverables funded by senior executives, strategic alignment is automatic. This further improves ROI.
If costs must be reduced, cuts can be based on a rational discussion of what the IT organization will stop delivering. This is much healthier than the old-fashioned "take it out of hide" or "do more with less" approach, which cripples an entire IT organization and ultimately drives costs up and service quality down.
White-paper on strategic cost cutting (instead of "do more with less")....
Furthermore, comparisons with outsourcing are equitable. Corporations can avoid the costly mistake of falling for vendors who promise 50% of the deliverables for 80% of the cost, claiming a 20% cost savings! With the true cost of internal products and services known, fair comparisons allow a company to use vendors only where they offer a clear cost advantage.
Quick list of the benefits....
Chapter on the benefits of FullCost....
5. What are the transformational benefits of FullCost?
Beyond financial benefits, FullCost improves client relationships and the IT organization's effectiveness.
Once an investment-based budget is approved, clients understand exactly what they can expect from the organization, i.e. commitments match available resources. In this way, FullCost manages clients' expectations and guarantees IT the resources it needs to deliver every commitment.
A more businesslike discussion of expectations combined with effectively delivering every commitment add up to better client relationships.
Internally, teamwork is enhanced. When executives fund deliverables, all participants on the project team are given the resources to contribute to the project. That includes the internal "prime contractor" and all the other groups needed to help with the project (internal subcontractors). When managers reliably get the support they need from peers, cross-boundary teamwork is enhanced.
Also, managers become more entrepreneurial. In the course of implementing FullCost, they learn to identify their product/service catalog. They identify their customers, and plan their business.
One IT organization brainstormed a comprehensive list of benefits they received from implementing activitiy-based budgeting with FullCost. You'll find a compelling case for investing in bit of time in understanding how FullCost might be applied within your organization.
FullCost can be a cornerstone of a CIO's transformation process. It can change an entire organization's culture in a matter of months.
Chapter on the transformational impacts of FullCost....
Methods and Processes
6. Why should business planning and budgeting be an integrated process?
Business planning defines what your managers will deliver in the year ahead, how they'll produce it, and what resources they'll need to do so. It includes a demand forecast, budget and resource requirements, and sets rates.
It makes no sense to develop a budget outside the context of a business plan. The plan and the budget should be developed together in a seamless process.
World-class organizations adopt a disciplined approach to business planning, budgeting, and rate setting. They document a step-by-step method that all their managers use, both individually and as a team, to plan their interdependencies. Done well, such a process cultivates entrepreneurship, improves efficiency, coordinates resources, and justifies investments.
Essay: Why annual business planning and budgeting should be an integrated process....
<A HREF="fc-5657.htm">FullCost: Why integrate business planning and budgeting
7. Why should budgeting and rate setting be an integrated process?
"Rates" are the unit costs of products and services. They are used for chargebacks, show-backs, governance (portfolio management) processes, project estimation, and benchmarking.
It's not advisable to develop prices as an analytic process separate from the budget process. Not only does this amount to a lot more work, but also the price list must always be linked to the budget. If pricing doesn't match the budget, clients may get budget to spend on your organization and later find it won't buy what they thought it would. Meanwhile, staff may find themselves collecting insufficient revenues to pay their costs (running at a loss), or making a profit and exposing themselves to criticism for overcharging clients.
With FullCost, very little additional effort is need to extract a price list (rate sheet) for chargebacks from the budget data. Integrating the budgeting and pricing processes saves considerable time and ensures consistency.
Essay: Why budgeting and rate setting should be an integrated process....
<A HREF="fc-6907.htm">FullCost: Why integrate budgeting and rate setting
8. Should a product/service cost model be built in the planning tool or the accounting/invoicing system?
A cost model links all your costs to your products and services, portraying the full cost of each. A cost model is the basis for an investment-based budget, and for rates (unit costs).
Within your IT financial systems, there are two possible places to build a product/service cost model: within your planning tool, or within your actuals-tracking systems.
For investment-based budgeting, and to publish rates at the beginning of the year, the cost model must be imbedded in your planning tools.
There are minor advantages to also building a cost model in your accounting/invoicing systems. But if you do, they must exactly replicate the cost model in the planning tool to ensure consistence.
Essay: Where to build your product/service cost model....
9. How is FullCost related to portfolio management and demand management?
Internal portfolio management means managing investments in service providers (such as IT) as one would manage a portfolio of financial investments.
Clients use their finite budget to "buy" products (projects) and services from internal staff based on returns on investments (ROI). This is the essence of market-based governance.
