1. ©1997 Lenhardt & Colton LLC Stephen D. Colton Lenhardt & Colton, LLC 1775 Magnolia Ln N Minneapolis, MN 55441 Ph (612) 550-0687 *** Fax (612) 550-0776 scai@skypoint.com Determining the “TRUE COST” of Low Income Customers

2. ©1997 Lenhardt & Colton LLC Workshop Objective Demonstrate How One Uses Activity Based Costing to Determine the “True Cost” of Serving Low Income Customers

3. ©1997 Lenhardt & Colton LLC Definition “True Cost” means there is a direct causal link between costs incurred and our cost objective, the Low Income Customer market segment.

4. ©1997 Lenhardt & Colton LLC Today’s Agenda Why Do We Need to Know the True Cost of Serving Low Income Customers? Why Turn to “Activity Based Costing”? Structuring an ABC Project Analyzing the Data Using Activity Based Data for Continuous Improvement.

5. ©1997 Lenhardt & Colton LLC Why Do We Need to Know? The Public Policy Question: “How Big is the Aggregate Need?” The Question for an Individual Utility: “How Do We Live Within the Subsidy?”

6. ©1997 Lenhardt & Colton LLC How Big is the Aggregate Need? $1,000,000? $20,000,000? $500,000,000?

7. ©1997 Lenhardt & Colton LLC Living Within the Subsidy Low Income Customer Payments + Low Income Assistance Cost of Providing Service to Low Income Customers In a Competitive Marketplace, the Difference Comes Out of Profit!

8. ©1997 Lenhardt & Colton LLC Why Do We Need to Know the True Cost of Serving Low Income Customers? Why Turn to “Activity Based Costing”? Structuring an ABC Project Analyzing the Data Using Activity Based Data for Continuous Improvement. Today’s Agenda

9. ©1997 Lenhardt & Colton LLC Traditional Data Tells Us What???

10. ©1997 Lenhardt & Colton LLC Activity Based Data Reveals Causes Cause of Costs Normal Credit & Collections Activities - Qty of Credit & Collections “Actions” - Current Credit & Collections Process High Arrearages at End of Winter

11. ©1997 Lenhardt & Colton LLC Activities The Process Model External Customers Suppliers Internal Customers Resources Consumed People Costs $$$ Supplies $$$ Deprec $$$ Inputs Outputs

12. ©1997 Lenhardt & Colton LLC Hierarchy of “Process Terms” Business Process Activity Tasks Activity Output Review Application Run Credit Report Assign Customer Number Perform Data Entry Send Confirmation 1. Setup New Account2. Connect new service3. Issue first billing Initiate New Customer Service Confirmation Letter

13. ©1997 Lenhardt & Colton LLC Why Do We Need to Know the True Cost of Serving Low Income Customers? Why Turn to “Activity Based Costing”? Structuring an ABC Project Analyzing the Data Using Activity Based Data for Continuous Improvement. Today’s Agenda

14. ©1997 Lenhardt & Colton LLC Steps of the ABC Process 1. Identify Activities 2. Trace Costs to Activities 3. Identify Outputs 5. Calc Cost per Output 4. Collect Demand for Outputs 6. Calc Market Segment Cost

15. ©1997 Lenhardt & Colton LLC Step 1: Define Activities Interviews Workshops

16. ©1997 Lenhardt & Colton LLC The APQC Business Process Model Develop & Manage Human Resources Manage Information Manage Financial & Physical Resources Execute Environmental Management Program Manage External Relations Manage Improvement & Change Understand Markets & Customers Develop Vision & Strategy Design Goods & Services Market & Sell Goods & Services Produce & Deliver Goods & Services Invoice & Service Customer Management & Support Processes Operating Processes

17. ©1997 Lenhardt & Colton LLC Activities That “Make a Difference” Understand Markets & Customers Develop Vision & Strategy Design Goods & Services Market & Sell Goods & Services Produce & Deliver Goods & Services Invoice & Service Customer Credit Activities Collections Activities

18. ©1997 Lenhardt & Colton LLC Example of Collections Activities Collections Activities Answer Customer Inquiries Resolve Billing Errors Apply Customer Pmts Negotiate Deferred Payment Plans Disconnect Customer Service Attend Staff Meetings Collections Activities Answer Customer Inquiries Resolve Billing Errors Apply Customer Pmts Negotiate Deferred Payment Plans Disconnect Customer Service Attend Staff Meetings

19. ©1997 Lenhardt & Colton LLC Step 2: Trace Costs to Activities

20. ©1997 Lenhardt & Colton LLC Step 3: Identify Outputs

21. ©1997 Lenhardt & Colton LLC Step 4: Collect Demand for Outputs Projected Aggregate Annual Demand for each Activity’s Output Projected or Actual Demand for each Activity’s Output by Market Segment

22. ©1997 Lenhardt & Colton LLC Aggregate Annual Demand

23. ©1997 Lenhardt & Colton LLC Output Demand by Market Segment

24. ©1997 Lenhardt & Colton LLC Step 5: Calculate Cost per Output

25. ©1997 Lenhardt & Colton LLC Step 6: Calculate Market Segment Cost

26. ©1997 Lenhardt & Colton LLC Today’s Agenda Why Do We Need to Know the True Cost of Serving Low Income Customers? Why Turn to “Activity Based Costing”? Structuring an ABC Project Analyzing the Data Using Activity Based Data for Continuous Improvement.

27. ©1997 Lenhardt & Colton LLC Analyzing the Data Total Cost of the Low Income Market Segment Differential Cost of the Low Income Segment Normalizing the Data -Cost/Sales Ratio -Cost/Customer Ratio -A Caution

28. ©1997 Lenhardt & Colton LLC Why Do We Need to Know the True Cost of Serving Low Income Customers? Why Turn to “Activity Based Costing”? Structuring an ABC Project Analyzing the Data Using Activity Based Data for Continuous Improvement. Today’s Agenda

29. ©1997 Lenhardt & Colton LLC Strategies for Continuous Improvement 1.Reduce Costs of Value Added Activities using Root Cause Analysis 2.Reduce the Frequency of Non-Value Added Activities

30. ©1997 Lenhardt & Colton LLC Applying These Strategies Strategy #1 Largest dollar Value Added Activity. Use Root Cause Analysis to identify the Cost Drivers and reduce them, improving the Cost per Output. Strategy #1 Largest dollar Value Added Activity. Use Root Cause Analysis to identify the Cost Drivers and reduce them, improving the Cost per Output. Strategy #2 A Non-Value Added Activity. Reduce the number of Non-Value Added Outputs by reducing the “demand” for those outputs. Strategy #2 A Non-Value Added Activity. Reduce the number of Non-Value Added Outputs by reducing the “demand” for those outputs.