ALA Council

Revenue versus Overhead

  • 1.  Revenue versus Overhead

    Posted Jul 28, 2018 12:38 PM
    It sounds as if there needs to be clarification for ALA Councilors as well as anyone interested in ALA budget issues about overhead versus revenue. I know I'm unclear on this and am struggling to understand.

    In its May 2018 report, "PLA Response to ALA Investment Plan (FY19-21)," PLA states, "Currently, Annual produces net revenue as well as overhead for the association. Overhead is used to support operations in mission-driven services like OIF and ODLOS. Midwinter does not produce revenue over and above overhead it generates. Improvements to Annual Conference could offset the overhead loss if Midwinter is eliminated. Additionally, eliminating Midwinter would reduce costs across multiple units of the Association that could be used for investment in current successful or promising new ventures [my emphasis]. From the PLA Board's perspective, ALA should strongly consider the elimination of the Midwinter Meeting."

    If Midwinter produces overhead that supports ALA offices that can't generate revenue, how is that materially different than generating net revenue? Has the gain/loss been mapped across the units in the association to demonstrate potential savings? I do understand the point about work effort for Midwinter and have reflected on this myself; there's an opportunity cost in managing Midwinter that could be limiting the revenue we could generate from, say, a bigger, bolder Annual. But without additional data and modeling it feels speculative to propose that eliminating Midwinter would save money through reduced work effort.

    ------------------------------
    Karen Schneider
    Dean, University Library
    Sonoma State University
    ------------------------------


  • 2.  RE: Revenue versus Overhead

    Posted Jul 28, 2018 03:57 PM
    All,

    Susan Hildreth, Treasurer, and I will outline the financial details to provide Council with information regarding Midwinter conferences. We will also check with Clara Bohrer to determine if this was previously calculated and if so, we can update with the 2018 MW financials.

    Thanks!

    Maggie Farrell - BARC Chair
    Dean of University Libraries
    UNLV Libraries
    maggie.farrell@unlv.edu




  • 3.  RE: Revenue versus Overhead

    Posted Jul 29, 2018 08:38 AM
    Thanks, Maggie!

    ------------------------------
    Karen Schneider
    Dean, University Library
    Sonoma State University
    ------------------------------



  • 4.  RE: Revenue versus Overhead

    Posted 13 days ago
      |   view attached

    Karen,

    Thanks for posting your message about the relationship between revenue and overhead – some time ago now – in ALA Members group in ALA Connect.  We've been considering the various pieces of your puzzle and will attempt to walk through a couple of areas.  We are also attaching a diagram prepared by Mark Leon, ALA's Chief Financial Officer, which may also help add some clarity.

    Your basic question is:  "If Midwinter produces overhead that supports ALA offices that can't generate revenue, how is that materially different than generating net revenue?  Has the gain/loss been mapped across the units in the association to demonstrate potential savings?" 

    First, it is important to point out that the ALA Conference Committee – and Conference Services staff – are well aware of the need to examine both Midwinter and Annual Conference.  That work is actively in process.   Both groups are aware of the broad range of member, attendee and exhibitor opinion posted here and elsewhere.

    Second, "overhead" is not an unusual concept.  It is a fairly standard way to recover normal costs of operation that are utilized by the entire organization such as IT, HR, accounting, building costs, and utilities.  The concept of "overhead" is embedded in the Operating Agreement between ALA and its Divisions.   The ALA Indirect Cost Rate also applies to ALA Conference Services. That rate (currently 26.5%) is applied at 100% to gross revenues from ALA Conferences (Annual, Midwinter).  Overhead is not allocated on dues revenue, either within the ALA General Fund (ALA membership) or ALA Divisions.  

    Net revenue from ALA Annual Conference and ALA Midwinter is gross revenue minus expenses – both direct (e.g. AV, security) and indirect (telephone costs allocated to Conference Services) – minus overhead and any applicable taxes.  Overhead thus acts as an expense for the revenue generating unit.  But, getting to the point of your question, they are redistributed within the budget – and therefore act like a "revenue" to the receiving unit.  ALA "business" units calculate a "contribution margin," which includes both net revenue and overhead, reflecting the dollars made available for allocation to both overhead units (e.g., HR) and "mission" units which typically generate less revenue than they consume (e.g., Diversity, Intellectual Freedom, Advocacy). The attached slide provides a graphic overview with budget details.

    Conference budgeting is complex in other ways.  For instance, there are some expenses that are calculated individually for each event – e.g. security, shuttle buses, AV, staff travel and housing (including both General Fund and Division staff), and many other items.  There will often be significant variations in these costs from meeting to meeting depending on location.  There are other costs that are somewhat more fixed and are often allocated across both meetings – personnel cost (Conference Services staff) is the primary factor here.  Some contractual services will also be allocated across both events.   Some governance costs are included in the ALA Conference Services budget (both Annual and Midwinter), notably the cost of on-site AV for governance groups (e.g. ALA Council, ALA Executive Board, ALA Division Boards of Directors) and various committee and other groups. 

