Analyzing the Performance of Your University’s Research Enterprise through P&Ls Using F&A

1. Analyzing the Performance of Your University’s Research Enterprise through P&Ls Using F&A 2013 NCURA Financial Research Administration Conference New Orleans March 12, 2013

2. Presenters • Matt Faris – Senior Director, Huron Consulting Group • Andy Horner – Associate Vice President for Financial Affairs, Boston University

3. Today’s Objectives • Understand how to create a research P&L from the readily available F&A cost proposal • Review commonly used Analyses and Key Performance Indicators (KPIs) that can be determined from the research P&L • Introduce strategies for improving bottom-line performance on the research P&L

4. Understand Creating a Research P&L

5. Why is this 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

6. Economic Impact and Current Environment • Significant Revenue Pressures • SEQUESTRATION! • Enrollment pressures • State appropriations declining • Tuition discount rates • Fundraising • Endowment Spending/Distributions • Expenses • Financial aid • Interest rate expenses – refinancing debt from variable to fixed rate • Capital expenditures and the facilities “arms race” • Assets • Cash balances • Stagnant / declining net asset balances • Endowment pressures • Liquidity • Deferred Plant Maintenance • Liabilities • Debt ratings – more downgrades than upgrades • Bond covenants

7. The Research P&L Lifecycle Determine Monitor Improve • 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

8. Using the F&A Cost Proposal to create a P&L High-Level Action Steps Determine 1 Gather Available Data • F&A Schedulesand Supporting Cost Accounting Data Monitor Improve 2 Create P&L Statement Structure • Identify the different research types for the bottom line analysis, such as Departmental Research & Clinical Trials 3 • Identify Direct Cost Objective Expenditures • Identify additional costs that may not be neatly contained within cost centers 4 • Revise Facilities & Administrative Cost Distributions • Redistribute F&A Costs based on the creation of the revised cost pools 5 • Identify Revenue Related to Direct Cost Objectives • Identify the direct and indirect funding sources related to the direct cost objectives

9. Gather Available Data – Sample Summary Stepdown Schedule 1 Determine Monitor Improve

10. Gather Available Data – Sample F&A Rate Schedule 1 Determine Monitor Improve

11. Create P&L Statement Structure – Sample Research P&L 2 Determine Monitor Improve

12. 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 related to the accounting for related revenues Determine Monitor Improve

13. 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

14. 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 Determine Monitor Improve

15. Review Analyses and Key Performance Indicators Used to Monitor Financial Performance

16. Introduction to the KPI Dashboard There are various financial analyses and key performance indicators that can be created and analyzed in real-time to allow for the on-going monitoring of the research enterprise Determine Monitor Improve

17. Introduction to the KPI Dashboard Research expenses are typically subsidized at a level of about 25% by non-research related revenues to account for shortfalls in direct and indirect cost recovery. Determine Monitor Improve

18. KPI Example – F&A Cost Recovery 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

19. KPI Example – Space Usage Analysis Space Usage, or Dollar Density, is the amount of research funding conducted in a defined space. Determine Monitor Improve • 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

20. Introduce Improving the Bottom Line

21. How to improve the bottom line There are various management decisions that can be made to improve the bottom line. Oftentimes, these include creating and / or enforcing policies. Determine Monitor Improve

22. How to improve the bottom line The management actions should be analyzed for time to benefits realization, implementation difficulty and timeframe. Determine Monitor Improve

23. How to improve the bottom line The management actions should be analyzed for time to benefits realization, implementation difficulty and timeframe. Determine Monitor Improve

24. Closing Thoughts 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

25. Questions? Matt Faris | mfaris@huronconsultinggroup.com | 312.880.3023 Andy Horner | ahorner@bu.edu | 617.353.2290