Program/activity-based management at the Regional Municipality of Peel: an organization in transition.

Transition to a program- and activity-based management system involves Peel's management and staff in much debate on issues of cost allocation, technology, and the corporate culture.

The Regional Municipality of Peel is a growing municipality located on the west side of the Greater Toronto Area (GTA) and is home to 834,000 of the GTA's 4.7 million residents. The Peel economy is prosperous and diverse, with a strong base in automotive, pharmaceutical, and telecommunications industries. Peel is also home to the Lester B. Pearson International Airport - Canada's largest airport. Standard & Poor's, Moody's, and the Canadian Bond Rating Services (CBRS) all assign Peel's credit worthiness their highest rating.

The Regional Municipality of Peel delivers and/or finances the following "portfolio" of major municipal programs: regional planning, sanitary sewer, water supply, solid waste management, arterial roads, policing, 911 emergency telephone, heritage, public health, home care, homes for aged, child care, disabled transit, and welfare services.

When asked to describe his impressions of Toronto, Peter Ustinov once remarked that the city reminded him of "Manhattan... run by the Swiss." Ustinov's now infamous remark underscored both the cosmopolitan character of greater Toronto and the efficiency of its administration. Pioneering innovative management techniques is part and parcel of the municipal governance tradition in the Greater Toronto Area. The Regional Municipality of Peel's corporate performance measurement (CPM) initiative is one of the latest examples of this tradition of management innovation.

At the core of Peel's Corporate Performance Measurement initiative is a commitment to a program- and activity-based management philosophy - a philosophy that currently is being implemented through activity-based program planning, budgeting, costing, and evaluation. Peel's management philosophy requires that three basic questions about every program be answered:

* What is the cost per unit of service for each Peel program - Is it efficient?

* Is each Peel program delivering high quality service from the customer's perspective - Is it effective in meeting stated program objectives?

* Is the amount of program being provided (i.e. service levels) consistent with the measured need in the community - What is the community impact of the program?

This article will document the underlying rationale for program/activity-based management in Peel. It will describe the current CPM "state of the art" (e.g., activity-based budget, program-based performance indicators, etc.), and it will set out some of the key technical challenges/costing issues Peel has grappled with during its transition to an activity-based view of the world.

Reinventing Management in Peel

The fiscal and service delivery realities now facing municipal governments in Ontario are without precedent. Senior government downloading of expenditures (i.e., devolution) and grant reductions are now part of the standard operating environment faced by municipalities. The taxpaying public displays a heightened sense of consumer expectations when it comes to quality - these heightened expectations do not moderate or go away simply because the good or service being purchased is traditionally thought of as government. Private-sector competition with traditional public-sector monopolies now is regarded as common sense. Clearly these new realities require different municipal management approaches - reinvented municipal management approaches. Traditional municipal management approaches are simply not up to the challenge.

Traditional municipal management makes use of the "org structure" as its central organizing principle: budgets are organized around sections and divisions and departments, and operational planning focuses on the desired volume of outputs instead of emphasizing program outcomes. The true cost of municipal programs, almost always consisting of a blend of costs associated with multiple org structures, is not available.

True program costs have not been a priority in the past because the interests of the "customer" have not been placed at the centre of the corporate culture. A basic truth has gone unnoticed - the taxpayer does not consume and pay for sections and divisions and departments. The taxpayer pays for programs. Until programs and their constituent activities become the central organizing principle of municipal management, taxpayer accountability will remain clouded, and the management challenge represented by the new realities will go unanswered.

As one of the first large municipalities in Canada to manage the transition between the traditional org-structure approach to management and a reinvented, program-based view of the world, Peel finds itself in a somewhat unique position to share its insights and experience to date.

The Peel Vision: CPM

Corporate performance measurement at Peel is based on the following five management building blocks, which will be integrated into Peel's program-based annual planning and management cycle:

* program missions and activity maps,

* activity-based costing,

* activity-based budgeting,

* activity-based reporting, and

* program performance measures.

A program's mission and activity map outline the fundamental reasons for delivering the program, list the objectives for the program, and document the program's constituent activities. For example, the program mission and map for the waste management program are as follows:

Program Mission Statement: To maintain and develop an ongoing integrated solid waste management system that meets the needs of citizens and businesses; conserves natural resources; minimizes the impact of solid waste disposal on the environment; and is environmentally sound, socially acceptable, technically efficient and economically viable. Programs and policy initiatives are aimed at the reduction of waste through reduction, reuse, recycling, and composting.

Activity-based costing utilizes the program map to reorganize Peel's general ledger account structure from a structure based on the org chart to an activity- and program-based structure. In the case of waste management, the previous general ledger structure reflected an org-chart view of the world which had a director and five managers heading up the following sections: planning and policy, waste reduction and recovery, landfill operations, development and abatement, and waste collection and recycling. Each section had its own set of cost centres and accounts despite a certain degree of functional/program overlap among the sections. The newly designed program map for waste management is illustrated in Exhibit 1; in this concept, costs are pooled according to various operations or levels of program activities (e.g., collection, processing, disposal) and subactivities (e.g., garbage, blue box, organics, white goods). Org charts are nowhere to be seen in the new general ledger structure for waste management.

