August 2000


Indirect cost cuts aimed at leaner, more competitive Lab

Citing a need to reduce the Lab’s cost of doing business if ORNL is to grow and prosper, Director Bill Madia has announced a drive to reduce the Lab’s indirect costs. The numbers are significant, and he acknowledged that meeting the goals will probably mean some staff reductions.

Indirect costs generally mean money spent in support of, instead of directly spent on, actual R&D activities—the “cost of doing business” (see the glossary on page 6). ORNL’s indirect costs, Madia wrote in a July 18 e-mail to staff members, put the Lab at a competitive disadvantage when bidding on research projects.

"Our laboratory delivers exceptional science and technology solutions to our customers, but we must become far more cost competitive."
“I have committed to ‘delivering the maximum amount of R&D per dollar spent by our customers’ as one of UT-Battelle’s key goals for ORNL. In order for us to grow and prosper as a leading research institution, we must reduce our indirect costs to become more competitive,” he said.

ORNL’s estimated annual indirect operating cost is $237 million. The Leadership Team wants to reduce that by $30 million over the next two years. The goals set out in an indirect-cost budget guidance package for FY 2001 calls for a $20 million reduction in FY 2001 and the remaining $10 million in FY 2002.

The latest measures are in line with a goal to place ORNL in the lower third of the national labs, costwise. Currently ORNL is one of the most expensive.

"The hope is that many of the recommendations will be aimed at eliminating cumbersome requirements or rethinking how those requirements are implemented.
Deputy Director for Operations Jeff Smith says that Leadership Team members are working with their managers to recommend cost reductions and assess what effects those reductions will have on their organizations. Different managers and staff members, depending on the specific type of indirect cost, will be involved in identifying the cost reductions.

“We first need to understand the cost drivers in each of the overhead pools and base our actions accordingly,” he says.

“For example,” he explains, “the division directors will be key to understanding the cost drivers in the technical divisions’ organizational burden pools. We hope that many of these recommendations will be aimed at eliminating cumbersome requirements or rethinking how we implement these requirements.”

Some actions may take several months to implement, and several cost-reduction opportunities need further exploration. For example, Smith says that ORNL intends to reduce its fleet of vehicles, which currently numbers about 600 cars and trucks.

“That’s a vehicle for every seven employees. It’s very costly to maintain that many vehicles. Other labs get by on much fewer,” he says.

He also says that ORNL pays more than $200,000 each year for pagers and deals with five separate cellular phone service providers. “I know we can reduce these costs,” he says.

Another example of reducing cost—the just-begun managed hardware program—is aimed at reducing the number of desktop computing configurations that must be maintained. Currently virtually any computer on the market can be ordered, and that prerogative will probably still exist. But under the managed hardware program the Lab will only have to support certain configurations.

Smith told the publication Inside Energy that retirements and attrition weren’t likely to figure highly in the cost reductions. Current attrition, which is the percentage of staff members who are leaving the Lab, is only at about two percent, he said.

Madia is direct in stating that staff reductions are coming.

Indirect Budget ComponentFY 00 Baseline (M)FY01 Target (M)Team Leader
"Fixed" Costs$    18.0   $    14.0   Turner
G&A73.0   67.0   Smith
Space20.0   18.0   Debban
Material Handling./Subct OH 9.0   8.0   Turner
Org Burden 92.0   82.0   Roberto/Harris/Gilliland
LDRD 15.0   15.0   Riedinger
Program Development 6.0   6.0   Riedinger
Operational Improvements 0.0   3.0   Smith
Reserves 4.0   4.0   Madia
TOTAL $ 237.0   $ 217.0   
These working groups have been tasked with recommending $20 million in indirect cost reductions for FY 2001 and assessing what effects they will have. The remaining $10 million will come from operational improvements.

“Although non-labor costs will be examined carefully, there undoubtedly will be staffing impacts from these actions,” he says. Human Resources will work with DOE on staff impacts, which will be announced in September, and identify options available for affected staff as the process progresses.

“I am firmly convinced that these actions are necessary for ORNL to grow,” he said in the July 18 message. “Our Laboratory delivers exceptional science and technology solutions to our customers, but we must become far more cost competitive, especially during difficult budget times like these.”

Following the $20 million in cuts for FY 2001, the remaining $10 million in cost reductions for FY 2002 will be accommodated through planned investments in operational improvements to business processes and systems.

ORNL’s costs have been a frequent focus area for the UT-Battelle team. In May, Madia announced that a

ORNL’s costs have been a frequent focus area for the UT-Battelle team. In May, Madia announced that a $9 million shortfall for the current fiscal year was going to require significant belt-tightening measures. He subsequently reported that, as a result of those measures, progress toward a balanced overhead budget for FY 2000 is on track.—B.C.