Cutting costs – how to select an optimum solution Workshop Session E2

Mike Walker FIRM FRICS

Principal - redamber consulting

Date: Tuesday 22 March 2011

Agenda

Cutting costs – how to select an optimum

solution

•Introductions/housekeeping

•Short presentation on value & cost

•Practical study (in teams)

•Close

redamber consulting

Rules for a VM workshop (& today)

•All ideas are welcomed, no matter how radical, innovation is encouraged

•Free flow of ideas is encouraged/spend some time on “blue sky thinking”.

•Do not dominate

•Build, combine and improve on others ideas.

•No killer phrases or put-downs/criticism of others ideas is not allowed

•This is a no fault, no blame process (a blame free zone!)

•„Stupid‟ questions are allowed (ie. there is no such thing as a stupid question)

•Please comply with my reasonable requests

•The „shelf‟ for parking of ideas

•Mobiles on silent please

.

Drivers of risk management – (a reminder)

Source: A Structured Approach to Enterprise Risk Management (ERM) and the requirements of ISO 31000

IRM, AIRMIC, Alarm 2009

The process of managing value

What do we need?

A structured way to define what value means to an

organisation, and a way to establish a clear consensus about

objectives, and how they can be achieved.

“Value Management is concerned with improving and

sustaining a desirable balance between the wants and needs of

stakeholders and the resources needed to satisfy them.

Stakeholder value judgements vary, and VM reconciles differing

priorities to deliver best value for all stakeholders” The Institute of Value Management: www.ivm.org.uk

Why manage value?

•to clearly establish at the outset all organisation or

project needs, objectives, priorities, risks and

constraints

•to separate needs from wants

•to establish a shared understanding and consensus

amongst key departmental stakeholders

•to define & optimise “value”

•to ensure time, money and effort are spent where most

needed (eg. the „space pen‟)

Definition of valueWhat does “good value” mean to you – it can vary!

•Relative

•Subjective

•Highest performance, or Lowest maintenance?

•Short term, or Long term?

•Sustainable/Recyclable/Renewable

•Reliable

•Aesthetical

•Whole life cost, or Capital cost?

•Lowest cost without detriment

•Income generation only?

Functional analysis

•This technique is at the heart of managing value

•shows the functions needed to enable the objective to be achieved

•A Function is a short two or three word statement

•A verb (a doing word) and a noun (an item or thing)

eg. „provide security shelter‟ (not „build a 3m x 4m structural glass

walled air conditioned reception kiosk‟)

•If there is a technical description – get to its function by

asking • Why is it wanted

• What does it do

What is value?

Can be described as:-

The reliable performance of what is required

to perform a function, at the optimum overall

resource expenditure.

or: (Function) WHAT YOU GET

(Resource) WHAT YOU PAY

eg. - a penthouse or a prefab?

- a mont blanc pen or a plain

pencil?

Ways to improve value

Change the ratios or proportions to:

• Reduce resource/cost while increasing or

maintaining function

• Increase function while maintaining resource/cost

• Increase function while increasing resource/cost (by

a proportionally smaller amount)

• Identify over-specification, decrease resource/cost

by a proportionally greater amount

The value hierarchy

A simple hierarchical layout with the overall objective

at the front end:

•First identify individual Functions

•Prioritise by giving a score to each Function

•Use the scores to derive an importance weight for

each Function

•The weighted scores should sum to „1‟

•This is called a „value hierarchy‟ (or sometimes termed a

„function hierarchy‟)

Value hierarchy example showing weightings

Space per person

Internal environmental conditions

Internal layout

Staff car parking

Accommodate different uses

Provision for future expansion

Environmental impact

Visual impact externally

Visual impact internally

Flexibility for short term changes

Adequacy of storage space

Visibility of entrance

Waiting area size

Visitors car parking

Building maintenance and repair

Energy costs

Security, cleaning etc

Good staff accommodation(0.35)

Flexible for future change(0.20)

Good design impact(0.15)

Efficient in use(0.12)

Accessible for customers(0.10)

Low maintenance costs(0.08)

Accommodate the department in one location

etc

Outline of the process

Run a formal review:

•Identify all stakeholder objectives & rank

•Identify functions

•Use these to inform preparation of a value hierarchy (VH)

•Identify a range of solutions/options for achieving objectives

•Appraise the feasibility of potentially valuable options by scoring how each satisfies, against the individual functions on the VH

•Carry out weighted evaluation (multiply scores for each solution/option against the appropriate weighted Function values)

•Sum the weighted scores to produce an overall „value of option‟ score

•Highest scores are the most promising options for further investigation

Running the risk workshop and techniques

Let‟s try one – in a practical study

redamber consulting

Practical Study : Rochester Moor Council

Imagine you are members of the Cabinet/Management

Board at Rochester Moor Council.

•In the face of significant reductions in public expenditure,

there is a need to focus on protecting front line services and

continuing to deliver the six Medium Term Objectives that

were set for the period to 2012.

•The Government imposed spending cuts of 12% pa over

the next few years, mean the Cabinet now has to find ways

to cut costs, and remove £5.17m from the Annual Capital

Budget.

Practical Study : Rochester Moor Council

Task.

• Using the value hierarchy, review the relative

importance weights and gain group agreement.

• Prioritise and rank the proposed option cuts making use

of the 6 point template.

• Carry out an evaluation for each option, and prepare a

ranked table identifying which proposals provide the

best „value‟ (ie. save the most with least perceived

impact)

• Identify a likely key risk associated with each option.

• Present the results, scores and risks.

Practical Study : Rochester Moor Council

Method

• Group working in small teams.

• Allocate a scribe, a timekeeper and a presenter.

• Use a flipchart to make the presentation.

Time

• 30 minutes

redamber consulting

• Mike Walker is a qualified risk manager and a

registered risk practitioner. A chartered surveyor, he

has been the organiser and facilitator of numerous risk

& value workshops; he has also trained many staff

and clients in risk & value management, and risk

awareness.

•RedAmber Consulting specialises in reducing and

removing the risks present in business and project

endeavours.

For further information contact Mike Walker:

mobile - 07980 327 672

email - mike@redamberconsulting.com

Tel: +44(0)20 7709 9808

Fax: +44(0)20 7709 0716

The Institute of Risk Management

6 Lloyd‟s Avenue

London

EC3N 3AX

United Kingdom