The program- and activity-based cost structures in the general ledger are being used to feed Peel's new activity-based corporate planning and budgeting system. This new system moves Peel's planning and budgeting from the traditional department/division/section hierarchy to a program- and activity-based hierarchy. The activity-based budget also creates two budget contracts with taxpayers: a pure expenditure contract and a contract based on cost per contracted unit of service to be delivered. This approach to budgeting focuses debate on the relative priorities of the programs and activities being delivered to the customer (the outputs and outcomes) as opposed to the department or the division (the inputs). Activity-based budgeting also quickly shows whether changes in the program's budget are driven by changes in the amount of service provided or by changes in the cost per unit of service.

Activity-based reporting will be based on access to an on-line, real-time accounting information system using the new activity-based account structures. The system will not only show budget and actual costs incurred but also provide program-based performance information.

Program performance is tracked by three distinct measures:

* community impact indicators document the amount of service provided versus its community demand;

* program efficiency is measured by comparing the cost per unit of service over time against historical unit costs; and

* program effectiveness is measured by two sets of customer service indicators: objective measures, such as percentage of households with waste collected on their scheduled day, and subjective measures derived from ongoing surveys of Peel residents.

Program-based Management

Peel's program-based planning and management cycle consists of five steps:

* program objective and target setting,

* program business planning,

* service level review,

* budget development, and

* program evaluation.

In program objective and target setting, the external environment is analyzed to identify threats and opportunities and to set draft targets. Broad budgetary guidelines, such as inflation projections, assessment changes, and grants from senior levels of government, are incorporated into these targets. The chief administrative officer, in conjunction with the senior management team, reviews previous year's targets and actual results to date to assist in realistic target setting.

The development of program business plans for the coming fiscal year is the second step of the cycle. The business plans consist of several sections designed to stand alone so they can be utilized in a variety of management and political settings. Each program has its own business plan. The overview consists of the program's mission, the above noted targets (as well as the previous year's targets and results), the program map, the resources/assets the program uses, and highlights of proposed changes in its activities in the next year. The CPM and service-level review has the program's unit costs, internal and external efficiency indicators, objective and subjective customer service indicators, and community impacts. A preliminary current budget summed by activity (including total-dollar and cost-per-unit variance analysis from previous year's budget) and a preliminary capital budget summed by project are included in separate sections of each business plan. Supplementary data to support the summaries and detail line item activity budgets also are found in separate sections of each plan. Finally, controllership and program review information is added by the finance department.

During the council service-level review, the program business plans are brought forward to council. During the review, council may trade-off the units of service that one program was planning to deliver with those of another activity that they feel has a higher priority.

The program's final capital and current budgets are developed and approved using the business plans, as revised by council, along with the latest external projections. Finally, program evaluation consists of reviewing the various performance indicators of the program to determine its efficiency and effectiveness in meeting objectives over the past year. These results are used to set new targets as the cycle begins again with step one. FY1997 will see this integrated cycle implemented in full by Peel for the first time.

Exhibit 2

COST ALLOCATION FOR PROGRAM AND ACTIVITIES

Allocation Example          Program

                            Direct program costs         $3,000,000
                            Internal charges                200,000
                            Program overheads               110,000
                            Corporate overheads              60,000
                            Total Program Cost           $3,370,000

Activity 1

Direct activity costs         $1,000,000
Internal charges                 150,000
Program overheads                100,000
Corporate overheads               50,000
Total Activity Cost           $1,300,000

Activity 2

Direct activity costs         $2,000,000
Internal charges                  50,000
Program overheads                 10,000
Corporate overheads               10,000
Total Activity Cost           $2,070,000

Key Costing Issues and Challenges

The transition to a program- and activity-based management system is conceptually and logistically challenging. The major issues, which have been the subject of much debate and careful consideration among Peel's senior management and staff, are cost allocation, technology, and corporate culture.

Cost Allocation Issues. The primary goal of a program-based management system is to develop full and accurate cost pools for each of the programs being delivered. By definition, full costs should include direct program costs, program support costs, corporate overheads, and internal charges. Exhibit 2 illustrates the application of this costing method to two activities of a program.

An issue common to the allocation of all types of costs is how far down the program map costs should be allocated. The answer depends on what level of fully costed activity has been defined as useful by council, taxpayers, and program management. Once defined, the level where full costs are deemed useful represents the minimum level to which costs must be allocated. This decision should be guided by a practical sense of cost/benefit, given the potential complexity of the allocation and the constraints imposed by available technology.

Program overheads (or program support costs) include costs of activities not related to service delivery, program research and development, and program administration (i.e., the department's commissioner's office). The method of allocation for these costs needs to be determined. If there is no unique cost driver, a fixed percentage allocation probably will be appropriate.

Internal charges are for established, internally provided support services. It is necessary to charge a program with the costs of all the internally provided support services consumed in order to arrive at full program costing. Examples of internally provided services include legal support, payroll processing, and rent for office space. Ideally, each charge received by a program would have a clear linkage to the consumption of the related support service, and the basis for the calculation of the charge rate would be available to the chargee.

