A fair price is fair play

Universities must learn to make full economic costing work on industry-funded projects, says Martin Vincent

September 25, 2008

On my first day as a procurement manager in industry in 1994, I inherited two approved suppliers for non-destructive testing of materials and assemblies.

The details were housed in a grubby Rolodex. One card was for a private-sector outfit with the note "Use if in a rush. Expensive"; the other was for a leading regional university and had "Slow, but cheap" scrawled in pencil under the contact details.

It seems I wasn't alone. By the late Nineties everyone recognised that the higher education sector was frantically competing against itself to win research projects and using cost as the differentiator. The result was cheap research and development, which was made increasingly inefficient by the crumbling infrastructure that was charged with supporting it but not receiving any decent investment in years.

Recognising that this wasn't a sustainable plan, FEC (full economic costing) was introduced to try to ascertain the true costs of university research. The Treasury then made it clear that it expected higher education institutions to recover 80 per cent of FEC from work done for the research councils and 100 per cent from that done for government departments and industry. Charities were designated a special case.

So, how successful has this been in practice? Do we have researchers unable to move for new kit and shiny postgrads? Where are the directors of finance stuffing suitcases full of cash under the bed?

The deficit analysis published in the Higher Education Funding Council for England circular 14/2008 paints an interesting picture. It's not quite The Scream by Munch. Maybe he should have done another one called "The Frown", which would sum up the situation nicely. On one hand, we have the deficit on publicly funded research, which has fallen by 11 per cent since the 2004-05 figures. Sadly, on the other hand, we have the deficit on non-publicly funded research growing by 8 per cent over the same period.

The figures show that institutions are unsurprisingly good at extracting the full costs from governmental departments, which have no option but to cough up the FEC figure. But they are struggling to make FEC work on industry-funded projects, and it's getting worse.

General investment into the sector has been high over the time frame involved. Why do the institutions persist in competing on price? The role of income generation has always been a source of confusion for most people in the sector, and this is no exception.

Autonomy for a university is traditionally important, yet unfettered competition between institutions serves to drive down the prices sponsors will pay. In a climate where universities are competing for resources to climb up a league table, who can really blame them for a short-term attitude and a focus on winning the project at all costs?

Setting a different recovery target for research councils and industry can be achieved. But expecting industry to pay more, and furthermore asking a university to enforce that equation in an openly competitive environment, just isn't going to happen.

Sure, it is a bit more complicated than that. You've got to add in the international dimension and the role of private-sector competitors whose job, it seems, is mainly to terrify the university into running up the white flag as soon as the negotiations start.

Generally, process control and project management are strengths of the private sector - because that's what it does. It can demand a premium because its "product" tends to be more focused and more responsive to the commercial imperative. In higher education, much of the negotiation is handled by the people undertaking the research. In asking them to negotiate a rate that FEC would recognise they have to believe that FEC represents a true reflection of the costs, and few are on board with that concept.

There needs to be a recognition by academic staff that overhead is a legitimately recoverable cost that extends beyond the immediate environs of the researcher. To achieve that, more professional project management is needed. If I were still buying widgets in a factory in Salford, would my Rolodex look any different? I doubt it.

Universities UK and Research Councils UK are to produce a review of progress made to date on the plan to ensure that universities are on track to deliver long-term financial sustainability in research. We'll await the outputs with interest.

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