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Implementing Full CostA new way of thinking and actingShort report about a cultural revolution in a university

Warsaw May 13th 2011

Pieter-Jan Aartsen (p.j.aartsen@uva.nl)

Corporate controller

Universiteit van Amsterdam

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Agenda

I. Preliminary considerations

II. Relevant environment - external and internal

III. Basic steps in preparation Full Cost

IV. Ways to implement Full Cost

V. Lessons learnt – recommendations

VI. Provisional conclusions

VII. Puzzling themes

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I.Preliminary

considerations

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Full Cost: a matter of transparency

Accountability towards national and European tax payers

Creating level-playing field / common reporting language

Inevitably: reflecting national setting individual universities

Main objective: showing value for money

Showing the need for university contribution to externally funded research projects

Creating a sound basis for negotiations about covering costs

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II.Relevant environment

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National setting universities

Institutional ties national government – universities Control and management structure Stakeholders organization Funding principles Boundaries financial responsibility Accounting principles

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Setting Dutch universities “Withdrawing” national government Development towards private enterprise structure:

Final responsibility: executive board Limited influence on decision-making by employees / students Also exploiting private activities (sometimes in separate legal entities)

National funding principles (output oriented): Education: # students, # Ba/Ma degrees (weighting factors per discipline) Research: # PhD, % on Education budget

Tendency to increase competition based funding (quality assesments)

to shrink fixed shaft (based in “history”)

Financial responsibility Full balance / P&L (1997: abolition cash-based system) 2008: Obligation to apply general (national) accounting principles

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National Dutch developments All public Dutch universities: intention to implement FC

Phasing is different

Empowered by Dutch Association of Universities

Agreement about “10 commandments” to respect in FC

Voluntarily (no requirement ministry of Education)

Other Dutch ministeries! have adopted FC in contract conditions (SISA)

Trying to pull on board Dutch Research Council!

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Organizational conditions (UvA)

Strong support for transparency by board / management Establishing climate for cost-(recovery) related decisions Full scope responsibility faculty deans

Concentrating financial and academic policy in one hand

Rationalizing internal budget allocation Tendency to relate costs to performance Automatic favorishing / rewarding “preferred behaviour”

Budgeting is about numbers, not (in first place) about € € is derivate: university heart pulses elsewhere

Sound information system to accommodate principles of cost and budget allocation

Planning & Control cycle: balance between autumn and spring

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Performance indicators: EC (education)

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III.Basic steps in

preparation Full Cost

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Denominate primary activities in university

Analyze cost drivers (primary and secondary)

Design cost allocation scheme

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Denominate main activities

Reason of existence universities:

Teaching

Research

Other activities Valorisation (growing intellectual property) Care for patients (hospitals – faculty of medicine) Guardianship cultural heritage (museums) Consultancies

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Analyze cost drivers

Support and facilities: Secondary cost drivers Time spent by support staff (# hrs / # fte) Use of space and housing facilities (# sqm) Use of ICT-facilities (# workstations, # laptops) Administrative support (k€ revenue, k€ costs, # headcount, # used) Use of university library (# fte academic staff) Student support and facilities (# students) Use of dedicated research facilities (time used / % cost increase )

Teaching & Research: Primary cost driver Time spent by academic staff (# hrs / # fte)

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Design cost allocation methodology - I

1) Separate all direct costsa) Direct project costs

b) Exclusively (directly) teaching- or research-related costs

2) Allocate remaining overhead costs:a) Collect these costs in cost pools;

representing separate support tasks / departments;

b) Allocate them via appropriate keys / indicators / cost drivers;(sqm / fte / income / total budget);

c) in one (“simplified model”) or in more steps; (eventually reciprocal);

d) mainly to available productive time of all academic staff. (per department / faculty)

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Design cost allocation methodology - II3) Calculate hourly rates of academic staff, taking into account available

“productive time”, discerning three components:a) Direct personnel costs (gross salary) - one rate per salary scale / step (CLA: ± 70)b) Surcharges on direct personnel costs:

• % Sickness leave (differing for support and academic staff)• % Redundancy payments (one rate UvA-wide)• % Perquisites, average on special remunerations (differing per faculty)

c) Indirect overhead costs - different rates (in €, not in % sal. increase)• Standard workspace facilities (one rate UvA-wide)• General faculty overhead (differing per academic discipline α, β, γ, medicine, dentistry etc.)• (Research) institute overhead ( differing per research institute (laboratories, equipment etc.)

