Lab’s battle against rising costs is a war on many frontsORNL’s efforts to control the rising costs of doing business have been like putting out a brush fire during a dry spell. Once a blaze is snuffed out in one area, other hot spots erupt down the line.
The Lab has been holding that line against assorted budgetary flareups during a time of changes that are having their own impacts on the financial burden. It’s important to note, says acting Chief Finance Officer John Hickey, that rising business costs can’t be attributed to any one thing. Several factors are responsible, he says—some voluntary, some not.
“We’re faced with an essentially flat to slightly declining budget along with many new cost challenges that will influence our internal rate structure through higher costs,” says Hickey. “These FY 2000 challenges are going to impact our overhead budget, and we’re looking for ways to mitigate that. But many of these costs are one-time events attributed to the changes the Lab is currently undergoing, or else investments in the Lab’s future.”
Those investments are the result of carefully considered decisions by the Lab’s Executive Committee. Nevertheless, they are affecting the Lab’s overhead rate, which could exceed an earlier targeted 39 percent. Those “challenges,” as Hickey terms them, are
It all adds up to about $9 million in increased costs. That comes in the face of a flat budget and one other significant factor: increased payroll costs.
- An increase in Laboratory Directed R&D funding by $1.7 million over FY 1999. Still, ORNL’s level of funding for LDRD remains below a level that would be affected by Congressionally imposed restrictions.
- Transition costs. This is an additional cost of about $2.5 million that the Lab will incur under terms of the M&O contract to help bring the UT-Battelle team on board.
- Splitting systems currently shared by ORNL and Y-12. This includes travel, telecommunications, payroll and other non-SAP systems. That cost is estimated to be $2.1 million in FY 2000.
- The cost of putting facilities that ORNL has vacated at the Y-12 Plant in a stand-by condition. As people and programs move out, there are costs associated with leaving facilities at Y-12 in order.
- Additional funding for technology transfer. In a change from previous policy directed by the Executive Committee, royalty funds from licensing Lab technologies are going to be used to fund other projects. Beginning in FY 2000, therefore, the Office of Technology Transfer will be supported by overhead.
- In a very specific case, ORNL has been directed by DOE to increase its fire protection staffing.
Under ORNL’s new salary program, many Lab R&D salaries were increased in an effort to bring pay back up to market-competitive levels. The raises were designed as—and have been hailed as—a move to retain valued employees with skills in high demand. However, some program managers are saying the pay increases, while nice, are hurting their ability to perform research. Money for facilities and equipment is being used instead for paychecks.
Compensation Manager Fred Shull says it’s inaccurate to attribute any resulting higher overhead and fringe rates solely to the pay increases.
"The real assets of ORNL are our peoplenot real estate, inventories or other such things. So we can and should think of these salary adjustments as a "business' investment."
“We laid the groundwork to fund these increases over the past three years. We identified the costs and realized cost savings to offset those increases. But other things have happened at the Lab, such as the increased investment in LDRD and transition costs, that have increased our overall costs,” Shull says.
“You could make the point that if we hadn’t raised salaries, we’d still have the money we saved. But what would we have gained if at the same time we were losing our talented R&D staff? The real assets of ORNL are our people—not real estate, inventories or other such things. So we can and should think of these salary adjustments as a ‘business’ investment, and we should look to realize an appropriate return on that investment.”
Similarly, the extra funds for LDRD can be seen as an investment in the Lab’s future—and a pretty good one. Johnnie Cannon, who heads the Office of Planning and Special Projects, says the Lab’s Director’s R&D Fund realizes an approximate three-to-one payback in new programs. “For seed money, it’s more like five to one, and there are other benefits such as R&D 100 awards, refereed journal articles, and inventions that sometimes lead to licensees and royalties,” Cannon says.
If ORNL hadn’t responded in force to a directive by former Energy Secretary Hazel O’Leary in 1995 to pair down costs, ORNL’s financial challenge would be much more daunting. In her Strategic Realignment Initiative, O’Leary told the Labs to reduce their operating costs by billions of dollars over a period of five years. ORNL’s target was to save $90 million over five years.
“We did it in four,” says Hickey. “We did things we otherwise couldn’t have done without those savings and efficiencies. They covered earlier investments in LDRD, paid for SAP and funded new program development and salary adjustments.”
In terms of cost of doing business, Hickey says ORNL is in the middle of the DOE laboratory pack. “We’re not the most expensive, and we’re not the cheapest,” he says. “But we realize that getting our cost of doing business down and keeping it down is important to the Lab’s ability to perform research and attract new programs. We in the finance arena are committed to this goal.”
Last month’s cancellation of a pension fund transfer was another setback in rolling back those costs. The move, which would have paid for retiree medical benefits with a portion of the pension fund surplus, as opposed to funding the account with Laboratory program money, would have reduced the Lab’s fringe rate by nearly three points. But news of the plan resulted in an outcry, and Energy Secretary Richardson cancelled the transfer, calling it poorly communicated.
It was one more “challenge” to keeping down the Lab’s cost of doing business.—B.C.