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Plan & Budget 2001 / 02 for the year ending 31 March 2002 - chapter five

building a cost effective service - "progress in achieving cost efficiencies"

Introduction

1 Our plan is to build a responsive and cost effective ombudsman service. We recognise that absolute costs have increased with increased workload. However, we plan to measure progress on cost effectiveness by comparing the unit cost of the service, year on year. On this basis, unit cost is estimated to increase from £730 in 1999/2000 (the average of the 'old' schemes) to £764 in the current year 2000/2001. This is a direct result of increased investment in resources and skills. Unit cost is then budgeted to fall next year, 2001/2002, to £688 as a result of increased scale and increases in productivity.

2 The initial investment in the merger of the schemes can be analysed into capital expenditure on premises and technology of £11.2m and establishment costs of £5m. The capital expenditure is being recovered through the depreciation charge and is therefore reflected in the unit cost. Establishment costs of £4.7m will be recovered in three instalments from 2002/03 onwards. The projected improvement in unit cost outlined below is to a large degree a result of this additional investment.

 

Progress in reducing unit costs

3 Our current measure of unit cost is to take the aggregate annual costs of the organisation (before financing charges) and divide this figure by the total number of cases closed in the year. This gives a broad approximation of the cost of resolving each complaint and can therefore act as a benchmark for changes in our cost effectiveness.

4 It is important to stress that this is only an approximate benchmark - the unit cost includes not only the direct costs of handling a case but also a proportion of other general and support costs. The measure therefore remains a reliable benchmark as long as the relative costs of the various stages of our process remain stable over time. We discuss the implications of this in paragraph 10 below.

5 Accepting that this is an imperfect measure, unit cost can still show a picture of current progress. As set out in chapter 3 of this document, in the current year 2000/01 we took the decision to invest in new additional skills and resources for the single ombudsman service. This has resulted in an increase in our unit cost from £730 (the average of the ombudsman schemes in 1999/2000) to an estimated £764 in 2000/01.

6 Looking forward to next year, our unit cost is projected to fall to £688, which is £76 below the current year and £42 below the unit cost of the separate ombudsman schemes in 1999/2000. The unit cost is made up as follows.

Build-up of cost per case    
 

2000/01
Estimate
£

2001/02
Budget
£
Case-handling direct costs 404 361
     
Costs of complaints prevention    
Customer contact division
(aiming to resolve as many complaints as early as possible)
79 73
External liaison/information 15 15
     
Other    
Management and board 21 16
Support costs 101 81
Premises and facilities 90 88
Depreciation 54 54
Total 764 688
     
Note cost of each activity divided by the number of closed cases.

7 Progress in achieving cost efficiencies can be tracked using this analysis. Productivity benefits show in a reduction in the case-handling unit cost, while scale benefits show in the management and support costs. However, as indicated in paragraph 10 below, the relationships will become more complex and we will need to track two or three key measures rather than a sole yardstick.

 

Control mechanism

8 We have suggested to the FSA that we introduce a control structure which would be similar to a 'one-way' ratchet. Each year, we will establish a target unit cost for the budget year. If complaint volumes are above the budget assumption, and additional funds are required, then this would need to be translated into a lower unit cost - for 2001/02 this would need to be below £688.

9 On the other hand, if complaint volumes are below the budgeted assumption, we should aim to make sufficient savings to keep the unit cost no higher than the agreed target number. Clearly, if this is predicted to happen mid-way through a financial year, we would need some time to achieve those savings. We would also want to take the opportunity to reduce queue lengths if these were at an unacceptable level.

 

Future refinement

10 Although this overall approach is sound, we will need to refine the actual definition of unit cost. At present, we simply take total costs (before financing) and divide it by the number of closed cases. However, as set out in chapter 3 of this document, a key element of the new business process is to try to resolve complaints as early as possible, and wherever possible, before they become chargeable cases. We could, therefore, envisage a position where our process is successful in resolving more disputes at an early stage - but where the unit cost appears to increase because of a fall in chargeable cases.

11 To overcome this problem, we will supplement the single unit cost ratio with a cluster of three or four ratios for next year's budget paper. The most probable ratios will be as follows.

Area Ratio Casework
productivity Cost per case
'Complaints prevention' productivity Cost per measured activity
Facilities and support costs Cost per total headcount

However, our overall approach will remain the same, and whatever measurement of unit cost is used, we will recalibrate previous years' data to provide a consistent base of comparison.

12 As a final point, it would be wrong to see the emphasis on productivity and unit cost as necessarily in conflict with the need to continually improve service standards. High levels of productivity lead to shorter response times. The more efficient process-organisations manage to combine low unit costs and short queues.