BBC Efficiency Review

1 BBC Efficiency Review An update on the BBC's overheads July 2015. Reviewing the BBC's approach to defining and allocating costs as overheads'. Following the Background The BBC's general overheads ratio All organisations have costs that are has reduced to for FY14/15. release of the BBC's The BBC is targeting a ratio below necessary and useful to support and Efficiency Review1, sustain their operations but which do by the end of the current the BBC asked PwC not directly support the delivery of core Charter period in FY16/17 through activities referred to as overheads'. completing delivery of its current to conduct an PwC was jointly commissioned by the Efficiency programmes objective Review of These results compare favourably BBC Executive and BBC Trust to its approach to provide an independent Review of the with other organisations we Efficiency . This BBC's approach in two specific areas.

2 Found the benchmark median Firstly, to assess how the BBC defines overheads ratio for a selection of report focuses on and allocates overheads within its comparable industries was the BBC's overall cost base and secondly, to and for the top quartile, approach to develop benchmarks to understand how Therefore the BBC is forecasting to general overheads, the BBC's spending on overheads be within the top quartile of today's compares with other relevant benchmark by FY16/17. defined as organisations. controllable costs What we covered that do not directly The scope of this Review covered the This report support the BBC's Infrastructure and Support This report outlines our findings in ( I&S ) costs within the UK Public delivery of public relation to the BBC's general overheads. Service Broadcasting cost base2. services. It contains: To assess the BBC's definition and A summary of our main findings in allocation of overheads within these assessing the BBC's cost base costs, we reviewed a range of The results of benchmarking parts documents relating to the BBC's cost of the BBC's cost base against other base.

3 Our Review was supported by relevant organisations consultations with BBC management, as well as regulatory accounting and media specialists within PwC's network. Headline findings We conducted a benchmarking analysis The BBC's definition and allocation to assess how the BBC compares with of overheads is in line with other other organisations. This analysis regulated industries and public considered the BBC's unique attributes, sector bodies such as its public obligations, scale and geographical reach. These attributes Breakdown of BBC UK Public Service can make it challenging to draw Broadcasting cost base2: FY14/15. meaningful comparisons, which is why we developed tailored benchmarks. Content Production This approach to benchmarking provides an indicative position, which Distribution outlines how the BBC compares with Infrastructure & Support selected organisations. Further details ("I&S") of our methodology and approach to benchmarking are outlined on the Of which Of which following pages.

4 Overheads content-related 1 Driving Efficiency at the BBC, Report published by the BBC, November 2014. 2 Total cost base excludes other non-controllable costs, external obligations such as funding for broadband rollout and S4C, group pension deficit recovery payments, licence fee collection costs, lease reclassifications, etc. PwC - 1. The BBC's definition and allocation of general overheads is broadly in line with other regulated industries and public sector bodies Defining overheads Public sector organisations/charities Both the definition The BBC defines overheads as the Public sector organisations, including and allocation Government departments and charities, proportion of its controllable spend that methodology used by does not directly support the delivery of which are required to outline all the BBC are broadly public services, or in other words, does spending of public funds and not directly support audience-facing donations, adopt a similar approach to aligned with activities.

5 The BBC. management accounting practice, Management accounting definition of Allocating overheads as well as with the general overheads' The BBC categorises its Public Service approach used by The BBC's definition is consistent with spend into a) Content Production costs, other public sector that used by the Charted Institute of b) Distribution costs (to get its services organisations and Management Accountants (CIMA), to audiences) and c) Infrastructure &. which defines general overheads as: Support ( I&S ) costs. Since (a) and (b). some regulated relate directly to the delivery of public expenditure on labour, materials or companies. The BBC services that cannot be economically services, they are not considered as has accepted and identified with a specific saleable cost overheads. The remaining I&S costs are implemented PwC's unit3. The overhead costs that relate to further allocated into content- supporting the organisation are supporting infrastructure costs and advice on specific commonly referred to as general other support costs.

6 The latter cannot improvements to its overheads that exclude production or be directly attributed to audience facing overheads definition. selling overheads, which is consistent activities and hence these constitute the with the BBC's approach. BBC's overheads. They include HR, Finance, the BBC Trust and related Key consideration Technology, Property and divisional Commercial or unregulated companies The BBC may also wish to running costs, among others. This Commercial or unregulated companies consider: approach to identifying overheads is rarely report detailed general overheads broadly in line with management unless for specific financial initiatives. Using the term accounting practice; however, we Often, they report selling, general and 'general overheads' to recommend the BBC refers to them as administrative expenses (SG&A) that make its terminology 'general overheads', to better align with include all support functions, sales and more aligned with standard accounting naming marketing costs.

7 Conventions and consider introducing standard naming convention within the some degree of automation to the industry Regulated industries process of calculating them. Regulated industries, such as utility Introducing distribution and telecoms, are required Outcome of our Review automation to the to identify overheads for cost process of calculating We have advised on specific revisions to accounting to demonstrate Efficiency , overheads; for the way overheads are allocated to non-discrimination and cost- example, embedding make the allocation even more aligned orientation of their tariffs. with industry practice, which the BBC. into finance systems has accepted and implemented for FY14/15. 3 Definition from CIMA handbook and refers to indirect cost or general overhead PwC - 2. The BBC's overheads ratio compares favourably with other regulated industries and public sector bodies The BBC's general Peer group selection PwC first sought to compare the BBC's broader SG&A costs, a more widely reported overheads ratio of measure of overheads, with private sector media and broadcasting peers.

8 Our high indicates that it level analysis suggests the BBC is currently better than the median benchmark4. is more efficient than The BBC expects it should be closer to the top quartile by the end of the Charter the average period, once the delivery of its current Efficiency programmes has been completed. However, since the vast majority of commercial companies do not publicly report organisation within general overheads in the same way as the BBC, a peer group comprising regulated, the benchmark. The public sector and charity organisations is more appropriate for specifically BBC expects the benchmarking overheads. impact of completing its Efficiency Benchmarking the general overheads ratio programme The BBC's general overheads ratio is defined as general overhead costs as a percentage of total (controllable) costs. General overheads are defined as Delivering Quality allocations of expenditure on HR, finance, technology, property and divisional First', will be to running costs which do not relate directly to audience-facing activities.

9 Reduce overheads We drew upon a set of 20 organisations from the public sector, including below by Government departments and large charities, and companies from regulated FY16/17, indicating industries such as telecoms and utility distribution. This peer group was chosen because each of the organisations operates under similar scrutiny and calculates that the BBC would and reports on general overheads. 75% of peer group organisations are UK-based be within the top and 25% are overseas (15% Asia, and 10% in the rest of Europe). quartile of today's The median general overheads ratio for this benchmark peer group overall is benchmark. and the median for the subset of public sector organisations (Government departments and large charities) alone is The BBC's reported general overheads ratio of is therefore percentage points lower than the overall median and close to the top quartile benchmark of The BBC's projected ratio for FY16/17 is below , reflecting the completion of the Delivering Quality First' Efficiency programme, which would place it within the Key adjustments top quartile of today's overall benchmark ( ) and very close to that for The BBC has adjusted regulated-sector only peers ( ).

10 The way in which General overheads % of total costs overheads are allocated to better align with Top Quartile Median Bottom Quartile accepted industry standard cost allocation methods. These adjustments are reflected in the ratio for FY14/15 of FY14/15. Top quartile for Median for Median for regulated regulated public sector industries only industries only only 4 Based on a composite benchmark of UK and overseas media and broadcasting companies, adjusted to reflect the same mix of operations between TV, Online and Radio as the BBC. PwC - 3. This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PwC does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.