Transcript of "Understanding the financial performance of the research enterprise webinar"
Understanding the Financial Performance of theResearch EnterpriseApril 17, 2013
Matt Faris – Senior Director Zach Belton – Director Jen Ohlman – AssociatePresenters1
Today’s Objectives Discuss the methods for creating Profit & Loss (P&L) statements forthe research enterprise Review research-related revenue and expense data− How to use this data to analyze performance− Understand potential impact to the bottom line Introduce methods to analyze and improve the bottom-line operatingresults for the research enterprise− Dive deeper to identify ways to measure performance of theindividual research administration units− Understand strategies to improve the operating results of theseunits2
Why is a Research P&L Important? Research is generally one of the top sources of revenue andexpenses for many institutions Research revenues rarely cover the expenses incurred, often fallingshort by 10% to 20% or more. Accordingly, it is important to understand and actively manage theresearch enterprise through the monitoring of current financialperformance and key performance indicators In addition, the financial impact of future investments in researchshould be determined prior to committing institutional resources0%20%40%60%80%100%Ratio of Research Expenditures to Total ExpendituresTop 300 Universities by total Research Expenditures - IPEDS|-------- 1 – 50 -----------|--------- 50 – 100 -------|----------- 100+--------------------------------------->4
Economic Impact & Current Environment Total postsecondary enrollment experienced first decline in 15years, enrollment pressures are expected to continueEnrollment Pressures Decreased 7.5% between 2011-12, and 0.4% between 2012-13State Appropriations 1/3 of institutions expect a net decline or increase less thaninflation in 2013Tuition & Discounts Gifts increased 2.3% in 2012, favoring current operations overcapital investmentsFundraising FY2012 endowments were flat, returning an average of -0.3% 57% of institutions increased expenditures on campus operationsEndowmentSpend/Distributions Increase in median age of physical plant from 10.5 to 11.5 from2003 to 2010, decrease in capital spendingDeferred Maintenance Cuts of up to 5% for NIH and NSF. Impact on universities isstill unclearSequestrationThe economic landscape for university investment emphasizes the needto understand the cost of research5
Decision SupportInvest ReduceHow can these analyses support management decisions?6Support strategic investments at theinstitutional or college level Evaluating the decision to invest in anew research building Adding a new research program withcapital intensive requirements, e.g., ananotechnology center with newbuilding, equipment and startuppackages Evaluating the overall mission toexpand the research enterpriseIdentify and manage costs to addressbudget constraints Determining sources of inefficiency inorder to maximize cost recovery, e.g.,under-utilized space, excessive costsharing Evaluate the investment theinstitution is making to support theresearch enterprise
The Research P&L Lifecycle Determine the financial performance of the research enterprise bycreating a Profit & Loss (P&L) financial model using Facilities &Administrative (F&A) cost rate data Monitor Bottom-Line Performance using Key Performance Indicators(KPIs) created from sponsored project data Improve Bottom-Line Performance and the level of efficiency andeffectiveness of the research enterpriseDetermineMonitorImprove8
