Sample Financial Baseline Report

RE-INVENTING XYZ

Financial Baseline Report

Finance Team

Prepared for:

XYZ BPE Project

XYZ Division Ministry of Government Services

October, 1994

XYZ BPE Project Financial Baseline Report

October, 1994 Page 1

Executive Summary The XYZ Financial Baseline Report has two objectives:

• Define the existing levels of cost within the scope of the XYZ BPE project from which the impact of the recommendations will be measured; and,

• Illustrate value and nature of the major drivers of cost in XYZ to help focus the efforts of the re-engineering teams.

The key result of this report is the Financial Baseline. It serves as the financial benchmark from which operating budget cost reductions, one of the key performance measures for the BPE project, will be measured. The Finance Team, in cooperation with the other project teams, has defined the Financial Baseline as the 1994/95 Budget. Their decision was based on a set of criteria to enforce comparability, verifiability, and reasonability. The following is a summary of the Financial Baseline. This report details the sub-components of each cost category as well as the steps and criteria used in their derivation.

XYZ Financial Baseline Manpower $ 25,000,000 Supplies and Services 15,000,000 Implementation Costs 1,000,000 Other Costs 2,000,000 Total Operating Budget $ 43,000,000 Capital Investments 4,000,000 Total Budget $ 47,000,000



The XYZ BPE Financial Baseline At the Project Design Meeting, the Deputy Minister discussed his vision of a “significant reduction in costs from existing levels” in the XYZ Division. His objective was to be attained through two major projects:

• The outsourcing of the information technology infrastructure to produce savings of over a third of the 1993-94 IT budget within 3 years; and,

• The re-engineering of XYZ’s processes to produce savings through productivity improvements and functional outsourcing.

In order to measure the cost reduction achieved, it is necessary to define a baseline, or a benchmark, from which the impact of the recommendations of the XYZ BPE project can be compared. In other words, it is necessary to define “existing cost levels”. As a first step, the Finance Team agreed that the best representation of the XYZ’s Budget is the current Business Plan for Ministry of Government Services. However, it required modification to meet the following defining criteria:

• The baseline must focus on costs that are within the scope of the project. i.e. only costs that may be impacted by the recommendations of the project teams should be considered.

The XYZ Core Process Model represents a complete picture of XYZ’s desired “world of work” to which the Process teams are

re-engineering. Therefore, all costs in XYZ’s Budget are in scope.



The baseline must not contain estimates of future cost reductions based on assumptions that may change as a result of the BPE project.

The current Business Plan for Ministry of Government Services contains estimates of XYZ budgets from 1993/94 to 1997/98. The Finance Team, in coordination with the other project teams, decided that the current budget year, 1994/95, provided the best reflection of existing cost levels. All future budget estimates show cost reductions based on assumptions made prior to the commencement of the BPE project. Therefore, only the 1994/95 Budget will be considered as the Baseline.

• The baseline must be verifiable through publicly available records. The number and nature of the stakeholders suggests that the results and the assumptions of the BPE project must not only be

understood, but be satisfactory to a wide audience. The XYZ Budget is available to the public through the Ministry of Government Services’ Business Plan. Any attempt to communicate a Financial Baseline that differs from the Budget will be difficult and may lead to skepticism.

• The baseline must recognize costs and savings known at the time of writing to permit reconciliations with activities occurring

in parallel to the BPE Project.

Following from the previous point, there should still be an attempt to reflect the most accurate information possible at the time of writing. The Finance Team decided that this would best be done through notes to the statements. The model is flexible enough that one can use the notes to quickly assess the impact of different assumptions.



Therefore, the Finance Team recommends that the Financial Baseline be represented by the complete 1994/95 XYZ Budget as follows: XYZ 1994/95 Budget

Manpower $ 25,000,000 Supplies and Services 15,000,000 Implementation Costs 1,000,000 Other Costs 2,000,000 Total Operating Budget $ 43,000,000 Capital Investments 4,000,000 Total Budget $ 47,000,000



Baseline Budget Details The Finance Team is responsible for providing budget details to the other project teams to:

• focus their attention on the most significant costs and opportunities for savings; • determine the potential impact of their recommendations; and, • validate the assumptions used by the other teams in their baseline and re-design analyses.

The requirements of each of the teams are summarized below with the relevant financial information. Complete 1994/95 Budget details are provided in Exhibit A. Organizational Design Team

In the baseline phase of a re-engineering project, the Organizational Design team is primarily concerned with the number and categorization of FTE’s (full time equivalents) and the average loaded compensation figures for each category. According to the Baseline Budget, the Finance Team estimates the total cost of Manpower at $25,000,000 over 650 FTE’s as follows:

Category Number of FTE’s Avg. Loaded Comp. Manpower

Total

Management 50 $ 65,000 $ 3,250,000 Professional/Technical 100 $ 50,000 $ 5,000,000 Clerical 500 $ 35,000 $ 16,750,000

The Organization Design Team has determined that the total number of existing employees in the XYZ Division as of September 30, 1994 is 500. The difference in the number of FTE’s and number of employees can be accounted for by:

• FTE’s are full time equivalents, not actual people. Job-sharing and temporary assignments distorts this number; • The 650 FTE’s is a budgeted number at April 1, 1994; • Since April 1, the number of FTE’s has been falling due to attrition without replacement; and,



• The reduction of 50 employees due to the Company ABC Outsourcing Agreement has not been reflected in the number of FTE’s.

