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CRAD Work Group Report on Internal Service Organizations

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CRAD Work Group Report on Internal Service Organizations

Council of Research Associate Deans

    Work Group Report on Internal Service Organizations

    Executive Summary

    Internal Service Organizations (ISOs) are defined by the University of Minnesota as units that sell goods and services to University departments and other units. Different kinds of ISOs have evolved over the years, but they have not been differentiated by either definition or accounting category. In order to focus on research, the work group defined research ISOs as a subset of ISOs that provide essential contributions to the university’s

    research mission. Research ISOs often function as organizational units that have a director, employ staff, provide services and equipment, and consume space and other resources.

    Research ISOs are a vital component of the University of Minnesota. Their services and work are essential to progress toward the goal of nationally competitive research performance. They are staffed and led by dedicated and talented personnel who strive to balance the pressures of technical service performance, market-like competitive forces, expectations of colleagues, and federal financial requirements. The Controller‟s Office

    effectively handles one aspect of ISO management: compliance with federal guidelines.

    Research ISOs vary from college to college and department to department and require in-depth technical and managerial expertise to carry out their mission. Managerial expertise may be inconsistent and, in some cases, the level of management, marketing, and leadership expertise may be inadequate for effective management of research ISOs.

    These limitations can result in the consumption of significant amounts of faculty and administrative time to deal with the recurring issues that research ISOs confront daily. When these issues are handled well, research ISOs deliver effective and efficient contributions to the university. When they are not handled well, research ISOs can siphon faculty and staff resources, including time and money, from other university priorities.

The recommendations of the work group for research ISOs are:

    ; Use business plans to increase understanding of the research ISO‟s role and

    strengthen overall performance

    ; Acknowledge that research ISO‟s start up support is limited and that realistic

    plans for sustained funding are necessary to secure a research ISO‟s future

    ; Clarify the department‟s or college‟s responsibility for the research ISO‟s product

    or service, and its financial, quality and personnel performance

    ; Require management expertise or training of research ISO directors

    ; Make explicit and strengthen the role of the Office of the Vice President for

    Research (OVPR) in the guidance of research ISOs

    ; Develop and implement a process for consistent, periodic, and comprehensive

    review of research ISOs for the purpose of continuing or closing their operation.

I Purpose

    The purpose of the work group of the Council of Research Associate Deans (CRAD) was to consider the present situation surrounding Internal Service Organizations (ISOs),

    including policies, issues, and business practices in order to make recommendations to

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    the CRAD, the Vice President for Research, and other units on ways to increase understanding, ensure effectiveness, and promote financial stability of research ISOs at the University of Minnesota. The recommendations were not based on survey results, but from informed opinions of work group members.

II Background

    A. University definition and guidelines

    An ISO is defined by the University of Minnesota as an account, not an organization.

    Units with sales recorded into revenue code „4410‟ meeting the criteria below constitute

    an ISO regardless of any other organizational characteristic, including purpose, size or employment of personnel.

    The only policy governing ISOs is a financial policy, “Selling Goods and Services to University Departments” - 3.2.1

    <http://www.fpd.finop.umn.edu/groups/ppd/documents/policy/Internal_Sales.cfm> Under this policy an entity constitutes an ISO, if it:

    1. Sells primarily to University department.

    2. Incidentally sells to external customers.

    3. Uses “approved” rates.

    4. Operates on a regular, continuous basis.

    The university has over 1000 accounts using „4410‟ revenue codes. Entities as large as the book store (an auxiliary service) and as small as copier recharge accounts have internal sales and are included in this total. The accounting codes themselves cannot distinguish between auxiliary services, copiers, or units operating equipment, providing services or employing staff. All transactions between an ISO and external customers should be “incidental”. If external sales are predominant, then the policy “Selling to

    External Customers” applies.

