The concept of budgeting for products and services is not new. It's been envisioned in discussions of zero-based budgeting (circa 1980s), activity-based budgeting (circa 1990s), and portfolio management (circa 2000s). However, the practicalities have been challenging.

What's new is this: Research over the course of the last decade, in over two dozen diverse public, private, and not-for-profit organizations, has resulted in a comprehensive understanding of the mechanics required to plan an organization's costs of products and services.

While the research was done primarily within IT organizations, it applies universally to any organization that provides services to clients within its company, as well as to entire enterprises.

Now, these requirements have been sorted into levels of capability -- the Full-cost Maturity Model (FMM).

The Full-cost Maturity Model (FMM) is a standard metric of an organization's capability to plan the full costs of its products and services.

The focus of FMM is on cost planning, not tracking. It addresses the processes by which an organization develops its operating plan, budget, allocations, and rates. It's not a metric of financial accounting systems, broader resource governance processes, or billing systems -- although all of these other things are founded on the budget and rates.

FAQ: Why implement planning before tracking systems....

The FMM scale describes five levels of capability. The scale ranges from simple budget cost transparency to, at the highest level, the calculation of budgets and consistent rates in a manner fully comparable to outsourcing.

As an organization moves up the scale, the benefits grow. Of course, you get what you pay for. Concomitantly, the mechanics become more challenging. FMM documents both the benefits and the essential mechanics (methods, processes, and tools) required to make each level work.

Each FMM level is complete, in that it includes all the mechanics needed to deliver the intended benefits.

Each FMM level is sustainable, in that prices include all of the direct and indirect costs necessary to deliver the products and services as well as the indirect costs necessary to sustain the organization in the future.

Each FMM level builds upon the last, so that investments in implementing a lower level are never lost. This allows an organization to evolve its cost-planning methods and tools in stages and to different levels of detail, depending on its needs. Starting at the first level, many of the benefits can be attained quickly; then more benefits can be realized in subsequent years as the organization evolves. And not every organization needs to attain the highest level.

Overview: The Five Levels

The five Levels of FMM are as follows:

Level 0: Traditional Budgeting

Costs are not linked to products and services. This is the current state of many organizations (even those which calculate rates).

Level 1: Transparency

Costs are linked to high-level product sets, and the cost model is transparent -- that is, well documented and based on consistent principles.

Level 2: Fair Allocations

Products sets are subdivided by client (business unit), documenting utilization as a basis for allocations.

Level 3: Demand Management

Product sets are broken down into detailed products and services -- specific client purchase decisions -- required for demand management and portfolio management processes.

Level 4: Accuracy

Accuracy is greatly improved since all indirect costs are amortized to just the right products and services, and billable-time ratios and compensation costs are calculated separately for each line of business under each manager.

Level 5: Rates

Costs are portrayed in total for products and services (the budget), and also rates (unit costs) are extracted from the same data.

Note that an organization which allocates its costs may or may not be at Level 2. Similarly, an organization that has implemented portfolio management may or may not be at Level 3, and an organization that has implemented chargebacks may or may not be at Level 5. Current practices such as these dictate the target level, but the organization may or may not have satisfied all the detailed requirements of that level.

Figure 4: Levels of Maturity

[pyramid with steps]

The next chapter documents the starting point -- Level 0 -- and the fundamental requirements to move up to any level. Then, a chapter on each level explains how that level works and its benefits. The detailed mechanics are documented in Appendix 3.