Sydney Waters improves efficiency and justifies costs
About
Sydney Water provides drinking water, recycled water, wastewater services and some stormwater services to more than four million people in Sydney, the Illawarra and the Blue Mountains. Sydney Water is Australia's largest water utility with 3,000 staff.
Sydney Water is a statuory State owned corporation, wholly owned by the New South Wales Government and has three equal, principal objectives: To protect public health, to protect the environment and to be a successful business.
Challenge
Sydney Water is a State owned corporation, but following corporatisation in 1996 of the previous entity the rules changed. Sydney Water became fully exposed to market forces much like any other commercial enterprise. Yet, with pricing policy dictated by a government appointed regulatory body, its hand were tied. Any price increase to the customer would need to be justified on the basis that the utility was managing assets in the most efficient manner.
With a higly departmentalised organizational structure cutting across six operating divisions and three corporate divisions, finding the answer wasn't going to be easy.
Impetus for change
The impetus for the transition for ABC/M (activity based costing/management) came in 2001 when funding from the State government was slashed. Corporate finance looked to the Asset Management team to make budget cuts.
Unfortunately, the usual method of asking managers to identify where cuts could be made had little or no effect. Clearly, the traditional apporach to budgeting wasn't going to work. A new, and constructive way of thinking was needed.
"My general manager came to me with the 'Asset Economic Model', a concept which steemed from the belief that there is one optimum cost at which you can run a set of assets. ABC could help us to come to grips with finding what the optimum costs for running our set of assets", says Aubrey Joachim, financial manager of Sydney Water's asset management division.
No stranger to ABC/M, Joachim was part of the team that introduced it to the state government's superannuation body in the early 90s. Sydney Water, however, was altogether different. Various spreadsheets and ABC-type packages were in use, but the appropriate tools of software to handle new complexities were entitely lacking.
Prodacapo's management solutions
Following a review of internal procedures and a detailed submission to the government's Independent Pricing and Regulatory Tribunal (IPART), Sydney Water announced a public tender in 2002. The proposed ABC solution would enable it to identify costs, validate them to the regulator and find efficiencies.
"We searched far and wide for the best software and the best provider. Across every benchmark Prodacapo and its Australian distributor ABM Systems came out in front", says Joachim.
Outcomes
Despite some initial reservations about moving away from traditional budgeting, deployment of Prodacapo's suite of management tools went ahead with the blessing of the entire management team.
The traditional budget mindset gave way to a new vision. Unlike before, Sydney Water now understands its activities insted of just its spending patterns, and can pinpoint the key activities that generate optimal savings and income. Specifically, Prodacapo has become an accepted part of day-to-day business management.
"It's changing the way people think about their job and the way they do their job", remarks Joachim. "Managers can now ask cand receive meningful answers to such questions as: Why are my operators spending 40 percent of their handson time operating a plant, another 10 percent on raising purchase orders, and som much on safety training and other administrative tasks?"
In short, Prdoacapo can identify products and service delivery costs, and capital and operating costs of infrastructure assets. And for any of its activities, Sydney Water can pose 'what if' scenarios that can model costs. As a result, Joachim's division is now able to link ABM with asset management principles, and disseminate unallocated cost pools as precisely as possible to their cost drivers.
"No one had ever figured exactly what the cost of operating each of our asset was. Prodacapo does just that, " says Joachim.
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