Essay: What is market-based governance?
Portfolio management is key to managing expectations and to aligning the provider with enterprise strategies and clients business needs. It also helps clients understand where their money is going.
Typically portfolio management is based on a steering committee comprising client executives who set priorities.
True portfolio management requires an understanding of how much money is in the "checkbook" and of the costs of various investment opportunities. Without that information, the steering committee can do little more than rank-order major projects.
FullCost drives the budget process, and then tells you how much of your budget is in that "checkbook" managed by clients (versus the portion of the budget that's yours to manage).
FullCost also defines the costs of all your products and services.
Although there's more to internal portfolio management than just knowing the organization's products and services and their costs, FullCost is an essential and practical first step.
Column on portfolio management....
10. What's the difference between FullCost and show-backs?
Show-backs means mock invoices, after products and services are delivered. They're used to build an understanding of the value delivered by an organization.
FullCost accomplishes that objective and so much more. It provides an understanding of what's possible (new projects and services) as well as what's already been delivered. It calculates rates, and provides a basis for demand management and governance.
It also costs less than show-backs, and is easier to implement.
Generally, an organization is better off starting with FullCost, and then later implementing show-backs based on the FullCost plan.
Essay: The Limitations of show-backs....
<A HREF="fc-5829.htm">FullCost: The Limitations of "Show-backs"
11. How is FullCost related to ITIL?
ITIL version 3 addresses the financial management processes of an organization, and FullCost is a practical tool-kit for implementing them.
Service catalog, demand management, service management, service costing -- these are the key ITIL concepts that can put IT's clients in control of what they buy from IT while aligning IT's resources to fulfill those sales.
The key challenge in addressing these processes is being able to calculate the true cost of IT products and service. That's where FullCost can help.
Article on FullCost and ITIL....
12. How can FullCost help me implement activity-based budgeting?
Activity-based budgeting (ABB) is an early generation of what's now known as investment-based budgeting (IBB).
ABB describes the cost of activities and processes (not things customers buy). Investment-based budgeting is more practical and powerful in that it describes the costs of the products and services the organization "sells."
Both replace the traditional budget that describes cost factors (expense codes) such as compensation, travel, and training.
Investment-based budgeting involves identifying all the organization's products and services, and assigning all the costs -- both direct and a fair share of indirect -- to each.
Investment-based budgeting is simple in concept, but the devil's in the details. Success requires a carefully designed method that addresses the complexities of across-the-board activity-based costing, crystal-clear definitions, practical tools, and consistency across all groups in the organization.
FullCost is a practical tool-kit that makes ABB and investment-based budgeting straightforward. It includes a detailed, step-by-step manual (a "cookbook") that walks an organization through the budget preparation process, step by step.
FullCost is all of ABB and more.
Essay: What is ABB, how is it different from ABC, and where does FullCost fit?....
<A HREF="fc-5965.htm">FullCost: Activity-based Budgeting
Related Systems
13. What's the difference between FullCost and corporate budget systems?
FullCost does not overlap with enterprise budget systems. Instead, it feeds them.
Enterprise budget systems simply roll up each department's proposed budget, allocate budget to departments, and then roll back down the final budget.
FullCost helps you prepare your submission to these budget aggregation systems.
It helps you develop your business plans (which are the basis for a budget), and then upload the result into enterprise budget systems.
Prior to uploading (i.e., submitting a proposed budget), FullCost is used to communicate with an internal service provider's clients. It enables a discussion of the needs of the business, and the investment opportunities which may be funded by the proposed budget. This dialog engenders business support for service providers' budget submissions.
14. How is FullCost related to our existing accounting systems?
No changes are needed in production financial systems. Past investments in software and customization are secure.
FullCost is used during the budget preparation and negotiation process, prior to finalizing the numbers that then feed the accounting systems. FullCost is also used for creating a service catalog and implementing fair allocations or chargeback rates.
Historic data from existing accounting systems may be used as one of the inputs to the FullCost plan.
The budget that results from FullCost can be fed to existing accounting systems for the purpose of comparing actuals to plan.
These limited linkages are easy to implement, since FullCost produces appropriately formatted outputs. Also, since FullCost is built on Excel, data is easily imported and exported.
FullCost is not a chargebacks (invoicing) system. The outputs of the FullCost plan become the inputs to a chargeback system, including rates (for revenues) and the business model that associates costs with products/services (for expenses).
Don't we need to get our cost tracking in line before implementing FullCost?....
