Tuesday, October 6, 2009

A Full Stop for Full Cost Recovery

Full Cost Recovery. As a business-term, it sounds like something from a Czechoslovakian foundry circa 1973. But it is actually the pricing system for services from the UK third sector.

Full Cost Recovery. Think about that term and what it says. In effect, the message is "You owe it to me to pay the full cost I incurred in producing this service". No more, no less. Not what you want to pay or I am willing to accept. Just the "full costs", full-stop.

This does nobody a service. For providers it eliminates the prospect of profit. Which in turn means you can't build the business. For customers it means you have to pay the costs of production, whatever these happen to be.

So why are we in thrall to this idea? Shouldn't we really be thinking not about how we recover our costs but how we push down our costs so that providers actually want to use our services. I don' buy moral status of the costs of charities. Like all organisations, the cost of charities are subject to drift. To even imply someone else has a duty to meet them is ridiculous.

So let's hear less of Full Cost Recovery and more about how we drive down costs, create profits and grow our impact as a result. Full Stop.


Rob Greenland said...

Good post Craig. I had a similar discussion at a workshop I ran yesterday. There is a zeal behind the calls for full cost recovery in the third sector. I see where it's come from - not wholly a bad place (be clear what your real costs are) - but you're right in that there is little thought given to whether the market can/should cover your full costs.

My experience of increasing numbers of social enterprises which are born out of third sector organisations is they inherit top-heavy management structures which mean that "full cost" is too much cost - even allowing for the added social benefits that a third sector org may sometimes bring.

Anonymous said...

Craig, I have to disagree, and in fact, I would suggest you don't fully understand the concept behind the term.

The message is not 'You owe it to me to pay the full cost I incurred', it's the fact that without understanding the full costs of a service, and without recovering those costs, an organisation would not survive.

It does not eliminate the prospect of a profit, or stop the driving down of costs, it allows organisations to make informed strategic decisions.

The costs of charities is not a moral status, we live in a society where providing a service costs money. Charities need to fully understand what these costs are so they can decide whether certain overheads are too high, whether they need to drive down costs, and whether they can make a profit.

Driving down costs and creating profits is a separate issue, Full Cost Recovery is about encouraging charities to fully understand. Knowledge. Full Stop.

N MUrray said...

The wider debate here is about the delivery and costs of "public services". In my view citizens are not especially ideological in this area eg they dont per se favour either public, voluntary or private sector but favour good quality, personalised and affordable services. In Scotland however some private sector social care providers have been proven to cut corners in order to, one would presumme, maximise profit - profit which goes(disappears) to either a sole owner and/or shareholders. However when profit is made by a voluntary organisation it is much more likely to be re-invested in an way that helps keep the organisation sustainable.

Again in my experience local aouthorities sometimes do not include all on costs when they publicise the costs of their own care services. For example the costs of back office staff and managers plus local and HQ premise costs. If you are looking for top heavy management look to the public sector first.

Tim Sanders said...

Anonymous is, in my opinion, both right and wrong. 'Full-cost recovery' is essential as an approach for voluntary and community groups to consider the true costs of their activities; it can prevent charities from bidding too low and unsustainably. But FCR as a demand from the vol and community sector to commissioners, has all the flaws that Craig says it has. I'm a local authority commissioner with a lot of experience with the sector, and:

- it's quite legitimate to expect grant-funded community groups to use their own resources in kind, fund-raising, other grants etc etc to complement grant funding. There are a few activities where we cover 100% of the costs, and some where we've stepped in and increased the grant when eg. Lottery funding has ended. But most of the small faith-based groups we fund, don't want FCR, they want a bit of money to complement their premises, volunteers, their own funds...

- Social businesses have to make profit from contracts, (albeit not to be distribued to shareholders). Delivering to a contract specification means accepting risks as part of the deal (fuel prices might double, staff might ring in sick...) and you need the reward to balance the risks. And social businesses even have the right to have loss-leaders if it fits with their plans.

- My experience of evaluating 100s of bids for grant funding, is that most voluntary and community groups don't think self-critically about their costs and operating models, and FCR courses make it worse rather than make it better ! I gently pointed out to one group, that if they had 20 people to their day centre on a Tuesday, why did they only have 16 places on a Friday. "Oh yes" they said, and we reduced the unit cost by 11% at a stroke. A local car-sharing scheme costs over £10 per local return journey, in spite of all the drivers being volunteers, because all the bookings have to go through the paid co-ordinator. Local taxi firms could complain about unfair state subsidy to a competitor ? I could go on...