Corporate overheads fall into two categories. The first category includes internal support costs that can be reasonably attributed to a specific program but are not yet charged back as established internal charges. In this sense, the first category exists only as a temporary cost accounting imperfection that needs to be properly charged back to programs. The second category of corporate overhead involves costs that cannot be attributed to specific programs (e.g., council and clerk costs) on the basis of consumption.

The issue for the remaining pool of "pure" corporate overhead costs that cannot be reasonably attributed to a specific program on a consumption basis is whether or not to allocate these costs back to programs at all. In order to develop full program costs, these costs may need to be allocated back to programs based on some arbitrary method like pro rata share of total program budgets. (Note: for external benchmarking, these costs can be backed out.)

Technology Issues. The question of who will have access to CPM data and how timely that information will be must be addressed early in the transition process. Specifically, if the CPM data are meant to be a program-management tool, then program managers and analysts need to have access to the information on a timely basis. Peel is committed to using its executive information system (ELS) to distribute and collect much of its CPM data.

The data available from the CPM system can be extremely detailed. For senior management purposes it is necessary to summarize the data to a level that allows for relatively easy scanning of program results on an ongoing basis. This information ideally would sit in a single application that is available to all senior management. From this high-level information, questions can be asked that will require exploration through the various levels of program and activity data to explain program performance. Again, Peel's EIS is meeting corporate need for performance tracking across the bundle of diverse programs by providing relevant time-series, summary-level data.

Corporate Culture Issues. CPM is a tool with which management performance can be measured in terms of unit costs, effectiveness of service delivery, and customer satisfaction with the service delivered. CPM is the centrepiece in a portfolio of management tools and techniques which can be used to generate continuous improvement. Once Peel's programs are properly costed and outcomes measured, process redesign and continuous improvement can begin. Successful program delivery plans and approaches can be repeated, unsuccessful plans and approaches discarded. Without first developing a corporate culture attuned to outcome measurement, it is impossible to learn from program management decisions and continuously improve during future planning cycles. Without understanding what a program and its related activities truly cost, it is impossible to make comparisons with other "best practices" providers of a similar program. It is through linkages to this culture of internal measurement and external benchmarking comparisons that continuous improvement efforts can flourish.

Staff performance evaluation provides the critical link in the plan, perform, and measure loop. Rewarding superior performance against agreed-upon benchmarks and correcting performance deficiencies according to the same benchmarked criteria are required to add the necessary rigour to the planning cycle. Clear linkage between program performance and individual staff performance appraisals ensures buy-in from the various levels of Peel management.

External Benchmarking Challenges

Corporate performance measurement is primarily an internal tracking and productivity tool. Progress in unit-cost management usually is measured by comparing a given program's current unit costs against its own historical unit costs. The program/activity-based approach to costing and management that underpins CPM, however, also is crucial to cost and quality benchmarking across municipal organizations. Without activity-based management, external benchmarking will fail to generate apples-to-apples comparisons and will quickly lose credibility.

Developing a commonly accepted program map that documents all of the activities for a given program is the first step in an external benchmarking exercise. The program map is crucial because efforts to benchmark costs at a summary level (e.g., cost per tonne for waste management) are bound to run into trouble. The blend of activities that make up the program rarely will be the same across the pool of comparator municipalities. For instance, Peel does not offer waste collection services to business, while some GTA municipalities do offer this service. It therefore would be inappropriate to make summary-level comparisons of cost/tonne data. Instead, external benchmarking needs to focus on each discrete program activity to ensure apple-to-apple credibility.

Common cost pooling/allocation protocols are the second critical element in external benchmarking. Common definitions of overhead costs, capital versus operating expenditures, asset replacement costs, and so forth will be required. Common cost allocation rules also will be required. While this process of developing accounting protocols is time consuming and complex, the credibility of the entire exercise is dependant on this costing "treaty" among participants. Benchmarking will do more harm than good unless the unit-cost comparisons are developed in a thorough and appropriate fashion.

To date, Peel has been playing an active role in municipal benchmarking efforts and a study undertaken by the Greater Toronto Coordinating Committee (reporting to the Minister of Municipal Affairs and Housing) and the regional chief administrative officers of Ontario.

Summary Observations

The transition to a program/activity-based management system and culture is never complete. The process is iterative. Peel continues to refine its program maps, activity-costing tools, performance indicators, and unit-cost planning techniques. The 1997 cycle marks the first attempt for Peel at fully integrating all of the elements of corporate performance measurement into a coherent planning and management cycle. While many of the details concerning implementation will continue to evolve, Peel will remain committed to its customer-centred approach to program-based management. The new fiscal realities facing Ontario municipalities no doubt will be a stimulus towards navigating away from the old org-chart view of municipal management towards a more relevant program-based view of the world.

MICHAEL R. GARRETT is chief administrative officer of the Regional Municipality of Peel, Ontario, and TODD MACDONALD is coordinator of management and policy services, finance department, Regional Municipality of Peel. For further information about Peel's activity-based management, telephone MacDonald at 905/7919400, ext. 4771.