Using the F&A Cost Proposal to create a P&LDetermineMonitorImprove9High-Level Action StepsGather Available Data F&A Schedules and Supporting Cost Accounting DataCreate P&L Statement Structure Identify the different research types for the bottom lineanalysis, such as Departmental Research & Clinical TrialsIdentify Direct Cost Objective Expenditures Identify additional costs that may not be neatly containedwithin cost centersRevise Facilities & Administrative Cost Distributions Redistribute F&A Costs based on the creation of the revisedcost poolsIdentify Revenue Related to Direct Cost Objectives Identify the direct and indirect funding sources related to thedirect cost objectives12345
12DetermineMonitorImproveSponsored Research Other Sponsored Activities Departmental and Gift Funded ResearchSponsoredResearch Cost Sharing TotalOtherSponsoredActivitiesIndustryClinicalTrials Total InstructionSponsoredInstructionDepartmentResearch Total Grand TotalDirect Operating RevenueGrants and Other Restricted Income Used for Program PurposesDirect Revenue 90,567,172 4,766,693 95,333,865 10,039,954 581,260 10,621,214 - 4,627,293 - 4,627,293 110,582,372Indirect Revenue 56,151,646 - 56,151,646 1,003,995 132,105 1,136,100 - 370,183 - 370,183 57,657,930Total Grants and Other RestrictedIncome 146,718,818 4,766,693 151,485,511 11,043,949 713,365 11,757,314 - 4,997,476 - 4,997,476 168,240,302Other RevenueTuition and Fees - - - - - - 310,244,000 - - 310,244,000 310,244,000Other Sources - - - - - - - - - - -Total Other Revenue - - - - - - 310,244,000 - - 310,244,000 310,244,000Total Operating Revenue 146,718,818 4,766,693 151,485,511 11,043,949 713,365 11,757,314 310,244,000 4,997,476 - 315,241,476 478,484,302Direct Operating ExpensesTotal Direct Operating Expense 90,567,172 4,766,693 95,333,865 10,039,954 528,419 10,568,372 215,169,125 4,627,293 11,568,233 231,364,650 337,266,887Net Income from Direct Operations 56,151,646 - 56,151,646 1,003,995 184,947 1,188,942 95,074,875 370,183 (11,568,233) 83,876,826 141,217,415Overhead ExpenseFacilities Related 31,824,455 1,674,971 33,499,426 1,966,619 103,506 2,070,126 28,772,720 618,768 1,546,920 30,938,409 66,507,960General and Administrative 30,330,176 1,596,325 31,926,501 2,476,341 130,334 2,606,675 74,525,164 1,602,692 4,006,729 80,134,585 114,667,761Total Overhead Expense 62,154,631 3,271,296 65,425,927 4,442,960 233,840 4,676,800 103,297,884 2,221,460 5,553,650 111,072,993 181,175,721Net Income from Operations (6,002,985) (3,271,296) (9,274,281) (3,438,965) (48,894) (3,487,858) (8,223,008) (1,851,276) (17,121,882) (27,196,167) (39,958,306)Create P&L Statement Structure –Sample Research P&L2
DetermineMonitorImprove13Identify Direct Cost Objective Expenditures3 Identify additional costs that may not be neatly contained within costcenters− Analyze faculty compensation and effort data to determine voluntary costsharing amount Sponsored Research− Create additional cost objectives that would allow for the further analysisof bottom-line results− For example, create cost pools for laboratory and non-laboratory basedresearch Specialized Service and Recharge Centers− Reclassify cost centers/accounts from Other Institutional and InstructionalCost Pools to this category− Reclassify related overhead allocations from other cost pools− Considerations will need to be made based on the accounting for relatedrevenues
DetermineMonitorImprove14Revise Facilities & Administrative Cost Distributions4 Redistribute F&A Costs based on the creation of the revised costpools General and Administrative Costs− Further refine distribution of general and administrative costs− For example, perform refined distribution of legal expense Departmental Administration− Reverse calculation per the proposal and calculate per more refinedmethodology− For example, replace 3.6% Faculty Allowance with effort gathered viaspecial survey existing effort reporting data or special survey Sponsored Projects Administration− Create additional sub-pools based on various functional activities− The sub-pools could include proposal review, proposal negotiation,financial report preparation, etc.
