Public Sector Governance and Accountability Series: Budgeting and ...

Activity-Based Cost Management in the Public Sector 223
it all. But ABC/M does provide the basis for determining cost-benefit
tradeoffs and thus allows comparison with other services that are competing
for tax dollars. This type of dialogue and discussion cannot easily occur
when funding is simply stated in the form of salaries, supporting expenses,
and supplies (for example, budgets). Dialogue is better stimulated when
costs are stated in other terms, such as unit costs per output, permitting
comparisons to be made.
A recognized need to shift emphasis from inputs to outputs is leading
some civilian and defense organizations to adopt financial funding relationships
that are based on pay for performance—rather than disbursing
cash to service providers as if they were entitled to it. As an example, one city
government had historically funded one of its social service agencies on the
basis, essentially, of inputs. The mission of this particular social service
organization was to prepare and place unemployed people into jobs as
workers. Historically, the agency billed the city’s central funding authority
in accordance with the number of unemployed candidates interviewed and
the number of hours of job training provided. Whether any of these candidates
got a job was irrelevant to the agency. The bases for payment were the
events involved in the process, rather than the relevant results—successful
hirings—that the city had hired the agency to produce.
The city government altered the payment arrangement to one based on
the number of jobs lasting for at least six months that were secured for the
former welfare recipients. This output-based solution worked much better.
The agency recognized that it needed to customize its training according to
individual needs and shortcomings. In the end, the agency benefited as
well—its revenues are now increasing at a 20 percent annual rate.
Annex 7A, which concludes this chapter, is an example of ABC calculations
for a government road maintenance department. It illustrates the
visibility and insights an organization can benefit from.
ABC/M Uses (and Some Pitfalls)
A significant lesson learned from previous implementations of ABC/M is the
importance of working backward with the end in mind. That is, it is to
management’s benefit to know in advance what it might do with the ABC/M
data before it launches the calculation effort. The end determines the level
of effort required.
Although ABC/M is basically just data tracking, one of its shortcomings
is the wide variety of ways the data can be used. Different uses require more
or less detail or accuracy. Accordingly, the system should be built with a clear