understanding the financial performance of the research enterprise webinar

Understanding the Financial Performance of the

Research Enterprise

April 17, 2013

Matt Faris – Senior Director

Zach Belton – Director

Jen Ohlman – Associate

Presenters

1

Today’s Objectives

Discuss the methods for creating Profit & Loss (P&L) statements for

the 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 operating

results for the research enterprise

− Dive deeper to identify ways to measure performance of the

individual research administration units

− Understand strategies to improve the operating results of these

units

2

Why is creating a Research P&L important?

Why is a Research P&L Important?

Research is generally one of the top sources of revenue and

expenses for many institutions

Research revenues rarely cover the expenses incurred, often falling

short by 10% to 20% or more.

Accordingly, it is important to understand and actively manage the

research enterprise through the monitoring of current financial

performance and key performance indicators

In addition, the financial impact of future investments in research

should be determined prior to committing institutional resources

0%

20%

40%

60%

80%

100%

Ratio of Research Expenditures to Total Expenditures

Top 300 Universities by total Research Expenditures - IPEDS |-------- 1 – 50 -----------|--------- 50 – 100 -------|----------- 100+--------------------------------------->

4

Economic Impact & Current Environment

Total postsecondary enrollment experienced first decline in 15 years, enrollment pressures are expected to continue

Enrollment Pressures

Decreased 7.5% between 2011-12, and 0.4% between 2012-13 State Appropriations

1/3 of institutions expect a net decline or increase less than inflation in 2013

Tuition & Discounts

Gifts increased 2.3% in 2012, favoring current operations over capital investments

Fundraising

FY2012 endowments were flat, returning an average of -0.3%

57% of institutions increased expenditures on campus operations

Endowment Spend/Distributions

Increase in median age of physical plant from 10.5 to 11.5 from 2003 to 2010, decrease in capital spending

Deferred Maintenance

Cuts of up to 5% for NIH and NSF. Impact on universities is still unclear

Sequestration

The economic landscape for university investment emphasizes the need

to understand the cost of research

5

Decision Support

Invest Reduce

How can these analyses support management decisions?

6

Support strategic investments at the

institutional or college level

Evaluating the decision to invest in a

new research building

Adding a new research program with

capital intensive requirements, e.g., a

nanotechnology center with new

building, equipment and startup

packages

Evaluating the overall mission to

expand the research enterprise

Identify and manage costs to address

budget constraints

Determining sources of inefficiency in

order to maximize cost recovery, e.g.,

under-utilized space, excessive cost

sharing

Evaluate the investment the

institution is making to support the

research enterprise

Key Analysis for Understanding Performance

The Research P&L Lifecycle

Determine the financial performance of the research enterprise by

creating 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 and

effectiveness of the research enterprise

Determine

Monitor Improve

8

Using the F&A Cost Proposal to create a P&L Determine

Monitor Improve

9

High-Level Action Steps

Gather Available Data

F&A Schedules and Supporting Cost Accounting Data

Create P&L Statement Structure

Identify the different research types for the bottom line

analysis, such as Departmental Research & Clinical Trials

Identify Direct Cost Objective Expenditures

Identify additional costs that may not be neatly contained

within cost centers

Revise Facilities & Administrative Cost Distributions

Redistribute F&A Costs based on the creation of the revised

cost pools

Identify Revenue Related to Direct Cost Objectives

Identify the direct and indirect funding sources related to the

direct cost objectives

1

2

3

4

5

Gather Available Data –

Sample Summary Stepdown Schedule

Determine

Monitor Improve

10

1

A-21 F&A Cost Groupings

Final Cost Bldg

Deprec

Equip

Deprec Interest

Operations

& Maint

General

Admin

Dept

Admin

Spons

Proj Admin Library

Student

Services Totals

F&A Cost Groups (USD Millions)

Bldg Deprec 24.68 (24.68) -

Equip Deprec 36.64 - (36.64) -

Interest 7.97 - - (7.97) -

Operations & Maint 111.64 2.19 1.31 .35 (115.48) -

General Admin 198.65 .98 2.3 .1 9.32 (211.35) -

Department Admin 42.75 .49 .33 .19 3.29 4.97 (52.02) -

Spon Proj Admin 8.08 .12 .07 .005 .66 .58 - (9.52) -

Library 6.16 .23 .6 .02 2.86 .44 - - (10.32) -

Student Services 6.26 .1 .1 .007 .99 .55 - - - (8.02) -

Direct Cost Groups (USD Millions)

