MPS development of police Activity Based Costing (ABC): Costing model developments

Report: 7
Date: 18 October 2007
By: Director of Strategic Finance 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 Finance Committee members with an update on the costing methodology developments both nationally and internally. A further report will be provided to the Finance Committee in November detailing the 2006/07 submission and progress, including the high level costing results.

This report also describes related work within the MPS Productivity Programme, to develop a framework to monitor productivity.

A. Recommendations

Members are asked to note the contents of this report.

B. Supporting information

National Developments of Costing Methodology

1. The Home Office (HO) have acknowledged that the ABC methodology could be revised in order to produce a costing model that Forces find easier to use thus satisfying both national and local needs. In order to develop the new model, the HO have:

• Run a series of workshops for practitioners to understand the key criteria for any new model;
• Circulated a questionnaire to Forces for completion by Borough staff, to understand what type of activity costing model they would find most useful. The MPS has contributed to this survey.

2. The need to review ABC has been reiterated through the Flanagan Review of Policing, as a recommendation setting a target date of Autumn 2008.

3. There is no current proposal for the revised ABC methodology at this stage, although process and unit costing methods have been suggested as alternatives to the existing model which allocates the full cost of a Force to operational activities.

4. National work is also being progressed to address Activity Analysis (AA) capture issues, including:

• Trials of capturing activity data from Airwave;
• Review of stratified sampling methods to reduce overall data requirements, the MPS are working with the HO on this issue.

5. The HO have made it clear though, that until a new solution for either the costing methodology or activity sampling methods is found, Forces are required to comply fully with the Annual Data Return (ADR).

6. Any new costing methodology is not expected to be introduced until 2008/09 at the earliest.

MPS ABC Developments

7. The MPS is also developing an interim ABC model, which makes best use of the data already collected to fulfill the existing methodology. This approach was supported by the McKinsey report that was recently produced as part of the Productivity work.

8. The MPS ABC Lead is working with the HO to develop this model further and also to establish whether it could provide a useful alternative to the existing methodology. However work in this area is progressing with due care, to ensure that any product developed can satisfy multiple requirements, including those of the Productivity agenda.

New MPS ABC Model

9. The new interim model is a three stage approach:

• Stage 1 – Borough costs and activities only
• Stage 2 – Central operational policing costs and activities only
• Stage 3 – Corporate costs by functional group

10. Stages 1 and 2 can be added together, to provide a total cost of operational policing.

11. Stages 1,2 and 3 added together will provide a total cost of the MPS and could be reconciled to year-end financial accounts.

12. If the categorisation of stage 3 costs could be agreed with other Forces, it would be possible to benchmark functional cost categories.

13. This approach utilises the existing data which has to be captured to comply with the ABC Annual Data Return, but instead of allocating all costs to operational policing codes, it would allow BOCUs and OCUs to analyse their own costs independently rather than automatically incorporating central overheads, which has previously been a barrier to BOCUs and OCUs making use of the data.

14. As this model will still meet the HO requirements, there will be no impact on the MPS’s ability to contribute data for the funding formula.

15. The model is not intended to be the final solution for ABC, as it is recognised that developing a nationally comparable model that allows adequate comparison of police forces and can produce actionable findings, is a challenging task. However, we will continue to work with the HO and other Forces to develop this.

16. Further details of the dummy model for the MPS can be found at Appendix 1.

MPS Productivity Programme

17. The MPS is currently taking forward a Productivity Programme, overseen by the Productivity Strategy Board, chaired by the Deputy Commissioner. The Board includes Management Board members, partners from HMIC, Home Office, Treasury and the MPA Chief Executive. The programme monitors delivery of a range of projects and other areas of work with the intention of:

• Delivering cashable efficiencies in line with agreed efficiency plan.
• Improving service delivery without significant further investment
• To ensure the efficient and effective use of all the resources. As well as achieving the outcomes set out in the Policing Plan, reduce the unit cost of delivery and work with partners to get as much as possible out of the available resources.

18. As part of this programme a framework for monitoring productivity is being developed using a range of data available to the MPS. This currently includes, for example

• Measures of good corporate management – eg budgets, HR, staff satisfaction measures when developed
• HMIC benchmarking information on costs of major areas of spend
• MPS data on the above, together with deployment information

19. We will work towards high level measures of cost, outcome/performance, quality/efficiency for major areas of spend, benchmarked appropriately. The work is at an early stage, but the Productivity Strategy Board has also been keen to commission work to look at where major differences exist between the MPS and other forces.