A portion of the Supplies and Services budget is also directly attributable to employees such as travel, rentals, and hosting. The average direct cost of Supplies and Services per FTE is $1,500 . Details are provided in Exhibit B.

Technology Team

The Technology Team has looked to the Finance Team to estimate the major cost elements of the data processing budgets so that they may understand which systems hold the most promise for significant savings. In the 1994/95 Budget, the cost of each of the major systems is expressed as a charge to Data Processing Services within Supplies and Services as follows. In 1995/96, the costs of the major systems are borne by Company ABC under an outsourcing agreement valued at $8,850,000.

Major Systems Costs 1994/95 Service A $ 3,000,000 Service B 1,500,000 Service C 3,750,000 Service D 500,000 Service E 100,000 Other 2,000,000 Total $10,850,000

Process Teams

At the completion of the re-design phase, a new XYZ budget will be estimated based on the recommendations of each of the project teams. Rather than estimating costs by cost center, the budget will be determined process-by-process. This approach enables the consideration of opportunities for functional outsourcing. As each process is re-designed, it may become apparent that an external organization can provide the same function with better performance (cost, service) than the re-engineered XYZ. For example, an external organization may offer the additional benefit of economies of scale or an established competence. The cost to implement



and operate the re-engineered process will be a key factor in determining whether the process could be outsourced to an external organization. Thus, only the cost of the re-engineered process is important and baseline costs on a process-by-process basis are not necessary.

Communications Team

The activities of the Communications Team result in transformation costs - costs incurred to communicate the goals and activities of the project team during baseline and design and to facilitate the change process during implementation. As a result, they are new costs and do not require baseline financial data.



The Financial Model To estimate the financial impact of the project teams’ recommendations, the Finance Team has developed a Financial Model in Excel. The model was designed to perform the necessary calculations efficiently and present the results in a consistent format. The XYZ Financial Model has been updated with the baseline data described in this report and is provided in the attached Exhibit C.



Exhibit A



XYZ 1994/95 Operating Expenditure Details

Manpower 25,000,000 58%

Supplies & ServicesTravel Expenses 400,000 1%Advertising 5,000 0%Freight & Postage 1,100,000 3%Rentals 200,000 0%Telephone & Communication 400,000 1%Repairs & Maintenance 800,000 2%Memberships 45,000 0%Data Processing Services 10,850,000 25%Forms & Printing 1,200,000 3%

Implementation 1,000,000 2%

Other 2,000,000 5%

Total Operating Budget 43,000,000 100%



Exhibit B



Average Supplies and Services Cost per FTE

Description Original Budget Amounts ExcludedAmounts Allocated

to FTE'sTravel Expenses 400,000 400,000Advertising 5,000 (5,000) 0Freight & Postage 1,100,000 (1,000,000) 100,000Rentals 200,000 200,000Telephone & Communication 400,000 (300,000) 100,000Repairs & Maintenance 800,000 (725,000) 75,000Memberships 45,000 (45,000) 0Data Processing Services 10,850,000 (10,850,000) 0Forms & Printing 1,200,000 (1,100,000) 100,000

Supplies and Services Total 15,000,000 (14,025,000) 975,000

FTE Allocation 975,000Number of FTE's 650Supplies & Service per FTE 1,500



Exhibit C



Parameters

Category Value

Financial Variables

Inflation Rate 0.00%

PeriodsPeriod 1 1994/95Period 2 1995/96Period 3 1996/97Period 4 1997/98



Manpower Reduction Savings

Budget YearsCategory 1994/95 1995/96 1996/97 1997/98 Totals

ManagementPositions DisplacedWeighted Average FTE's DisplacedAverage Cost per FTE 65,000 65,000 65,000 65,000

Subtotal: Manpower Savings

Professional and TechnicalPositions DisplacedWeighted Average FTE's DisplacedAverage Cost per FTE 50,000 50,000 50,000 50,000


Administrative SupportPositions DisplacedWeighted Average FTE's DisplacedAverage Cost per FTE 35,000 35,000 35,000 35,000


Total Manpower Reduction Savings

Net FTE Impact



Supplies & Services Savings - FTEs


Manpower Reduction FTE's

Net FTE DisplacementAvg. Supplies & Services Cost per FTE 1,500 1,500 1,500 1,500

Total Supplies & Services Savings - FTEs



Severance Costs


ManagementPositions DisplacedPositions Eligible for SeveranceSeverance Cost per Position 50,000 50,500 51,000 51,500