Instruction 231.36 4.52 3.36 1 22.05 25.88 36.97 1.65 7.62 8.02 342.44

Organized Res 95.33 4.24 5.18 2.41 21.67 10.54 12.62 7.23 1.52 - 160.76

Other Spon Act 10.57 .21 .47 .04 1.36 1.01 .87 .62 .006 - 15.25

Other Inst Activity 26.26 3.22 4.59 3.4 16.16 2.02 .49 - .68 - 56.8

Hospitals & Clinics 705.4 8.4 18.33 .45 37.13 165.3 1.07 - .44 - 936.53

Total 1,511.78 - - - - - - - - - 1,511.78

Base Year Rate Calculation Summary by Major Function (USD)

Instruction Organized Research OSA

FACILITIES GROUP

Depreciation/Use Allowance

Buildings/Improvements $ 4,518,300 2.0% $ 4,243,167 4.5% $ 207,650 2.2%

Equipment $ 3,362,450 1.5% $ 5,182,396 5.5% $ 465,044 5.0%

Interest Expense $ 1,004,046 0.4% $ 2,408,350 2.5% $ 36,693 0.4%

Operation and Maintenance $ 22,053,612 9.5% $ 21,665,514 22.9% $ 1,360,739 14.7%

Utility Cost Adjustment $ - 0.0% $ - 1.3% $ - 0.0%

Library $ 7,621,286 3.3% $ 1,519,201 1.6% $ 58,091 0.6%

TOTAL FACILITIES $ 38,559,695 16.7% $ 35,018,627 38.3% $ 2,128,217 23.0%

ADMINISTRATIVE GROUP

General $ 25,879,485 11.2% $ 10,538,650 11.1% $ 1,056,441 10.0%

Departmental $ 36,965,008 16.0% $ 12,617,292 13.2% $ 874,634 8.3%

Sponsored Projects $ 1,646,496 8.2% $ 7,251,359 8.2% $ 617,508 8.2%

Student Services $ 8,022,310 3.5% $ - 0.0% $ - 0.0%

TOTAL ADMIN $ 72,513,299 38.8% $ 30,407,300 32.5% $ 2,548,584 26.4%

Adjustment for 26% Limitation -12.8% -6.5% -0.4%

MODIFIED TOTAL DIRECT COST AND F&A RATES

On-Campus Base/Rate $ 231,364,650 42.7% $ 94,524,780 64.3% $ 9,236,575 49.0%

Off-Campus Base/Rate $ - 26.0% $ 809,085 26.0% $ 1,331,797 26.0%

Total On/Off (All Campus) $ 231,364,650 $ 95,333,865 $ 10,568,372

Sponsored Base $ 20,192,699 $ 88,930,969 $ 7,573,146

COMPOSITION OF RATE BASE

Federal Awards

On-Campus (full rate) $ - $ 63,047,557 $ -

Off-Campus (full rate) $ - $ 520,948 $ -

Research Training Awards $ 131,220 $ 4,994,943 $ 518,024

Other Federal Awards $ 4,065,129 $ 11,653,454 $ 5,434,510

Non-Federal Sources $ 227,168,301 $ 15,116,963 $ 4,615,839

Total $ 231,364,650 $ 95,333,865 $ 10,568,372

MISCELLANEOUS STATISTICS

Cost Sharing in Rate Base $ - $ 7,091,650 $ 263,782

ASF by Major Function 432,941 409,501 66,387

Percent of ASF Financed 17.1% 25.8% 3.1% 11

Determine

Monitor Improve

Gather Available Data –

Sample F&A Rate Schedule 1

12

Determine

Monitor Improve

Sponsored Research Other Sponsored Activities Departmental and Gift Funded Research

Sponsored

Research Cost Sharing Total

Other

Sponsored

Activities

Industry

Clinical

Trials Total Instruction

Sponsored

Instruction

Department

Research Total Grand Total

Direct Operating Revenue

Grants and Other Restricted Income Used for Program Purposes

Direct Revenue 90,567,172 4,766,693 95,333,865 10,039,954 581,260 10,621,214 - 4,627,293 - 4,627,293 110,582,372

Indirect Revenue 56,151,646 - 56,151,646 1,003,995 132,105 1,136,100 - 370,183 - 370,183 57,657,930

Total Grants and Other Restricted

Income 146,718,818 4,766,693 151,485,511 11,043,949 713,365 11,757,314 - 4,997,476 - 4,997,476 168,240,302