    The process to establish an ISO includes developing a business plan and completing an internal sales approval questionnaire

    (http://www.fpd.finop.umn.edu/groups/ppd/documents/form/Sales_Approval_Form.pdf)

    Authorization consists of a review of these by Accounting Services in the Controller‟s

    Office and establishment of a financial account. Creation of an ISO requires departmental OR collegiate approval. A non-sponsored account must be designated, at the time an ISO is proposed, to “guarantee funding” and to cover deficits.

B. Federal regulations

    The federal government in OMB Circular A-21 makes distinctions between “recharge

    accounts” (accounts that facilitate sharing the cost of copiers for example) and “specialized service facilities” which would provide more scientifically complex services or equipment, not general office equipment.

A-21 prohibits charging internal customers “paying” with federal funds MORE than

    other internal customers or external customers. Having standard rates for internal customers helps to ensure ISOs do NOT charge federal funds more than any other

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    internal customer. However, once an internal rate is established, A-21 allows departments or colleges to subsidize internal charges using acceptable accounting mechanism. Neither A-21 nor university policy prohibit charging external customers more than internal customers. Federal regulations require that rates be reviewed every other year.

    Another federal precaution concerns indirect costs. In developing fees for ISO services, it may be possible to include indirect costs directly associated with the ISO in the ISO rate. However, if these indirect costs are included in the ISO fee, then a separate object code that is exempt from accruing indirect cost would need to be charged in order to avoid double charging of indirect costs.

III Findings

    A. Review of ISOs

    Accounting services periodically selects ISOs for review based on four risk factors:

    1. total sales to sponsored accounts

    2. total amount of internal sales

    3. ratio of internal to external sales

    4. ISO with past problems

    Variances between expenses and revenues of plus or minus 15% are allowed in the current policy. Deficits alone are not considered a risk factor, so colleges may be unaware of an ISO until that ISO faces a financial crisis.

B. Common Problems

    ISOs are not audited separately, but as part of a larger departmental or collegiate unit audit. The work group requested a list of problems commonly found by the Department of Audits. These problems include:

    ; poor accounting controls, such as the lack of timely billings or absence of an

    accounts receivable process;

    ; compliance risks, such as inadequate documentation of separate internal and

    external fees, or charging industrial customers less than standard internal rates;

    and,

    ; poor management practices, such as not including all allowable costs in the fee

    development or the lack of planning for equipment replacement.

    Members of the work group agreed that these problems had been encountered with some of their ISOs.

IV Discussion

    A. Operational definition and breadth of research ISOs

    Although ISOs include many different types of units that provide goods or services to university departments, the work group focused on ISOs that are needed for research and scholarly purposes. The work group operationally defined research ISOs as: Research

    ISOs are those that provide essential contributions to the university’s research mission.

    They often function as organizational units that have a director, employ staff, provide services and equipment, and consume space and other resources.

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    Research ISOs commonly are initiated in response to an external opportunity, i.e. purchase of a major piece of equipment or provision of research services. ISOs may be created in response to faculty members who identify unmet needs for scientific services, such as advanced statistical applications, or highly technical research tools that support multiple users. Research ISOs demonstrate a broad range of services that include the Mass Spectrometry Service Facility, Experimental Surgical Services, The Characterization Facility, the Physics Machine Shop, the Imaging Center, and several survey research centers throughout the University.

B. Financial and management problems

    There are no central processes to identify the need, allocate support, or even recognize the role of research ISOs in the research infrastructure. The Research Infrastructure Task force found “technologies and services are currently housed within various Internal Service Organizations (ISOs) and core facilities that are scattered throughout the University and administered on an ad hoc basis by individual faculty members . . . . there is currently no central cross-collegiate oversight of these critical facilities, no comprehensive mechanism to coordinate their activities, and no standardized funding mechanism”.

    (<http://www1.umn.edu/systemwide/strategic_positioning/tf_final_reports_060512/res_coll_final.pdf>_). While the Controller‟s Office currently has an essential process for

    reviewing the financial performance of ISOs for compliance with federal guidelines and university financial policy, it addresses only a small fraction of the financial, marketing, managerial, and leadership expertise required to operate a successful ISO.