Subtotal: Severance Cost

Professional and TechnicalPositions DisplacedPositions Eligible for SeveranceSeverance Cost per Position 30,000 30,500 31,000 31,500


Administrative SupportPositions DisplacedPositions Eligible for SeveranceSeverance Cost per Position 20,000 20,500 20,500 20,500


Total Severance Costs



Info. Tech. Operating Costs


Private Agent Desktop

Vital Statistics

Corporate Registries

Land Titles

Motor Vehicles

Personal Property

Registries Office Automation

Total Info. Tech. Operating Costs



Training Costs


Skills Upgrade for Re-designed Processes

Positions requiring TrainingAverage Training cost per Position

Training Cost for Re-designed Processes

General Skills Upgrade Training

Total Training Costs



Outsourcing Costs


Total Outsourcing Costs



Consulting Costs


Outplacement Consulting

Total Consulting Costs



Communications Costs


Total Communications Costs



Benefits


Manpower Reduction Savings

Supplies & Services Savings

Total Benefits



Costs


Supplies & Services Costs

Information Technology Operating CostsOutsourcing Costs

Total Supplies & Services Costs

Implementation Costs

SeveranceTrainingConsultingCommunications

Total Implementation Costs

Total Costs



Capital Investments


Total Capital Investments



Amortization


Capital Investments by completion date

Total Completed Capital Investments

Amortization (7 years Straight Line) 14.30%14.30%14.30%14.30%14.30%14.30%14.30%

Total Amortization



Forecasted Cash Flow

Budget Years Category 1994/95 1995/96 1996/97 1997/98 Totals

Benefits:Manpower Reduction SavingsSupplies and Services Savings

Total BenefitsCosts:

SeveranceInformation Technology OperatingTrainingConsultingCommunicationsOutsourcing

Total CostsCapital Investments:

Information TechnologyTotal Capital Investments

Total Forecasted Cash Flow

Cumulative Cash FlowPayback Period



Forecasted Cash Flow (Including External Divisions)

Budget Years Category 1994/95 1995/96 1996/97 1997/98 Totals

Benefits:Manpower Reduction SavingsSupplies and Services SavingsExternal Division Benefits

Total BenefitsCosts:

SeveranceInformation Technology OperatingTrainingConsultingCommunicationsOutsourcingExternal Division Costs

Total CostsCapital Investments:

Information TechnologyExternal Division Capital Investments

Total Capital Investments

Total Forecasted Cash Flow

Cumulative Cash FlowPayback Period



Forecasted Operating Expenditures

Baseline Forecasted Forecasted Forecasted Forecasted1994/95 1994/95 1995/96 1996/97 1997/98

Category ($000) ($000) ($000) ($000) ($000)

Operating Expenditures

Manpower 25,000.0

Supplies and Services 15,000.0

Implementation Costs 1,000.0

Other (Amortization) 2,000.0

Forecasted Operating Expenditures 43,000.0

Forecasted Capital Investments 4,000.0

Forecasted FTE's 650.0



Forecasted Operating Expenditures Comparison - 1994/95 BaselineBaseline Forecasted Forecasted Forecasted1994/95 1995/96 1996/97 1997/98

Category ($000) ($000) % Chg ($000) % Chg ($000) % Chg


Manpower 25,000.0 (100%) (100%) (100%)

Supplies and Services 15,000.0 (100%) (100%) (100%)

Implementation Costs 1,000.0 (100%) (100%) (100%)

Other 2,000.0 (100%) (100%) (100%)

Forecasted Operating Expenditures 43,000.0 (100%) (100%) (100%)

Forecasted FTE's 650.0 (100%) (100%) (100%)



Forecasted Operating Expenditures Comparison - 1994/95 ForecastForecasted Forecasted Forecasted Forecasted

1994/95 1995/96 1996/97 1997/98Category ($000) ($000) % Chg ($000) % Chg ($000) % Chg


Manpower 22,000.0 (100%) (100%) (100%)

Supplies and Services 15,000.0 (100%) (100%) (100%)

Implementation Costs 500.0 (100%) (100%) (100%)

Other (Amortization) 2,000.0 (100%) (100%) (100%)

Forecasted Operating Expenditures 39,500.0 (100%) (100%) (100%)

Forecasted FTE's 500.0 (100%) (100%) (100%)



Summary

Category ($000s)

ParametersInflation Rate 0.00%

Budget (1997/98)Manpower 0.0 (100%)Supplies & Services 0.0 (100%)Implementation Costs 0.0 (100%)Other Costs (Amortization) 0.0 (100%)

Forecasted Operating Budget 0.0 (100%)

Forecasted Capital Investments 0.0

Forecasted FTE's 0.0 (100%)

Total IT Investment (1994/95-1997/98) 0.0Severance (1994/95-1997/98) 0.0

Payback Period 0.0

Documents

Sample Financial Baseline Report