4) Finally allocate full costs by time recording • Hours recorded multiplied with hourly rates (in different components)• To individual research projects (+ teaching programs / evt. other activities)• Final step: exclusively teaching or research related overhead costs on the basis of

time spent (FP7 requirement: not mixing costs by nature)

N.B. Applied to all activities: either governmentally or externally funded, i.a. FP7- research

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Breakdown Full Cost rate UvA

1 - Personnel costs

5 - Central administration

6 - Work space

8 - Institute costs

2 - Sickness leave

3 - Redundancy payments

4 - Other personnel costs

7 - Departmental costs

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IV.Ways to implement Full Cost

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Necessary preconditions Apply cost allocation model to figures from Annual Report

or from annual budget, provided regularly adjusted from post calculation

Decide: Implementing cost settlement procedures in Financial Information System

(making full cost base of management accounting throughout organisation) Keep model extracomptable (Excel)

(making full cost a tool of controllers especially for reporting FP7-projects)

Communicate tariffs / rates / procedures in organization

Offer a reliable time-recording system Preferably computerised (and integrated with FIS)

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Zooming in: Time recording Active day-to-day time recording (Employee Self Service):

only by those who are employed in contract activities (if required)

Instructions for active time-recording: In principle: record all real hours spent (avoid mystification / simplification / copying plan) Take into account off-time due to illness and holidays Way of recording overtime (at FC-rate or zero-rate) depending on contract conditions:

if overtime will be paid for (In NL not, acc. to C.L.A.) if time spent will be compensated (saving for taking sabbatical, racking holidays / year) if external contract party is willing to pay for it (E.U.-FP7: not)

Passive “background” recording (periodically updated timetables) for all other personnel: “detailed” distribution of available time to various activities /

project (as planned – taking into account illness and holidays) timesheets are “automatically” generated

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Other aspects of time recording Emphasize:

Academic activity is highly “personnel consuming” Appointments / salaries of academic personnel are expressed in

hours per week,- due to this: Measuring academic effort in time spent is the best cost indicator In any case as long as external funding is not output-related “No cure no pay” is conflicting with academic “code of conduct”

Sometimes “misunderstanding”: Nor brain activity (probably continuous), nor presence is measured Desecration of the academic professional is not the aim Accept the necessity as an economic fact of life

Management reporting Knowledge about time available and time spent can refine and

deepen the conception of academic activity

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Time spent academic staff: Fac. of Science

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Time spent academic staff: Fac. of Humanities

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V.Lessons learnt

Recommendations

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Some do’s and do not's Be sure of the support of the University Board and management Use only one central Financial System and make an image of the

governance (responsibility) structure within the university in this system In “companies”, profit centre's, cost centre’s or business areas e.g.

Take only a few transparently measurable cost drivers (less is more) Only a minimum of relevant and significant cost distinction has to be supported Avoid scholastic discussions (or cut them off timely) Show and explain breakdown of cost rates (the necessity and reasonability of them)

Make use of the information about time spending of academics At the maximum level available (estimated time division can be beginning) FC is not about available (human) capacity but about the use of (human) resources

Build in: There is something to gain For those who are increasing efficiency or productivity

Put no IT-specialists in the lead But financials with knowledge of the nature of the academic “enterprise” Involve faculty staff, in any case those who are working “at the frontier with outside”

Designing and implementing a FC is funny job and a solvable problem

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VI.Provisional conclusions

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Added value of Full Cost

Full Cost: the only clear base for management decisions Put the money where the universities heart is Relating costs to cost drivers and in the meanwhile budgets to performance

indicators can replace the cheeseslicer / salt dispenser show added value of financial discipline (not just transferring governmental decisions)

In the long run: FC necessary precondition for sustainability

Explicitly co-funding, matching and cross-subsidizing is better than hollowing out government budgets implicitly

Matching expresses bi-lateral interest in research outcome

Showing poverty: the beginning of political awareness

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VII.Puzzling themes

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FP7 and Different national settings:

Level-playing-field? One size fits all? Eligibility criteria!

Is the price of Full Cost acceptable?

FP7 Consortia: Market principle or Quality Selection?

Academic manager: contradictio in terminis?

FP7-regulations: Crowbar to increase transparency?