DetermineMonitorImprove15Identify Revenue Related to Direct Cost Objectives5 Different award types determine how revenue is to be recognized− Cost reimbursable awards, direct and indirect costs can be equated to therelated expense− Fixed awards, revenues can be equated to cash receipts− Determine if there are funds designated to support DepartmentalResearch activity Determine what sources of revenue supporting research should beincluded in the presentation which could include− Endowment Income− Gifts in general support of research programs− Royalty Income
Key Performance Indicators Used toMonitor Financial Performance
17Key Performance Indicator:Top Line Revenue GrowthBOTTOM LINE IMPACT Large decrease in sponsored award revenues, particularly of a localized nature, areindicative of a stagnant research enterpriseDetermineMonitorImproveBUDGETARY / MANAGEMENT ACTION Proposal development! Target institutional strengths and invest Diversify sponsor funding mix through increased targeting of industry and foundationsponsorsDESIRED TRENDHIGHKey Performance Indicator:Top Line Revenue Growth
18DetermineMonitorImproveBOTTOM LINE IMPACT Negative bottom-line impact resulting from when the F&A overhead recovery designatedby the sponsoring agency does not cover the associated costs incurredBUDGETARY / MANAGEMENT ACTION Refine policy to limit the acceptance or these awards – F&A Rate Waiver Establish dollar density metrics and have management actions as a result of not achievingthe targeted metric Revenue Enhancement OpportunityDESIRED TRENDHIGHKey Performance Indicator:Effective Rate of Return on Awards
19DetermineMonitorImproveBOTTOM LINE IMPACT Negative bottom-line impact resulting from when the F&A overhead recovery does notcover the costs incurredBUDGETARY / MANAGEMENT ACTION Evaluate and refined F&A rate calculation if the associated cost (effort) justifies theanticipated return Develop policy that allows institution to direct charge non-federal sponsors for coststypically included as overhead Revenue Enhancement OpportunityDESIRED TRENDHIGHKey Performance Indicator:F&A Cost Recovery
20Analyzing the Unrecovered Cost after revenue distribution at the Cost Pool level can supportuniversity management when making decisions related to the return of overhead to the variousorganizational units of the institutionDetermineMonitorImproveCost PoolAllocatedCostSubmittedRateLess:CapImpactSubmittedRateLess:NegotiationImpactNegotiatedRateNegotiatedRate as %of TotalDistributionof F&ARevenueUnrecoveredCostGeneral Administration 6,445,389 9.84% 2.88% 6.96% 6.96% 12.43% 4,352,136 2,093,253Departmental Administration 10,170,655 15.53% 4.54% 10.99% 10.99% 19.62% 6,867,557 3,303,099Faculty Administration 2,357,654 3.60% 3.60% 3.60% 6.43% 2,250,000 107,654Sponsored Projects Administration 4,117,556 6.29% 1.84% 4.45% 4.45% 7.94% 2,780,307 1,337,249Subtotal 23,091,254 35.25% 9.25% 26.00% 0.00% 26.00% 46.43% 16,250,000 6,841,254Building 3,253,765 5.49% 5.49% 0.88% 4.62% 8.24% 2,884,691 369,074Equipment 1,267,436 2.14% 2.14% 0.34% 1.80% 3.21% 1,123,671 143,765Interest 1,525,531 2.58% 2.58% 0.41% 2.16% 3.86% 1,352,490 173,041Operations and Maintenance 12,472,473 21.06% 21.06% 3.37% 17.69% 31.59% 11,057,721 1,414,752Utility Allowance 1.30% 1.30% 1.30% 2.32% 812,500 (812,500)Library 1,713,262 2.89% 2.89% 0.46% 2.43% 4.34% 1,518,927 194,335Subtotal 20,232,467 27.83% 0.00% 35.46% 5.46% 30.00% 53.57% 18,750,000 1,482,467Total $43,323,721 63.08% 9.25% 61.46% 5.46% 56.00% 100.00% $35,000,000 $8,323,721MTDC - Admin $65,501,390MTDC - Facilities $59,228,045DA split 15.53% 81%DA 3.60% 19%Faculty 19.13% 100%Key Performance Indicator Example:F&A Cost Recovery
21DetermineMonitorImproveBOTTOM LINE IMPACT Negative bottom-line impact resulting from the inefficient use of research spaceBUDGETARY / MANAGEMENT ACTION Develop space management policy that specifies implications of not meeting targetedresearch dollar density metrics− Reassignment of research space− Retain F&A Recovery to cover shortfallDESIRED TRENDHIGHKey Performance Indicator:Space Usage
