Managing cost of governance in Nigeria: A paradigm shift

By Nosa Victor Omoregie,   |   08 September 2015   |   3:34 am  

Managing-costStructural Cost Drivers – Structural Cost Drivers are decisions about the types of resources that an organization or entity obtains; organization or entity configuration and product complexity.

These determine, or drive, the overall make up and structure of costs e.g. the plan and design of a house – more elaborate design, larger size, and special features increase the overall cost of the house.

There was this story of a man who got a loan of N5m to build a house but had a very high taste of a house and hired an architect to do a design with very sophisticated features and expensive inputs interior and exterior and when the architect finished and brought the plan with all the structural drawings and cost estimate it turned out to be that it will cost 10 times the fund available and the man was accusing the Architect of not considering what fund he has.

The Architect told him your decisions to have the type of structure affected the cost. He had to review the plan and design to meet the cost level that could be borne by the client (Omoregie 2003).

Business configurations and organizational models evolve based on leadership’s philosophy of how the business should be managed. Many companies are constantly adding new products and customers.

Yet often they don’t take a step back and challenge the productivity or value of their overall business configuration. The array of products and services a company offers, and the customers and geographies it serves, will drive the scale, scope and complexity of the business. Complexity drives costs.

An organizational structure that lack adequate role clarity can be a critical factor in creating cost inefficiencies. Many organizations have found themselves precariously straddling these issues, with corporate center and business unit responsibilities ill-defined and major decision-making processes diffuse.

Companies in these situations develop duplicative processes for the sake of “management.” Analyses are created in the business units for the corporate offices that are not used in daily management of the business.

Infrastructure is developed to gain more insight into the business units, yet many of these processes add minimal value to the enterprise.

Executional Cost Drivers: Executional Cost Drivers on the other hand are decisions about the specific processes and activities that use organization resources. This determines how an organization carries out its work and causes resources to be consumed by that work e.g. the policies, methods, and procedures that an organization uses to conduct its work.

External Cost Drivers:These are those causative factors of costs emanating from outside of the organization and typically cannot be easily influenced in the short term.

It could be said that organizations do not have direct control over such factors. Their effect would be general on the entire industry but could have specific effect on an organization depending on the nature of the business of such organization.

These could include such factors as Government Policies (Petroleum products pricing policy, Tax policy, Wages policy, Electricity tariff, Import and export duty policy, Regulatory requirements); Social and Political factor – crisis factor; Economic events; Supply disruptions; Technological Changes; Legal Changes etc.

Internal Cost Drivers: These are those causative factors of costs emanating from inside the organization and can be generally influenced in the short medium term.

These are factor inherent in the management of organization and therefore affect it uniquely. Such factors will include Process deficiency; Existence of poor outsourcing/purchase policies and practice; Lack of adequate cost management skill and mindset; Existence of Value Creation Problem; Poor Personnel Practices; Organizational Configuration and Complexity; Poor Management of Assets, etc.

Drivers of cost in the public sector: Public sector (government) cost could be viewed from the structural and executional as well as the external and internal drivers’ perspective.

As discussed earlier the structural issues have to do with the structure of the administrative machinery of government. The definitions of cost of governance relate the expenditure of government to its administrative structure.

Structural issues have to do the constitutional provision based on effective representation in government. The system of government, presidential system, is an obvious structural problem that does not encourage cost effectiveness.

The number of legislators that have to be provided for and at outrageous salaries and allowances contributes in no small measure to the problem of governance.

In the executive arm of government, the number of ministries and ministers constitute a serious structural problem in the cost of governance.

Also the execution of government programmes impact on the cost of governance. This refers to the executional cost drivers. How is government apparatus managed and administered? The system gives room for cost overload and direct and indirect corruption nurturing.

In Nigeria you are corrupt if you are not a friend of those in government. Contract award has moved from the old 10 per cent to contract value sharing with over blotted and over invoice value.

Most projects are not completed because by the time the contract value has been shared between the contractor and the awarding officer there little or nothing left to do the job with adequate return on the project for the contractor.

This will result in poor project execution or outright abandonment. A poorly completed project consumes high repair cost. Therefore government policies and operational procedures could constitute serious executional cost drivers.

Viewed from the internal cost drivers’ perspective in the public sector drivers of cost emanate from inside of the public sector direct activities and management.

This could be attributed to the structure of the public sector in terms of the configuration of the operational processes (duplications, overloads); corrupt tendencies engendered by cost ineffective and inefficient decisions; political leadership selection process; etc.

External cost drivers in the public sector are drivers of cost emanating from outside of public sector direct activities and management.

These cost drivers could be externally local or internationally, that is, as a result of factors from the local environment or the international environment.

The private sector provides a major source of locally derived driving factors of cost in the Public Sector. For instance, the private sector is the main medium of execution of the Public Sector budgets.

Given the profit maximization motives of the private sector their drive for profit optimization could in many instances undermine the processes in the public Sector thereby constituting a dysfunctional pressure on the Public sector cost.

The operators of the private sectors are involved in providing inputs even at public sector budgeting process. The private sector operators facilitate the corrupt tendency in the public sector through unholy incentives to undermine due process.

International forces driving public sector cost could include the impact of high prices of import especially those relating to infrastructural development; exchange rate variations.

Conclusion: It can be observed from the above that the drivers of cost in government in Nigerian are a complex web of interacting forces within and outside of government as well as the structure and executional procedures of governance.

The understanding of the drivers of cost is major building block to achieving effective management of cost. Adequate attention must be given to those identified drivers of cost and strategies put in place to manage them.

Recommendations: Emanating from the discussions above, it is recommended that the new government should immediately set up a committee made up of professionals drawn from all related discipline to undertake a comprehensive cost driver analysis to guide the government in taking the right decision in embarking on the reduction of cost of governance in Nigeria.

This is to avoid throwing the bath water away along with the baby through wrong selection of areas of focus. Am not unaware of the celebrated Oronsaye report on the public service reform but I believe a committee devoid of civil service and political interference should produce a more acceptable roadmap for cost of governance in Nigeria. *Mr Omoregie is the Registrar/Chief Executive Officer, Chartered Institute of Institute of Cost Managers of Nigeria.

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