Many departments view themselves as having a set of “fixed” overheads and most of their budgeting activity is concentrated on assessing the marginal cost of new developments. Whilst initiatives such as TRAC are trying to move the higher education sector away from this type of thinking, approaches in post-compulsory education generally are varied and inconsistent.
Full cost approach
A full cost approach is more helpful all-round. To describe it in commercial terms, the cost of providing products and services for customers should cover the direct and indirect costs ie should reflect the reasonable price of doing that piece of business. Presenting costs in this way prevents the kind of micro-management discussed earlier. Customers can debate whether or not a particular product or service is worth delivering but they cannot argue, for example, that they would like the service so long as the internal service provider cuts their training budget.
A full cost approach is also essential for consistency and prioritisation as a marginal approach can distort project costs significantly. For example, the marginal costs of a number of projects could appear relatively low whilst the IT department has spare capacity on a particular server. Once capacity is reached, does the next project pay the full cost of a new server?
Whilst cloud approaches may change the nature of some of these problems, such questions need to be answered before cloud provision can be reliably compared with in-house alternatives. Failure to address this in a consistent way will have two main consequences:
- The return on investment (ROI) for particular projects may appear different depending on the order in which they are considered
- It will not be possible to make robust comparisons between in-house provision and external suppliers
In many cases the cost of in-house provision may appear artificially low due to a marginal costing approach. There are however some activities that in-house service providers undertake which can be viewed as being for the “corporate good”. External vendors would not necessarily undertake such activities with the result that in-house costs seem relatively high.
One such example might be work on enterprise architecture (EA), Service Oriented Architecture (SOA) and open standards. Individual customers may see no particular benefit in this research and indeed the IT department could choose to ignore these issues and continue to demand additional resource every time a new point-to-point interface is needed. The real beneficiary of this type of research and development is the organisation as a whole and it is important that the institution recognises and puts a value on such activities in the interest of overall efficiency.
Some overheads can be viewed as essential “keeping the lights on” type activity and two issues arise here.
One is to define which of these activities would normally be undertaken by external vendors, and hence would be reflected in their prices, in order to ensure that benchmark comparisons are fair and reasonable. The second is to determine which of these are genuinely essential “overheads” and which stem from the way we choose to do things. With the range of technology options now available we can no longer assume that the way we have always done things is justified.
Just because the services are essential and have long been part of the in-house service provider’s portfolio, does not mean that cloud, shared service or outsourcing options may not provide a better way forward in the future.
"Despite recent initiatives within the FE and HE sectors to improve costing information, neither sector routinely deploys the type of costing systems that can readily identify the full costs associated with activities such as the delivery of a service."
Breslin and Cullen 2008
"Comparative costing of old and new teaching methods has proven difficult, therefore, both across and within institutions. We cannot generalize across institutions because local conditions are so different, and we cannot compare old and new methods within institutions because there is no established baseline for the comparative costing of old and new teaching methods."