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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.