IEEE Fiscal State of Affairs: V

As we left 2001, IEEE finances suffered from the double whammy of an optimistic view of investments vs. the actual market slump.  Even a heroic performance in operations could not offset the red ink from investment losses. Halfway through 2002, the operating lessons have been remembered and augmented, the investment lesions have not worsened, and the 02 forecast is tracking the budget expectations. As we review financial events since our last report, four headings of our previous discussions are still appropriate:

1. Selection and management of initiative programs within the Institute,

2. Periodic review of the Corporate Infrastructure activities

3. A closer look at (read “simplification of”) the complicated set of business rules that are required to support the many offerings of the Societies and Councils,

4. A financial model that more properly allocates expenses among users.

As one of the principles of the IEEE financial model (see 4. below), new and continuing initiatives will be capped by dividend and interest income. A process for initiative approval has been established. The New Initiative Committee of the Board of Directors has met to review initial submissions of ideas for possible funding in 2003.  Of the 17 ideas submitted, the Committee has asked that 9 be developed into formal business plans for further consideration. These refined proposals are due to the Committee by 8 July.  Following those submissions, the Committee will review the proposals and make a recommendation to the IEEE Executive Committee (ExCom) at its August meeting as to which initiatives should be funded. In turn, the ExCom will then send forth a recommendation to the IEEE Board of Directors for incorporation into the 2003 IEEE Operating Budget on which the Board will vote at its November meeting. If you have any questions about the process or status of any initiatives, please feel free to contact Matt Loeb in Piscataway at +1 732 562-5320 or via e-mail at m.loeb@ieee.org.

Recall that past discussion in this column dealt with the distribution among TAB Societies and Councils of the direct infrastructure costs, so-called because of the relatively “direct” relationship of these costs to activities such as headcount, membership, and expenses. We developed pay-by-the-drink philosophy to deal with these within TAB, and called it the Principles Method. And finally, this method of distributing these direct infrastructure expenses will be phased in over a 3-year period. Some follow-up activities to this process have been identified, since our last discussion, including:

A. Collecting accurate cost data for these expenses and benchmarking them to “competitive” costs for similar services.

B. Preparing a collection of  “best practices” that S/Cs can use when considering changes in their operations that may reduce their share of Infrastructure allocations.

In short, the process of identifying these costs, distributing them equitably among the operating units of the Institute, and within each operating unit (of which TAB is one) is complete. The next part of the process, benchmarking and lowering these costs, has now been defined and both of these activities encourage proper financial behavior and will work toward lowering these direct infrastructure costs.

Well what of the indirect infrastructure costs?  For the 2002 budget, indirect costs are allocated based on three methodologies: ASPP revenue tax, Book Broker revenue tax, and Reserves. The first pass 2003 budget has those costs allocated based on expenses (less conference expenses). A TAB committee reported on its recommendations for assigning these costs at the June TAB meeting, but lack of consensus around the suggestions will require additional refinements and another try at the November meeting.

In November 2001, the BoD charged RAB and TAB with identifying business rule changes to realize a possible $3M annual savings in infrastructure charges associated with membership services. RAB and TAB Business Rule Simplification teams have been working the details since February. TAB committee discussion has focussed on simplifying the options available for Society membership, and the subscription process for members regarding optional Society publications. The TAB Strategic Planning and Review Committee led a wider discussion on the value proposition of  Society Membership and optional publications. TAB FinCom became involved on issues of pricing strategy. Two principles of membership and publication pricing were socialized at TAB:

1. Membership dues should recover the variable costs of servicing Members (Here and in the following, variable cost is the cost of servicing the next Member).

2. Prices for Society optional publications to Members should recover their variable costs.

The reception of these principles within the June TAB meeting was mixed, and broader consensus needs to be reached. The simplification exercise is to reduce the number of options to select Society membership and optional publications available from Societies.  Reducing the distinction among members eligible for reduced rates will help. This category presently includes student, unemployed, low income, retired, permanent member, and life member grades. Can business rule simplification take place while maintaining member benefits? Stay tuned; better yet, participate.

RAB is addressing other details of Membership Business Rules simplification. Already, rule simplifications have been put into place that will realize annual savings of about $300K, starting in 2003.

IEEE Budget principles adopted at the November Board of Directors’ Meeting for the 2002 Budget are serving as a template for the 2003 Budget development. The first order principles, approved at the June BoD meeting, include:

• The operating budget will be balanced (bottom line equal to or greater than zero). Individual Operating Units (OUs), which includes TAB, will also have balanced operating budgets, including any applied infrastructure charges.

• Investment income is NOT part of the operating budget.  Dividends & Interest (D&I) will be budgeted, but used specifically to fund new and continuing initiatives.  Any excess D&I income will be used to reduce infrastructure charges.

• Other investment income surplus/loss will be distributed proportionally to those OUs with reserves.

In addition, a process and timeline have been identified for developing the budget. With principles and process now well defined, 2003 budget development has begun, but is a bit behind schedule because of the lingering approval period for the 2002 budget.

The April 2002 Institute forecast is on target to break-even. TAB and Standards are feeling the strain of their challenge budgets, but increases in revenue and savings in infrastructure make up their shortfalls.

Direct infrastructure costs have been identified, and a method for distribution has been approved. The stage is now set for comparing these costs to others, determining best practices, and driving costs down in this area. Distribution methods for indirect infrastructure expenses are being addressed. Business Rules Simplification efforts have begun within the area of Membership Services. The financial model is defined, understood, and is being applied to the 2003 budget process. Additional substantial cuts to infrastructure are planned for 2003 to further streamline operations. Finally, in its June meeting, the BOD has approved an external review of the IEEE Corporate infrastructure expenses with the goal of determining their value and their costs. The RFP for this has been completed and the expectations are to have the engagement completed by November.  In summary, methods for improving the financial health of the Institute are proceeding along both tactical and strategic fronts. If this keeps up, I will have to talk about one of my other interests, Publications activities, next time! As always, your comments and suggestions are welcome.

Peter Staecker, the Division IV Director, can be reached at 167 Cedar Street, Lexington, MA  02421; Phone: +1 781 861-7643; Fax: +1 781 863-5751; E-mail: p.staecker@ieee.org