    What is not calculated within the "cost" of Conference are the costs being incurred – both in General Fund units and Divisions – to support the ongoing work of supporting governance and other volunteer work (e.g. planning, agendas and minutes), including staff salaries, which remain in the unit where the staff member works, either General Fund or Division.   Ultimately, if you're trying to look at the full cost – of conferences, of organizational complexity, of mission-attainment, of content creation – you generally need to look at more than a single event or group.  This would be itself a costly and time-consuming effort.   This is made more difficult by the need to untangle cause, value, purpose.

    The ALA Conference Committee and ALA Conference Services are working together on future directions for Midwinter and Annual Conference.  They have concluded that they need time for additional analysis, with the likelihood of engaging external perspective and expertise.  We anticipate that they will continue this work through FY2019. 

    We realize that this is a long response so the attached visual should help.  Please let us know if you have any additional questions and we really appreciate your interest in the details.

    Maggie Farrell, BARC Chair and Susan Hildreth, ALA Treasurer



    ------------------------------
    Maggie Farrell
    Dean of Libraries
    University of Nevada, Las Vegas
    maggie.farrell@unlv.edu
    ------------------------------

    Attachment(s)



  • 5.  RE: Revenue versus Overhead

    Posted 12 days ago
    I appreciate the indepth response with its detailed insights about revenue versus overhead. It's easy to ask "If we were establishing a library association today, would we do X?" I do this all the time, and it can be useful for resetting habits of mind, but the inherent flaw is we aren't establishing a library association today, we are working with the complex legacy of a mature association. 

    However, it appears that some of the context of my original question was lost, so I'll restore the context. I wrote, "In its May 2018 report, 'PLA Response to ALA Investment Plan (FY19-21),' PLA states, 'Currently, Annual produces net revenue as well as overhead for the association. Overhead is used to support operations in mission-driven services like OIF and ODLOS. Midwinter does not produce revenue over and above overhead it generates. Improvements to Annual Conference could offset the overhead loss if Midwinter is eliminated. Additionally, eliminating Midwinter would reduce costs across multiple units of the Association that could be used for investment in current successful or promising new ventures [my emphasis]. From the PLA Board's perspective, ALA should strongly consider the elimination of the Midwinter Meeting.'" 

    I then asked, "If Midwinter produces overhead that supports ALA offices that can't generate revenue, how is that materially different than generating net revenue? Has the gain/loss been mapped across the units in the association to demonstrate potential savings? I do understand the point about work effort for Midwinter and have reflected on this myself; there's an opportunity cost in managing Midwinter that could be limiting the revenue we could generate from, say, a bigger, bolder Annual. But without additional data and modeling it feels speculative to propose that eliminating Midwinter would save money through reduced work effort." 

    In other words, I was questioning PLA's contention that overhead produced by Midwinter was not a source of income for units that cannot produce income on their own (I am deliberately avoiding the revenue/overhead language). In other words, what's the difference to the unit, as long as the unit has funds to operate?

    Now on to my responses to parts of Maggie and Susan's excellently detailed message:

    "Second, "overhead" is not an unusual concept.  It is a fairly standard way to recover normal costs of operation that are utilized by the entire organization such as IT, HR, accounting, building costs, and utilities.  The concept of "overhead" is embedded in the Operating Agreement between ALA and its Divisions.   The ALA Indirect Cost Rate also applies to ALA Conference Services. That rate (currently 26.5%) is applied at 100% to gross revenues from ALA Conferences (Annual, Midwinter).  Overhead is not allocated on dues revenue, either within the ALA General Fund (ALA membership) or ALA Divisions."

    To be clear, I wasn't questioning the concept of overhead, quite common to most of us who manage grants and even pay OH on campus facility projects. I would be curious to know how the IDC rate of 26.5% is determined, though (to underscore) I'm not questioning the IDC rate, I'm just asking, and I won't lose any sleep over this question. 

    "Net revenue from ALA Annual Conference and ALA Midwinter is gross revenue minus expenses – both direct (e.g. AV, security) and indirect (telephone costs allocated to Conference Services) – minus overhead and any applicable taxes.  Overhead thus acts as an expense for the revenue generating unit.  But, getting to the point of your question, they are redistributed within the budget – and therefore act like a "revenue" to the receiving unit."

    If I'm reading this correctly, then the answer to the first part of my original question is "You are correct, to the unit who receives funds, there is no difference -- money is money." If I have that right, then it appears I am correct that PLA's contention that Midwinter does not produce revenue (or at least, very little revenue) misses the bigger picture that Midwinter returns overhead that supports units that cannot produce income on their own.

