The ABCs of Competitive Government: The Indianapolis Experience.

• Author: Goldsmith, Mayor Stephen

The mayor of America's twelfth largest city shows how activity-based costing worked wonders for municipal government.

Indianapolis is the home of the greatest car race in the world--the Indianapolis 500, which features high-performance cars flying at hair-raising speeds around a two-and-a-half-mile track. The cars and their drivers are the stars of the show. But behind every great driver, there is a team of great mechanics, and those mechanics swear by their tools. They know that unless you have the right wrench, you can't change so much as a sparkplug, let alone do major engine work.

Good tools are important not only for overhauling cars, but for overhauling government as well. During my two terms as mayor of Indianapolis, city government has indeed been overhauled. We have become the national leader in the use of competition to improve services and reduce costs, saving more than $422 million by allowing private companies to compete with city agencies for nearly 100 contracts. It is not surprising that other cities have been following our lead; I was pleased to read Mayor John Norquist's article in the April 1999 issue of Government Finance Review, which described Milwaukee's efforts to use competition to improve its services.

But no government can implement competition with its bare hands, so to speak. Neither can it wave a magic wand and wait for competition to take place. Like a mechanic fixing a car, an administration fixing government needs to have the right tools. Here in Indianapolis, they might better be called power tools-- dynamic initiatives that have restructured city agencies and allowed them to compete with efficient private companies. One of the most powerful of these tools is activity-based costing (ABC), a still relatively new costing system that accurately relates costs to specific activities. Before we introduced our employees to ABC, city agencies were up to their necks in uncharted expenses. After the introduction was made, agencies began streamlining processes, reducing costs, competing with private companies, and winning contracts.

Traditional Accounting

Implementing competition seemed pretty easy to me in 1992. I figured that we would simply compare city agencies' service costs to private companies' and go with the best deals. The problem with that approach became apparent at a meeting I had with department heads. "How much does it cost us to fill a pothole?" I asked. No one answered, because no one knew. Departments did not keep track of that kind of information. Budgets, yes. Total expenses, yes. Costs of individual activities, no.

That wasn't surprising. Every year, each city department would draw up a standard budget, containing all the usual categories -- labor costs, material costs, administrative expenses, and so on. But that budget couldn't tell the department how much it cost to fill a pothole--or plant a tree, or mow a park, or plow a mile of snow. The big numbers were there, but they had nothing to do with individual activities.

And although rough attempts to estimate labor activity costs achieved some precision, approximations of other costs were hopelessly inaccurate. Material costs are...