Activity Based Costing update (ABC)

Report: 07
Date: 18 December 2008
By: Director of Resources on behalf of the Commissioner

Summary

Since 2003/04, the Home Office has required that all police forces provide Activity Based Costing (ABC) information to agreed definitions and standards as part of the annual data requirement.

This report provides the Finance and Resources Committee with an update on the status of ABC in light of the Home Office Green Paper recommendation that ABC should be replaced with an alternative which costs less, is easier to use and has a greater impact on productivity.

The report also outlines the alternative ‘objective analysis’ as indicated within the review by Sir Ronnie Flanagan.

A. Recommendations

That Members are asked to note the contents of this report.

B. Supporting information

National Developments of Costing Methodology

1. Activity Based Costing (ABC) became a mandatory requirement for all police forces from 2003/04 and has since formed the basis of Annual Data Returns (ADR) to the Home Office (HO) for both Activity Analysis (AA) and ABC costed data - a requirement of the National Policing Plan.

2. Although ABC costed data was promoted as a management tool to enable forces to make better use of their resources, very few police forces have been able to successfully use the results to drive improved performance. For many forces, ABC has not been a success and in fact, the HO has been considering a review of the entire process for some time. This view was also supported by Sir Ronnie Flanagan’s report ‘The Review of Policing’ dated 7th February 2008, where two recommendations were made in relation to ABC:

• ‘The Home Office should urgently examine its requirement for each force to undertake Activity Based Costing with a view to this requirement being replaced with an alternative which costs less, is easier to use and has greater impact on productivity.’
•  ‘The Home Office should support the HMIC, the Audit Commission, forces and police authorities in developing a statistical profile for each force, similar to those used successfully in local government and the health service, which would include comparable high level data on staff numbers, objective costs and key management ratios. Prototypes of these profiles should be prepared by autumn this year, with final versions available by autumn 2009.’

3. On 17 July 2008, the Home Secretary published the Policing Green Paper “From the neighbourhood to the national: policing our communities together”. This document broadly accepted Sir Ronnie Flanagan’s recommendations relating to ABC and specifically stated that data collection should be reduced by up to 50%.

In response to the above, the ACPO ABC lead Matthew Bennion-Pedley wrote to all forces commenting as follows:

•  ‘In the interim, the Home Office position remains that ABC should continue. The intention is therefore to find a replacement before the end of this financial year, for application as part of the 2008-09 outturn. Activity analysis will also be reviewed; however Forces should continue with current arrangements for the time being.’
•  ‘ACPO are leading the work to find a replacement and, in the light of Sir Ronnie Flanagan's and others' positive comments about the emerging 'Objective Analysis', have combined the respective ACPO portfolios of Police Accounting (Derek Smith - West Midlands) and ABC (Matthew Bennion-Pedley - Wiltshire).’
•  ‘Work on the 'Objective Analysis' core is nearing completion and this will then be supplemented by activity analysis where this helps to deliver useful benchmarking information for a range of agreed output costs. The latter element of the work is still in its infancy but we hope to produce proposals for consultation towards the end of the year. The emphasis for the final model will be upon achieving a balance between robustness and simplicity, since no-one wishes to create another bureaucratic industry.’

4. The proposed Policing ‘Objective Analysis’ (POA) aims to provide robust financial information to give a clearer understanding of the costs of policing and how resources are used within the service. It is expected that the POA will be a tool to aid performance improvement, resource allocation, use of resources and benchmarking, both internally and externally.

5. Whilst the proposed objective analysis is not intended to be a direct replacement for ABC, future developments of POA will integrate the Activity Analysis (AA) data and performance information to provide a robust benchmarking analytical tool.

6. The development of POA is being led by West Midlands Police Service, however the Financial Information Team within Strategic Finance are working closely with a number of other forces to ensure any changes to the model fits with the internal needs of the MPS.

Structure of the Objective Analysis

7. The structure of the proposed new objective analysis, as shown in Table 1, has been developed through workshops and consultation with stakeholders over the past year. This work has challenged the structure of the analysis, considered ways in which it can be used and tested the practicalities of introducing POA.

Table 1 – Proposed Structure for Policing Objective Analysis

8. Each of the headings at Level 1 can be further broken down to Level 2; Appendix 1 details the full list of Level 2 headings. There is still some discussion to finalise the detail at level 2, but significant changes are not likely to occur.

Proposed implementation of Policing Objective Analysis

9. A consultation paper, ‘Understanding the Costs of Policing – A New Police Objective Analysis’, was issued by Derek Smith (West Midlands Police) to various stakeholders including the Home Office, CIPFA Police Panel, Association of Police Authorities and Policing Authority Treasurers in mid-November. Consultations will take place between 17 November and 5 December 2008.

10. Table 2 details the proposed implementation timescales;

Table 2 – Policing Objective Analysis Implementation Timescales 

11. The Financial Information Team are confident the MPS will be able to meet the mandatory deadline for 2008/09 and are currently preparing POA reports for both level 1 and level 2 using the 2007/08 outturn. These figures will be provided to the MPA in due course. In addition, the POA data for 2007/08 may be required as comparative information for the mandatory level 1 return in 2008/09, if this new objective analysis is approved by CIPFA.

Linking to statutory financial reporting

12. Whilst it had been reported previously that BVACOP might be phased out for the Police Service, this now seems unlikely, as CIPFA still requires consistent financial reporting within the Statement of Accounts for all local authorities.