Other Revenue

Tuition and Fees - - - - - - 310,244,000 - - 310,244,000 310,244,000

Other Sources - - - - - - - - - - -

Total Other Revenue - - - - - - 310,244,000 - - 310,244,000 310,244,000

Total 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 - 315,241,476 478,484,302

Direct Operating Expenses

Total 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 11,568,233 231,364,650 337,266,887

Net 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) 83,876,826 141,217,415

Overhead Expense

Facilities 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 66,507,960

General 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 80,134,585 114,667,761

Total 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 5,553,650 111,072,993 181,175,721

Net 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&L 2

Determine

Monitor Improve

13

Identify Direct Cost Objective Expenditures 3

Identify additional costs that may not be neatly contained within cost

centers

− Analyze faculty compensation and effort data to determine voluntary cost

sharing amount

Sponsored Research

− Create additional cost objectives that would allow for the further analysis

of bottom-line results

− For example, create cost pools for laboratory and non-laboratory based

research

Specialized Service and Recharge Centers

− Reclassify cost centers/accounts from Other Institutional and Instructional

Cost Pools to this category

− Reclassify related overhead allocations from other cost pools

− Considerations will need to be made based on the accounting for related

revenues

Determine

Monitor Improve

14

Revise Facilities & Administrative Cost Distributions 4

Redistribute F&A Costs based on the creation of the revised cost

pools

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 refined

methodology

− For example, replace 3.6% Faculty Allowance with effort gathered via

special 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.

Determine

Monitor Improve

15

Identify Revenue Related to Direct Cost Objectives 5

Different award types determine how revenue is to be recognized

− Cost reimbursable awards, direct and indirect costs can be equated to the

related expense

− Fixed awards, revenues can be equated to cash receipts

− Determine if there are funds designated to support Departmental

Research activity

Determine what sources of revenue supporting research should be

included in the presentation which could include

− Endowment Income

− Gifts in general support of research programs

− Royalty Income

Key Performance Indicators Used to

Monitor Financial Performance

17

Key Performance Indicator:

Top Line Revenue Growth

BOTTOM LINE IMPACT

Large decrease in sponsored award revenues, particularly of a localized nature, are

indicative of a stagnant research enterprise

Determine

Monitor Improve

BUDGETARY / MANAGEMENT ACTION

Proposal development!

Target institutional strengths and invest

Diversify sponsor funding mix through increased targeting of industry and foundation

sponsors

DESIRED TREND

HIGH


Top Line Revenue Growth

18

Determine

Monitor Improve

BOTTOM LINE IMPACT

Negative bottom-line impact resulting from when the F&A overhead recovery designated

by the sponsoring agency does not cover the associated costs incurred


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 achieving

the targeted metric

Revenue Enhancement Opportunity

DESIRED TREND

HIGH


Effective Rate of Return on Awards

19

Determine

Monitor Improve

BOTTOM LINE IMPACT

Negative bottom-line impact resulting from when the F&A overhead recovery does not

cover the costs incurred


Evaluate and refined F&A rate calculation if the associated cost (effort) justifies the

anticipated return

Develop policy that allows institution to direct charge non-federal sponsors for costs

typically included as overhead

Revenue Enhancement Opportunity

DESIRED TREND

HIGH


F&A Cost Recovery

20

Analyzing the Unrecovered Cost after revenue distribution at the Cost Pool level can support

university management when making decisions related to the return of overhead to the various

organizational units of the institution

Determine

Monitor Improve

Cost Pool

Allocated

Cost

Submitted

Rate

Less:

Cap

Impact

Submitted

Rate

Less:

Negotiation

Impact

Negotiated

Rate

Negotiated

Rate as %

of Total

Distribution

of F&A

Revenue

Unrecovered

Cost

General Administration 6,445,389 9.84% 2.88% 6.96% 6.96% 12.43% 4,352,136 2,093,253

Departmental Administration 10,170,655 15.53% 4.54% 10.99% 10.99% 19.62% 6,867,557 3,303,099

Faculty Administration 2,357,654 3.60% 3.60% 3.60% 6.43% 2,250,000 107,654

Sponsored Projects Administration 4,117,556 6.29% 1.84% 4.45% 4.45% 7.94% 2,780,307 1,337,249

