Cost baseline: measure today's cost before you change it

Key takeaways

A cost baseline is a documented measure of what a process costs today, taken before anything changes. Without one, no saving can be proved or disproved. A sound baseline records volume, hours, loaded hourly cost, error rate and turnaround for the same period. Two weeks of logging is enough for most routine processes.

• A baseline is today's cost, measured before any change.
• Record 5 things: volume, hours, loaded rate, errors and turnaround.
• 2 weeks of logging is enough for most routine work.
• Use the same definition before and after, or the saving is fiction.

What is a cost baseline?

A cost baseline is the agreed starting figure against which future costs are compared. For an operational process, it states what the work costs per period and per unit now, with the assumptions written down. It is the before in any before-and-after comparison.

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Why do savings claims fail without one?

Savings claims fail without a baseline because memory flatters the past and invoices flatter the present. An owner recalls the old process as one salary. The new arrangement shows up as a clear monthly bill. The comparison is between a guess and a fact, and it can be argued either way.

The UK government's Green Book on appraisal warns of optimism bias: the tendency to overstate benefits and understate costs. A written baseline is the simplest defence.

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What should a baseline include?

A baseline should include every cost that would change if the process changed, and enough quality data to show the work was comparable.

• Volume: items completed in the period.
• Hours: time spent by everyone who touches the work.
• Loaded rate: wage plus employer costs and holiday, per worked hour.
• Direct costs: software, postage and other spend tied to the process.
• Quality: error or rework rate.
• Speed: average turnaround.

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What does a worked baseline look like?

Take sales invoicing in an illustrative firm. Over two weeks, 180 invoices are raised. The office manager spends 21 hours at a loaded £23.20 per worked hour and the owner spends 3 hours checking, valued at £40. Labour is £487 plus £120, or £607. Software tied to invoicing is £15 for the fortnight.

The baseline is £622 for 180 invoices, or about £3.46 per invoice. Twenty-two invoices were queried or reissued, an error rate of about 12%. Average time from job completion to invoice was 9 days.

• Cost per invoice: about £3.46.
• Error rate: about 12%.
• Turnaround: 9 days from completion to invoice.

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How do you collect the data?

Collect it with a simple time log and counts from your systems. Ask everyone who touches the process to record their time in 15-minute blocks for two weeks. Pull the volume from the software. Count corrections by hand if you must.

• 1. Define where the process starts and ends.
• 2. Log time for two typical weeks.
• 3. Count items completed and items corrected.
• 4. Apply loaded hourly rates.
• 5. Write down every assumption.

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What are the common gaps?

The common gaps are leaving out senior people's time, ignoring rework, picking an unusually quiet or busy fortnight, and forgetting the cost of supervision. Each makes the old process look cheaper than it was. The opposite error is loading on costs that will not change, such as rent, which inflates the saving.

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What does this look like in practice?

A pattern we see a few months after a change: someone asks whether it has saved money, and nobody can say, because the only before figure is an impression. The businesses that can answer are the ones that spent two weeks logging first. The log also tends to reveal savings that need no outsourcing at all.

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Cost baseline checklist

Confirm each item before changing the process.

• Process boundaries are written down.
• Two typical weeks are logged.
• Everyone who touches the work is included.
• Rates are loaded, not just salary.
• Errors and turnaround are recorded.
• Assumptions are listed and dated.
• The same method will be used after the change.

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Next step

Choose the process you are most likely to change this year. Tell us who does it and roughly how often, and we will help you set a baseline you can rely on later.