Essay: The difference between planning and tracking systems....
<A HREF="fc-5738.htm">FullCost: Planning versus Actuals systems
Alternatives
15. How is FullCost related to our existing budget spreadsheets?
Budget planning tools may be replaced by FullCost. For example, home-grown spreadsheets can be replaced by this supported product, with all the ease of use of spreadsheets and far more power.
Why replace home-grown spreadsheets with FullCost....
<A HREF="fc-5756.htm">FullCost: Buy Versus Make
16. What's the difference between FullCost and cost-modelling tools?
FullCost has a cost engine at its core. But it's so much more than a simple tool to allocate costs to product/service rates.
It produces a budget as well as rates, the basis for investment-based budgeting.
In the process, FullCost also produces the annual business plan, which explains how the organization will deliver the forecasted products and services.
Furthermore, the rates calculated by FullCost are more accurate than most ABC-based cost models. And since they're imbedded in a planning system, rates can be held stable throughout the year -- even if volumes go up or down.
Essay: The difference between planning systems and cost-modelling tools....
<A HREF="fc-5930.htm">FullCost: Planning systems versus cost-modelling tools
17. What's the difference between FullCost and the "budget modules" in financial accounting and invoicing systems?
Many financial accounting systems have a "budget module" which vendors claim can be used for budget planning.
In fact, these systems provide trends in costs, and some provide trends in service volumes. But there's a lot more to business planning than trends.
FullCost provides a full suite of tools for business planning, budget planning, and rate setting. It goes well beyond simply projecting trends and doing "what if's" on growth rates.
Essay: What's in the FullCost planning system, beyond the "budget modules" in financial accounting and invoicing systems........
<A HREF="fc-5219.htm">FullCost: Versus Budget Modules
In fact, the trends in costs and sales coming from accounting and invoicing systems are valuable inputs to FullCost -- helpful, but not sufficient. Thus, they're synergistic with FullCost.
18. Why FullCost is better than its competition?
FullCost is unique, and currently does not have direct competitors.
Most other budget systems do not cost products and services. Those that do project historic data, not true investment-based budgeting.
Other product/service costing tools produce rates, but not a product/service budget. Their rates do not account for variability in demand, since they're not imbedded in planning systems.
Other planning and performance-management systems require product/service costs as an input, not an output like FullCost.
FullCost is unique in its integration of business planning, investment-based budgeting, and rate setting capabilities.
Why FullCost is better than its competition?...
When?
19. Don't we need to get our historic data in better shape before we attempt FullCost?
In fact, it's better to begin with FullCost, and then later work on improving tracking systems.
With FullCost, you develop a plan (and budget) for the future. Planning uses historic data, but it also involves management judgments about the future.
Sure, the better your historic data, the better your estimates of the future. But no matter what, you've got to plan the future based on what you know today. And historic data should season management judgment, not substitute for it.
FullCost will structure what you know along with your estimates of the future. Then, over time, you can improve your judgments with better tracking data. FullCost will provide a map of what needs to be done in your tracking systems.
Essay: Why implement planning before tracking/chargeback systems....
20. How long does it take to implement FullCost?
It takes 6 to 10 months, depending on the level of granularity you choose. A key decision is the target Maturity Level you choose, using the Full-cost Maturity Model.
Why does it take so long?
In the first month, you'll plan the project and deconstruct your organization chart into entrepreneurial lines of business -- the basis for developing a service catalog and planning a business. Worth a month of time? Most would be pleased to do this so quickly.
In the next month, you'll define (or refine) your product/service catalog. Note that many organizations have spent more than a year working on their catalogs. You'll finish it quickly in this practical process with our guidance and the templates we bring.
As you look through each phase of the process and consider all that's accomplished, you'll be hard-pressed to find any transformation process that delivers as much in so little time.
The FullCost planning process....
21. How much time must our managers invest in implementing FullCost?
During the 6 to 10 months of implementation, participating managers will spend 1 or 2 days per week in the planning process.
Does that seem like a lot? Consider this:
At the senior management level, how much time should you be spending on leadership versus management -- on "swamp-draining" versus "alligator fighting"? Most executives would answer between 20 and 40 percent (and more at higher levels). That's a day or two a week on improving the organization (leadership), the rest going to ongoing management of operations.
This is not a one-time event. Leadership is an ongoing responsibility.
Once a leadership team commits to making time for leadership, FullCost simply structures the day or two per week they've promised in a transformation process that delivers additional benefits with each step.
The FullCost planning process, and the lessons learned at each step....
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