Minerva Partners LLP

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Costing and Pricing

• Presentation to SCFDG
• Minerva Partners experience with their Clients

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Minerva Partners

• Two Partners
• Nigel Scott MBA
• Alexis Chapman ACA
• Partners with you
• Finance and Strategy Support
• Step Up, providing guidance and development in
  financial management
• Training in strategic and financial management

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Nigel Scott MBA

• 1991 2002 Finance Director in major charities
• 2005 Course Director MSc Charity Finance, London
  South Bank University
• 2002 now Minerva Partners, clients include
• CFDG, ActionAid, The Redress Trust, British Youth
  Council, Merlin, Amnesty International, YWCA,
  Norwood
• Trustee Interact Worldwide, Richmond CVS,
  Sporting Chance Foundation, Lorna Young Foundation

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Agenda

• Using Full Cost Recovery
• Client examples
• Using Activity Based Costing
• Client example
• Developing a pricing policy
• Accounting or Marketing?
• Quality issues

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What does FCR mean?

• The principle that an organisation should be able
  to recover the full costs associated with
  providing a service (or other output). This
  includes
• Direct costs
• Direct Support costs
• Indirect Support Costs
• Governance and Development Costs

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SORP 2005 Glossary

• Support costs are those costs that, whilst
  necessary to deliver an activity, do not
  themselves produce or constitute the output of
  charitable activity.
• Similarly, costs will be incurred in supporting
  income generation activities such as fundraising,
  and in supporting the governance of the charity.
• Support costs include the central or regional
  office functions such as general management,
  payroll administration, budgeting and accounting,
  information technology, human resources and
  funding

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SORP 2005

• Charitable activities are all the resources
  expended by the charity in the delivery of goods
  and services, including its programme and project
  work that is directed at the achievement of its
  charitable aims and objectives.
• Such costs include the direct costs of the
  charitable activities together with those support
  costs incurred that enable these activities to be
  undertaken.

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The ACEVO Model Full Cost Recovery

• Published October 2002
• Provides a template to help organisations in
  applications for contract and grant funding
• Broad support including HM Treasury and NCVO
• Adopted by Big Lottery Fund and other funders
• But not everyone!

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The manual categories of activity

• Direct output costs
• Category 1 costs
• Category 2 costs
• Category 3 costs

• Front-line activity
• Direct support work
• Indirect support work
• Governance and strategic development work

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ACEVO model weakness

• Costs are allocated to projects on the basis of
  the value of Direct and Direct Support costs
• Not appropriate to UR
• Needed an alternative ABC!!

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ACEVO Model used by STAR

• BLF continuation project
• Full model turned into a spreadsheet
• Included a contribution to reserves
• BLF accepted model, except for
• Contribution to reserves!

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Local Authorities

• Approach to costing local authority social
  services generally not based on Full Cost
  Recovery and variable
• CIPFA Code of Practice on Best Value Accounting
  (2000) excludes governance and strategic
  development costs
• CIPFA guidelines also excludes Unapportionable
  Central Overheads such as pension fund charges,
  unallocated IT costs and fixed asset costs

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Government view

• Nobody can force organisations to bid for
  things or get them to do things they dont want
  to do. Its part of the programme of initiatives
  such as Futurebuilders that the sector builds up
  its own sustainable structures, so it isnt
  dependent on grants and is able to have a solid
  base of its own.
• Paul Goggins
• Minister for the Voluntary and Community Sector

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Local Government view

• If our friends in the voluntary sector started to
  play hardball services would improve.
• We would need to stop seeing them as a soft touch
  and make longer-term, higher-risk commitments.
• Maybe thats why so many council chief executives
  feel able to disparage the efforts of the third
  sector on their patch it is a comfortable
  position, and it avoids financial commitment
• But, in the long run, there can only be winners
  if we help the voluntary and community sector
  build its confidence
• Reported by Warren Hatter, New Local Government
  Network

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Our experience

• Over 60 Local Authorities working with three
  clients
• 26 different identified models for residential
  care
• Core costs continues to be the big issue for them
• Lack of strategic view on pertnerships

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Costing at YWCA

• Moved out of residential care
• Retains a large HO infrastructure
• Local projects bid for at local level are
  required to achieve 15 management charge
• Projects can pick from a menu of HO services to
  suit the requirements of the local funder

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Costing at Norwood

• Long-term residential care
• Some residents are under-charged
• Need a pricing model for new residents
• Need a separate costing model based at home level
• Danger of subsidy
• Mixed costing/pricing

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Activity Based Costing

• Activity drivers
• Quantifiable requirement that means you need to
  undertake an activity
• Activity rate
• The average expenditure for each unit of the
  activity driver
• Pricing decisions
• Using activity rates to determine the real cost
  to a funder

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Activity Based Costing

• Using the Cost Classification
• Identify the activity drivers
• Identify the costs associated with each
  Classification and their relationship to the
  drivers
• Identify those costs which do not relate to a
  driver or Classification
• Decide whether the surplus costs are needed for
  regulatory purposes

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ABC at United Response

• Determined the Activity driver as
• Contact Hour
• Included anticipated organic growth
• This enabled a cost per hour to be calculated
• Total hours were 2,880,677

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Simple spreadsheet!

• Staff hours per week calculated
• Day, Night, Sleep In
• Area Support Manager
• Division Support Manager
• Recharged per capita
• Insurance, Audit, Training, Recruitment
• HO costs as management fee
• Direct support, Indirect support, Governance

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Result

• Wide variance in surplus or deficit in each
  service
• At Division level this showed up the competence
  of budgeting
• Some Divisions historically undershot their
  projected net surplus
• One Division was always spot on, now they seemed
  to have a very low margin, yet

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United Response output

• Pricing model
• Divisions must achieve surplus
• Enables local negotiation to suit purchaser
  limitations
• Puts beneficiary first
• Some local services will operate at a deficit

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But how to price?

• Pricing per service varied enormously across and
  within regions
• Previously profitable services now seemed
  loss-making
• Need to decide where the balnce must be taken

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Pricing Policy the accounting approach

• Market pricing
• External focus
• Prices charged by competitors are examined
  together with the amount customers are willing to
  pay
• Cost-plus pricing
• Internal focus
• Total costs of the product are established and
  then a profit mark-up is added

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Pricing Policy the marketing approach

• Target Costing
• A price is set with reference to market
  conditions and customer purchasing patterns. A
  target profit is then deducted to arrive at a
  target cost. The target profit is set before the
  product is manufactured.

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Setting the Price

• Price-quality strategies
• Selecting the pricing objective
• Determining Demand
• Estimating Costs
• Analysing Competitors Prices and Offers
• Selecting a Pricing Method
• Selecting the Final Price

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Price-quality strategies
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Selecting the pricing objective

• Survival
• Maximum Current Profit
• Maximum Current Revenue
• Maximum Sales Growth
• Maximum Market Skimming
• Product-Quality Leadership

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Selecting the Final Price

• Psychological pricing
• The influence of other Marketing-Mix elements
• Pricing Policies
• Impact of Price on Other Parties

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Questions and Discussion

• Nigel Scott MBA
• Minerva Partners LLP
• nigel.scott_at_minervapartners.co.uk
• Tel [phone]