Subtotal 23,091,254 35.25% 9.25% 26.00% 0.00% 26.00% 46.43% 16,250,000 6,841,254

Building 3,253,765 5.49% 5.49% 0.88% 4.62% 8.24% 2,884,691 369,074

Equipment 1,267,436 2.14% 2.14% 0.34% 1.80% 3.21% 1,123,671 143,765

Interest 1,525,531 2.58% 2.58% 0.41% 2.16% 3.86% 1,352,490 173,041

Operations and Maintenance 12,472,473 21.06% 21.06% 3.37% 17.69% 31.59% 11,057,721 1,414,752

Utility 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% 1,518,927 194,335

Subtotal 20,232,467 27.83% 0.00% 35.46% 5.46% 30.00% 53.57% 18,750,000 1,482,467

Total $43,323,721 63.08% 9.25% 61.46% 5.46% 56.00% 100.00% $35,000,000 $8,323,721

MTDC - Admin $65,501,390

MTDC - Facilities $59,228,045

DA split 15.53% 81%

DA 3.60% 19%

Faculty 19.13% 100%

Key Performance Indicator Example:

F&A Cost Recovery

21

Determine

Monitor Improve

BOTTOM LINE IMPACT

Negative bottom-line impact resulting from the inefficient use of research space


Develop space management policy that specifies implications of not meeting targeted

research dollar density metrics

− Reassignment of research space

− Retain F&A Recovery to cover shortfall

DESIRED TREND

HIGH


Space Usage

P&L Category Value External Funding All Funding

Chemistry

Research Expenditures $ 2,670,962 $ 3,546,757

Space (sq ft) 14,703 14,703

Dollar Density ($/sq ft) 182 241

Biostatistics


Space (sq ft) 1,110 1,110

Dollar Density ($/sq ft) 1,049 1,254

Biomedical

Engineering


Space (sq ft) 14,034 14,034


Dermatology


Space (sq ft) 9,761 9,761


Neurology


Space (sq ft) 8,533 8,533


Microbiology


Space (sq ft) 7,981 7,981


Research

Enterprise


Space (sq ft) 56,907 56,907


22

Principal Investigators,

Academic and Clinical

Departments and

Designated Research

Programs already

calculate this KPI

Multiple PIs associated

with one project and

shared laboratories and

support facilities create

challenges for this KPI

Space Usage, or Dollar Density, is the amount of research funding conducted in a

defined space

Determine

Monitor Improve

Key Performance Indicator Example:

Space Usage

23

Determine

Monitor Improve

BOTTOM LINE IMPACT

Negative bottom-line impact resulting from when the pricing structure and/or facility

volume does not generate enough revenue to cover the direct and or indirect facility

expenditures


Change service pricing structure

Seek additional internal or external users

Consolidate or eliminate certain facilities

Designate institutional funds to cover deficits

DESIRED TREND

LOW


Specialized Service Facility & Recharge Center Operating Results

24

Determine

Monitor Improve

BOTTOM LINE IMPACT

Negative bottom-line impact resulting from the direct and overhead costs associated with

research are being covered by institutional funds


Establish policy to request institutional funds for “bridge” support


DESIRED TREND

LOW


Unfunded Research

25

Determine

Monitor Improve

BOTTOM LINE IMPACT

Negative bottom-line impact when faculty members are not reaching their targeted

external support salary coverage percentage


Create policy that defines implications of not meeting target which could include measures

such as reduction in lab space, etc.

Reassign available effort to instructional or administrative mission


DESIRED TREND

LOW


Faculty Unfunded Research Salary

26

Determine

Monitor Improve

BOTTOM LINE IMPACT

Negative bottom-line impact when established research programs do not meet financial

and/or programmatic goals


Create process to evaluate programs and determine if program resources should be

reassigned to more successful research programs.

DESIRED TREND

LOW


Underperforming Research Programs

27

Determine

Monitor Improve

BOTTOM LINE IMPACT

Negative bottom-line impact resulting from the commitment of institutional funds to

support external research projects


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 circular

DESIRED TREND

LOW


Mandatory / Voluntary Committed Cost Sharing on Sponsored Projects

Spend more time in the “Determine” stage planning and structuring

the 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 can

be updated in real-time with sponsored project data

The KPI dashboard should be customized to include the metrics that

align with the research mission priorities

Establish thresholds for acceptable operating losses and goals for

aspirational performance

28

Closing Thoughts

understanding the financial performance of the research enterprise webinar

Education

research enterpriseidentify

research building

research pl important

research pl lifecycle

research enterprise

research enterprise

ratio of research expenditures

institutions research