    Experience has shown that research ISOs are rarely self supporting beyond the initial period of start up grant funding. Research ISOs often struggle financially trying to cobble together funding from multiple sources and departmental or collegiate goodwill. At times fee structures are developed without inclusion of all costs, and at times fees are held artificially low to provide a “service” for the researcher/user. Research ISO directors

    from faculty and other research ranks are empathetic to colleagues who are attempting to stretch resources available in their grants. This can result in charges or fees that are below actual costs, and this in turn, can result in deficits within an research ISO. In addition, research ISO directors must sometimes compete with their counterparts at other universities that are able to offer comparable services at lower rates because larger subsidies are provided by their colleges or central offices.

    Management problems often loom larger than financial pitfalls. Faculty and others who direct research ISOs often have limited, or no, management experience or training. It appears likely that many directors of research ISOs shoulder that responsibility in addition to an otherwise full workload. Although required to establish an ISO, business plans are not reviewed regularly and the original need is not reestablished. Research ISOs

    routinely become organizations that employ valuable personnel making them difficult to close even if the original need can be met in other, more cost effective ways.

C. Important benefits of research ISOs

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    Regardless of their origin and sometimes tenuous existence, research ISOs provide fundamental research infrastructure needs when they are established and often become essential to ongoing research in certain fields and disciplines. They employ highly trained staff and technicians who are experts not just in the services they provide, but also in creative ideas that can advance the research goals of this institution. Because of their level of specialized knowledge, their experienced know-how, and their close working relationships, research ISOs can provide unique solutions that would not be available commercially.

    Research ISOs which provide advanced technology may be the basis for recruitment or retention of faculty members as well as highly talented post docs and graduate students.

    These essential research services, located on campus and operated by knowledgeable colleagues, are not just a matter of convenience, but also of immense importance in demonstrating capability and expertise in grant and contract proposals. The availability of customizable technology and services through research ISOs also can attract industry and other institutional partners.

The Strategic Positioning Infrastructure Task Force “concluded that affordable and easy

    access to cutting edge technologies and research services are essential for the research productivity of our faculty members. (page 11)

    (<http://www1.umn.edu/systemwide/strategic_positioning/tf_final_reports_060512/res_coll_final.pdf>)

V. Recommendations

    The recommendations that follow apply to Research ISOs which meet the operational definition above and are in addition to the requirements of the existing financial policy.

    A. Establishing, operating, and supporting ISOs

    New Designation

    Research ISOs are integral to the research infrastructure and a new model for

    financial and business management is needed. Research ISOs should be defined and

    be distinguishable from other units having internal sales, including other ISOs.

    The definition of a research ISO should incorporate the operational definition

    provided in this report and should meet the requirements as described in OMB

    Circular A-21. The Controller‟s Office should ensure that their policy (3.2.1),

    currently under revision, is consistent with the recommendations in this report.

    Hybrid Model

    In the creation or revision of policies and compliance statements with federal

    guidelines, the University is urged to recognize that research ISOs often represent a

    hybrid model that strives to provide a research contribution and at the same time

    comply with good business practices, but these twin goals are sometimes in conflict

    in their realization. Further work is needed by University administrators, the OVPR,

    the Controller's Office, and collegiate and departmental senior administrators and

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    faculty leaders to help research ISOs become fiscally capable research resources that will enhance the abilities of faculty and other researchers to realize their potential.

Business Plan

    When a research ISO is established, its initial business plan needs to include financial plans that span a longer time frame (3 -5 years). These plans need be developed in concert with the Resource Responsibility Center manager(s) and the dean(s), as well as the Controller‟s Office. While Departments can manage ISOs, the Dean must

    approve the establishment of research ISOs. A department or college must sponsor

    the proposed ISO and as part of that sponsorship, agree to cover any deficits that occur in the ISO. The department or college can share the financial risk with other units who support the creation of the ISO. Those agreements must be in writing and shared with the Controller‟s Office.