13. CIPFA are currently evaluating POA and it is anticipated that future Statement of Accounts will include a service expenditure analysis in the form of objective analysis and a reconciliation to convert this into the statutory BVACOP format.

Other developments

14. The MPS AA unit are currently working with West Midlands Police to develop management information reports through both activity and performance data to improve productivity and efficiency.

Conclusion

15. Since publication of the Green Paper no guidance has been issued by the HO as to whether ABC returns will be required for 2008/09 and beyond. The MPS has taken the view that until the HO issues a definitive statement, we will continue with AA studies throughout the current year, albeit at the minimum level previously agreed with the HO. This will continue to provide the force with valuable statistical data and also enable completion of both the AA and ABC ADR’s at the end of this financial year, if required.

16. The consultation on the Green Paper closed on the 10th October 2008, and the results have yet to be published. Once a white paper is issued and we are clear on the future of ABC/POA, we will be able to determine exactly how this will affect the current ABC work and also provide a steer for the development of POA and thus benchmarking throughout the police service.

17. POA will also provide valuable data for inter-BOCU comparisons throughout the MPS and allow comparison with Most Similar Forces (MSF) and similar BOCUs.

Abbreviations

AA

 Activity Analysis

ABC

 Activity Based Costing

ACPO

 Association of Chief Police Officers

BOCU

 Borough Operational Command Unit

BVACOP

 Best Value Accounting Code of Practice

CIPFA

 Chartered Institute of Public Finance and Accountancy

HO

 Home Office

HMIC

 Her Majesty’s Inspectorate of Constabulary

MSF

 Most Similar Force

MPS

 Metropolitan Police Service

POA

 Policing Objective Analysis

C. Race and equality impact

There are no race or equality impacts.

D. Financial implications

There are no further financial implications that can be determined at this stage.

E. Background papers

• MPS Development of Police Activity Based Costing (ABC): Costing Model Developments – MPA Finance Committee, 18 October 2007.
• MPS Development of Police Activity Based Costing (ABC): 2006/07 Results, 19 November 2007

F. Contact details

Report author(s): Denis Langham, Senior Accountant, Strategic Finance, MPS

For more information contact:

MPA general: 020 7202 0202
Media enquiries: 020 7202 0217/18

Appendix 1

Policing Objective Analysis – Level 2 Headings

1. Local Policing

1. Neighbourhood Policing
2.  Incident (Response) Management
3.  Other Local Policing
4.  Local Investigation
5.  Public Protection Unit
6.  Community Protection
7.  Local Command Team
8.  Local Support Overheads

2. Dealing with the public

1.  Local Call Centres / Front Desk
2.  Central Communications Unit
3.  Contact Management Units

3. Criminal Justice arrangements

1.  Custody / Prisoner Handling
2.  Criminal Justice Arrangements
3.  Drug Intervention Programme
4.  Police National Computer (PNC)/ Driver & Vehicle Licensing Agency (DVLA)
5.  Criminality Information Unit (CIU) / Criminal Record Bureau (CRB)
6.  Coroner Assistance
7.  Fixed Penalty Scheme (Central Ticket Office)

4. Road Policing

1.  Central Traffic
2.  Local Traffic Unit
3.  Traffic Wardens / Police Community Support Officer (PCSO) Traffic
4. Casualty Reduction Partnership

5. Intelligence

1. Central Intelligence Command Team
2.  Intelligence / Threat Assessments
3.  Community Intervention Units
4.  Covert Policing

6. Specialist Operations

1.  Central Operations Command Team
2.  Air Operations
3.  Mounted Police
4.  Underwater / Search
5.  Dogs Section
6.  Level 1 Advanced Public Order
7.  Airport & Ports Policing Unit
8.  Firearms Unit
9.  Civil Contingencies

7. Special Investigation

1.  Crime Support command Team
2.  Major Investigation Unit
3.  Economic Crime
4.  Regional Asset Recovery Team
5.  Specialist Investigation
6. Witness / Victim Protection
7.  Vulnerable Person Protection

8. Investigative Support

1.  Forensic Services
2.  Forensic Intelligence Bureau
3.  Photographic Image Recovery

9. National Policing

1.  Secondments (out of force)
2.  Counter Terrorism / Special Branch
3.  ACPO projects / initiatives
4.  Other National Policing Requirements

10. Support Functions

1.  Human Resources
2.  Finance
3.  Legal
4.  Transport
5.  Estates
6.  Information Communication Technology (ICT)
7.  Professional Standards
8.  Press & Media
9.  Performance Review
10.  Corporate Development
11.  Procurement
12.  Training
13.  Administration Support
14. Force Command
15. Central Buildings
16.  Support to Associations & Trade Unions
17.  Force Band
18.  Social Club Support
19. Insurance & Risk Management

11. Police Authority

1.  Members Expenses
2.  Authority Admin & Support
3.  Consultation
4.  Statutory Expenses
5. Treasury Management
6.  Internal Audit
7.  External Audit

12. Central Costs

1.  Depreciation
2.  Revenue Contribution to Capital
3.  Capital Financing
4.  Prior Period Adjustments
5.  Pensions (FRS17)

13. Income

1.  Specific Grants
2.  Secondment Income
3.  Trading Account Income
4.  Income from Officer Services
5.  POCA (Proceeds of Crime)
6.  Other Income

Memorandum item

Sections 1 to 13 above Reconcile to:

1.  Police Grant
2.  Revenue Support Grant
3.  National Non Domestic Rates
4.  Precept
5.  Appropriation from/to reserves

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