P&L Category Value External Funding All FundingChemistryResearch Expenditures $ 2,670,962 $ 3,546,757Space (sq ft) 14,703 14,703Dollar Density ($/sq ft) 182 241BiostatisticsResearch Expenditures $ 1,164,685 $ 1,391,827Space (sq ft) 1,110 1,110Dollar Density ($/sq ft) 1,049 1,254BiomedicalEngineeringResearch Expenditures $ 3,722,537 $ 4,641,035Space (sq ft) 14,034 14,034Dollar Density ($/sq ft) 265 331DermatologyResearch Expenditures $ 2,757,349 $ 3,362,019Space (sq ft) 9,761 9,761Dollar Density ($/sq ft) 282 344NeurologyResearch Expenditures $ 1,029,482 $ 1,479,436Space (sq ft) 8,533 8,533Dollar Density ($/sq ft) 121 173MicrobiologyResearch Expenditures $ 1,822,631 $ 2,668,284Space (sq ft) 7,981 7,981Dollar Density ($/sq ft) 228 334ResearchEnterpriseResearch Expenditures $ 13,365,608 $ 17,287,321Space (sq ft) 56,907 56,907Dollar Density ($/sq ft) 235 30422 Principal Investigators,Academic and ClinicalDepartments andDesignated ResearchPrograms alreadycalculate this KPI Multiple PIs associatedwith one project andshared laboratories andsupport facilities createchallenges for this KPISpace Usage, or Dollar Density, is the amount of research funding conducted in adefined spaceDetermineMonitorImproveKey Performance Indicator Example:Space Usage
23DetermineMonitorImproveBOTTOM LINE IMPACT Negative bottom-line impact resulting from when the pricing structure and/or facilityvolume does not generate enough revenue to cover the direct and or indirect facilityexpendituresBUDGETARY / MANAGEMENT ACTION Change service pricing structure Seek additional internal or external users Consolidate or eliminate certain facilities Designate institutional funds to cover deficitsDESIRED TRENDLOWKey Performance Indicator:Specialized Service Facility & Recharge Center Operating Results
24DetermineMonitorImproveBOTTOM LINE IMPACT Negative bottom-line impact resulting from the direct and overhead costs associated withresearch are being covered by institutional fundsBUDGETARY / MANAGEMENT ACTION Establish policy to request institutional funds for “bridge” support Designate institutional funds to cover deficitsDESIRED TRENDLOWKey Performance Indicator:Unfunded Research
25DetermineMonitorImproveBOTTOM LINE IMPACT Negative bottom-line impact when faculty members are not reaching their targetedexternal support salary coverage percentageBUDGETARY / MANAGEMENT ACTION Create policy that defines implications of not meeting target which could include measuressuch as reduction in lab space, etc. Reassign available effort to instructional or administrative mission Designate institutional funds to cover deficitsDESIRED TRENDLOWKey Performance Indicator:Faculty Unfunded Research Salary
26DetermineMonitorImproveBOTTOM LINE IMPACT Negative bottom-line impact when established research programs do not meet financialand/or programmatic goalsBUDGETARY / MANAGEMENT ACTION Create process to evaluate programs and determine if program resources should bereassigned to more successful research programs.DESIRED TRENDLOWKey Performance Indicator:Underperforming Research Programs
27DetermineMonitorImproveBOTTOM LINE IMPACT Negative bottom-line impact resulting from the commitment of institutional funds tosupport external research projectsBUDGETARY / MANAGEMENT ACTION Refine policy to restrict the commitment of institutional funds on external projects Reduction in the use of institutional funds in the support research Pray that the elimination of VCCS stays in the revised OMB circularDESIRED TRENDLOWKey Performance Indicator:Mandatory / Voluntary Committed Cost Sharing on Sponsored Projects
Spend more time in the “Determine” stage planning and structuringthe P&L− The Research P&L is only as good as the data used to create it The Research P&L Lifecycle is a continual feedback process that canbe updated in real-time with sponsored project data The KPI dashboard should be customized to include the metrics thatalign with the research mission priorities Establish thresholds for acceptable operating losses and goals foraspirational performance28Closing Thoughts
Matt Faris | email@example.com | 312.880.3023Zach Belton | firstname.lastname@example.org | 312.583.8787Jen Ohlman | email@example.com | 312.880.3072Questions?29@Follow us
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