    In addition to data supporting the fee structure, the financial plan should identify all organizational partners and the level of financial participation, and subsidy, if necessary. An ISO that is being proposed and relies upon substantial grant funding must have a tentative plan for replacing that support at the end of the initial grant period. The department or college is an equal partner with the Controller‟s Office in reviewing the plan.

Management Expertise

    The research ISO business plan needs to address the management qualifications of the director and require appropriate financial or management training if experience is insufficient to meet the operational needs of the ISO. As directors change, their replacements must meet the same management qualifications. The reporting structure within the college should hold the research ISO director responsible for its success, meeting financial and operational goals. Financial and management training opportunities are available for faculty and staff at the University.

Customers

    The research ISO business plan must describe the customers, their expectations for pricing service and quality and the competitive options that customers have for the work the ISO performs. Policies need to be developed at the collegiate level that will facilitate best business practices to foster good working relationships with customers and clarify to customers the work requirements placed on the ISO.

OVPR research ISO website

    The OVPR should create and maintain a web accessible list of research ISOs which can be used both to locate existing research services and resources that are available on campus, and to act as sources of expertise or best practices for other faculty members during the creation of an ISO. Working with the Controller‟s Office, the

    OVPR information should be current and provide, at a minimum, the following:

    ; Name of the ISO, college or department

    ; Director and contact information

    ; Location and web address, if any

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    ; Brief description of services

    ; Planned date for comprehensive review

B. Reviewing and repositioning or closing ISOs

    Review

    The department or college that sponsored the ISO is responsible for reviewing the plan at least once a year and ensuring that the ISO in on track with securing alternate funding if needed. Financial review of intercollegiate research ISOs should be part of the annual compact process.

    Research ISOs should be reviewed, beyond the fee structure and financial health, at regular intervals. The appropriate interval (1- 3 years) should be determined when the ISO is established and be based upon the complexity, sales volume, and financial risk of the research ISO. Records of these reviews should be maintained at the collegiate level.

The review questions for research ISOs should include:

    ; Does this ISO continue to provide a research service that cannot be met

    elsewhere?

    ; If this service can be provided more cost effectively elsewhere, what is the

    rationale for sustaining the ISO through financial subsidies?

    ; Are the ISO financial plans viable for the long term, and if not, what

    actions are necessary to provide stable financing?

    ; Do the ISO financial plans include schedule equipment replacement and

    similar requirements?

    ; What, if any, management improvements are necessary? Is the ISO

    director participating in management training programs, if necessary?

    ; Should this ISO be closed?

    The deans can initiate a review of an ISO at times other than the scheduled timeframe. Upon request of the Dean, the OVPR can assist in identifying individuals (inside or outside the UMN) with the necessary expertise to participate in the review.

Sunsetting

    If a decision is made to close an ISO, then a plan should be developed to phase it out over an appropriate period of time. The plan should include restrictions on acceptance of new work and placement or outplacement of current staff. If the ISO to be closed is carrying a deficit, then a written plan for how to cover the deficit needs to be specified.

    Appendices

    A. Workgroup Membership

    B. Partial list of research ISOs

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    Appendix A. Workgroup Membership

    Name Department Phone Judy Garrard School of Public Health 5-8772 David Hagen Sponsored Projects Administration 6-9895 David Johnson College of Education and Human 4-1062

    Development

    Mos Kaveh Institute of Technology 6-3833 Tom Klein U of MN Extension Service 4-2239 Charles Moldow Medical School 5-5417 Jim Parente College of 4-9839

    Liberal Arts

    Jane Pribyl Controller‟s Office 4-7972 Peggy Sundermeyer Office of the VP for Research 6-7850 Kerri Barrett Office of the VP for Research 4-2640

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