20. The framework will also, ideally, include high level measures of productivity/efficiency for operational processes. ABC data will, where possible, be used to provide cost information relevant to this.

Fit with APACS

21. As part of the development of the productivity framework we will take account of the development of APACS. Developments at present are in line with early thinking on the content of the APACS Organisational Management Domain.

22. The HO is also consulting on the development of efficiency measures for use, ultimately, within APACS. Initial consultation proposes the use of ABC data for this. Whilst it is generally accepted that ABC has its limitations, at this stage it is the only costing methodology that Forces produce which can be compared at operational activity level nationally across the Police Service.

23. The MPS’s view is that there is a need to ensure that data in APACS is driven by the needs of the framework partners - ABC should not be used within APACS purely because it already exists. Instead, the HO should start from the position of identifying what purpose the financial data must fulfill, to then establish a costing methodology that is entirely appropriate for the purpose.

24. Work in this area is at an early stage, and the MPS will continue to work with the HO to help shape development of the indicators. Development of productivity measures for the MPS should help us gain a better understanding of what costed/resource data is needed locally.

Other Developments

25. There is a strong suggestion that BVACOP for the Police Service may be phased out, with a general acceptance that it does not currently add value as a management tool.

26. Work is ongoing in a few Forces, led by West Midlands Police, to develop an alternative methodology to replace BVACOP.

27. The MPS is engaged on this work, whilst airing concerns that replacing BVACOP with a new and different model to ABC, will again result in the need for Forces to produce two different sets of data.

Abbreviations

AA

Activity Analysis

ABC

Activity Based Costing

ADR 

Annual Data Return

APACS

Assessments of Policing and Community Safety

BOCU

Borough Operational Command Unit

BVACOP

Best Value Accounting Code of Practice

HO

Home Office

MPA

Metropolitan Police Authority

MPS

Metropolitan Police Service

OCU

Operational Command Unit

 C. Race and equality impact

There are no race or equality impacts arising from this report.

D. Financial implications

There are no direct financial implications arising from this report, as the additional internal work has been absorbed within existing resources.

E. Background papers

• MPS Development of Police Activity Based Costing (ABC): 2004-05 Results, 19 January 2006
• Implementation Of Activity Based Costing In The MPS - MPA Finance Committee Paper, 14 November 2002
• Operational Policing Measure - MPA Finance, Planning and Best Value Committee Paper, 29 May 2002
• Update On Implementation Of Activity Based Costing In The MPS: Data Collection From BOCUs – MPA Co-ordination and Policing Committee Paper, 17 February 2003
• Update on Implementation of Activity Based Costing (ABC) in the MPS – MPA Finance Committee 15 September 2003
• Update on ABC implementation in the MPS - MPA Finance Committee 15 September 2004
• Audit Commission’s “Police - Activity Based Costing (ABC) Review 2004” – MPA Finance Committee 7 April 2005
• MPS Development of Police Activity Based Costing (ABC) – MPA Finance Committee 15 December 2005
• MPS Development of Police Activity Based Costing (ABC) - 2004-05 Results – MPA Finance Committee 19 January 2006
• MPS Development of Police Activity Based Costing (ABC) - 2004-05 Audit, 2005-06 Progress and Use of Data 20 July 2006
• MPS Development of Police Activity Based Costing (ABC) - 2004-05 Audit Progress, 2005-06 Results, Developments and Use of Data 23 November 2006

F. Contact details

Report author: Rachel Musson, Strategic Finance

For more information contact:

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

Appendix 1: New ABC Model Proposal - Summary

Part A:
Actual Borough costs and activity rather than distorting the data with allocation of central overheads and sustaining costs

Part B:
Actual Central Operational Unit costs and their activity rather than including sustaining costs

Part C:
Categorisation of all other costs including those currently considered Business Support (finance, estates, HR etc) and Sustaining (strategic command, professional standards, trading profit/loss)

A and B

• Link to PPAF/APACS to enable performance data comparison

C

• Ideally if other Forces were to adopt the same approach, we could compare category of costs between Forces, using say, Force headcount to weight data

A+B+C

• Combined with simple allocation methods, will allow a full cost by activity as currently provided to the Home Office for the ADR
• Will reconcile to Financial Statements and thus provide confidence in the data

Initial Issues

Progress To Date

• Initial model scoped
• Brief consultation with expert ABC practioners from other Forces to establish that the principals are sound
• If model is developed as currently proposed, there will be no significant additional work to that required for the HO ABC ADR and can be managed within existing resources of Strategic Finance

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