    I did start to wonder what happens if revenue goes into the red for Midwinter. Since Midwinter overhead charge is a predetermined percentage, is this guaranteed income to the units regardless of Midwinter's revenue situation (which I'm guessing then means ALA's overall budget absorbs the loss) or is there a clause that reduces the OH charge to reflect the loss?

    I had more trouble with this sentence: "ALA 'business' units calculate a 'contribution margin,' which includes both net revenue and overhead, reflecting the dollars made available for allocation to both overhead units (e.g., HR) and 'mission' units which typically generate less revenue than they consume (e.g., Diversity, Intellectual Freedom, Advocacy)."

    At this point we have several terms floating about: overhead unit, mission unit, and business unit. I understand the distinction between the first two, but am not sure what is meant by a "business unit." Is "business unit" a synonym for "overhead unit"? Also, does "calculate a contribution margin" translate to "these ALA units forecast their needs for revenue/OH?"  If I'm correct about that, am I also correct that the executive director reviews and approves forecasts from business units, most likely in an iterative review cycle prior to the fiscal year where requests are balanced against strategic priorities and known needs?

    "Conference budgeting is complex in other ways.  For instance, there are some expenses that are calculated individually for each event – e.g. security, shuttle buses, AV, staff travel and housing (including both General Fund and Division staff), and many other items.  There will often be significant variations in these costs from meeting to meeting depending on location."

    ALA members experience these varying expenses as well. If memory serves, there are also conference sites that incur lower expenses but also generate less revenue. It would be good to know that conference site net revenue is factored into site selection.

    "...What is not calculated within the "cost" of Conference are the costs being incurred – both in General Fund units and Divisions – to support the ongoing work of supporting governance and other volunteer work (e.g. planning, agendas and minutes), including staff salaries, which remain in the unit where the staff member works, either General Fund or Division.   Ultimately, if you're trying to look at the full cost – of conferences, of organizational complexity, of mission-attainment, of content creation – you generally need to look at more than a single event or group.  This would be itself a costly and time-consuming effort.   This is made more difficult by the need to untangle cause, value, purpose."

    Right, and setting aside the "cause, value, purpose" point, given how much of conference work and ongoing ALA work is powered by human resources and how intertwined they are, it's not possible to draw down ALA by 10% (for example) the way you might reduce a collections budget. That's the larger hole in PLA's argument.

    That said, there's a fundamental insight embedded in PLA's statement that this excellent response from Maggie and Susan surfaces. The more I look at the ALA conference/OH/revenue model, the more it seems to suggest that ALA exists to a significant degree to fund its conference cycles. This cycle is baked into ALA's HR, fiscal, and governance structures. There are no easy answers.



    ------------------------------
    Karen Schneider
    Dean, University Library
    Sonoma State University
    ------------------------------



  • 6.  RE: Revenue versus Overhead

    Posted 10 days ago

    Karen,

    We are so glad that many members are asking difficult questions because we have some tough decisions facing our association. Council and the Executive Board, in consultation with members including division and round table leaders, have to face some financial realities. As BARC Chair and Treasurer, it is our responsibility to analyze decisions for financial impact and to provide data and information for Council, Executive Board, and the Conference Committee to make those difficult decisions.

    So you are correct in that "all money is green" regardless of source.  So if we eliminated Midwinter, directed those energies to other activities, then we need to consider the total financial impact and what we might eliminate, do differently, or alter.

    Here are some realities -

    • Midwinter revenues are declining (for a variety of factors) but Midwinter still generates revenues
    • Those revenues support non-revenue, core activities such as the Washington Office
    • Elimination of Midwinter revenues will require different funding for core services
    • Overhead charges are lower than actual costs but there is a strong desire to keep the rate as low as possible realizing the impact on divisions and other operations
    • It is difficult to fully account for division and round table staff time in preparing for, managing, and follow-up for Annual, Midwinter, and specialized conferences.

    We have to make some difficult decisions - what should our conferences look like, how do we conduct the business of our association realizing the significant contributions of our volunteer members, how should the association be organized, and we love your first question - if we were designing ALA today, what would we look like and how would we work? And how do we move from today's model to a new model yet hopefully maintain the revenues we need for some core advocacy and professional development activities?  You are correct that there are no easy answers but we know one easy answer – to do nothing is not sustainable.  We are appreciate the ongoing work of the Conference Committee who is looking at conference options and the Executive Board in examining operations and revenue enhancements.  We will continue to provide financial information to assist Council and the Executive Board in determining options and a path forward.

    Two notes referred to in the discussion:
    "Business unit" refers to those central ALA services such as publishing and conferences.
    IDC Rate determination: http://www.ala.org/aboutala/mleader/budget/indirectcostcalculation

    Maggie Farrell, BARC Chair and Susan Hildreth, ALA Treasurer



    ------------------------------
    Maggie Farrell
    Dean of Libraries
    University of Nevada, Las Vegas
    maggie.farrell@unlv.edu
    ------------------------------