A Fair and Equitable Approach to Finance

Most of us work for organizations that are very concerned about the cost of doing business. The reason for this concern is obvious. If expenses exceed revenues, an organization cannot stay in business for very long. The same realities of business must also apply to professional societies. ASME is a not-for-profit corporation and, as such, is not expected to make a profit. On the other hand, ASME cannot survive for very long if it spends more than it brings in. This was the case a few years ago. The wakeup call came when the ASME leadership realized that, at its current rate of expenditure and revenue, we would be out of reserves and thus out of business in about seven years.

Terry Shoup

The good news is that ASME responded with steps to make sure that it could stay financially viable into the future. As a result, we are in a much stronger financial position than we have been in many years. To take these steps, we have had to look carefully at what it really costs to operate the Society and at what we have available in terms of revenues. The result has sometimes been painful and has caused us to debate what is most important to our success. Since our largest category of expenditures is salary for our staff, we have reduced the size of our staff and thus the amount of service we are able to provide. Our current staff now numbers 292 — a number that is significantly down from a level of 402 a few years ago.

In some cases, we have embraced the use of new technologies by doing more of our business electronically. We now have more meetings by teleconference than ever before. We now make information available electronically instead of using mass mailings. This has saved postage, has saved paper, has saved travel funds, has saved travel time, and has, in some cases, enabled us to be more responsive. We have moved to establish electronic communities of practice to allow our members to network globally without the need to travel to meet one another face-to-face. When necessary, we have eliminated programs altogether if their perceived value was less than the cost to operate them. Because it is so painful, this process of "sunsetting" programs is something that most professional organizations do not do well. Nevertheless, it is something that all organizations, and especially ASME, must face in order to remain viable into the future.

All of this change suggests that we need to continue looking carefully and responsibly at our revenues and our expenses. What we sometimes forget is that most of our revenue does not come from dues. Indeed, out of our approximately $65 million operating budget, less than $8 million (less than 1/8) comes from member dues. The majority of ASME revenue comes from other sources. Examples of this are the sale of codes and standards, registration fees from meetings, the sale of various technical publications, and so forth.

There are, of course, other parts of our work that do not generate revenue and must be subsidized from these revenues from other sources. These programs and services are extremely important parts of what ASME must be about. Examples of these things are strategic planning, public service, government relations, K-12 outreach, engineering education, history/heritage, and general/administrative expenses (sometimes referred to as G&A expenses). In a sense, every member of ASME benefits from these subsidized and essential activities.

The newly formed FAIR (Financial Accounting and Information Reporting) Task Force is in the process of reviewing all costs and revenue streams throughout ASME with the goal of developing a new financial model that will enable operating units, including divisions and sections, to make good financial decisions in order to thrive. Another benefit will be to determine a fair, equitable and rational distribution or allocation of costs and revenues.

The new financial model will provide a more accurate financial picture for ASME sectors and operating units and, ultimately, will drive better decision making, planning and resource management within all units.

One of the first objectives in developing the model is to define and clarify G&A (general and administrative — both direct and indirect), Sector Indirect Costs, and Service Costs (also indirect). Examples of G&A costs are: Human Resources, Finance and Accounting, and Information Technology. Indirect Costs are those management expenses that are not directly associated with a unit or program (for example, Knowledge and Communities management expenses), while Service Costs are support functions for unit activity (e.g., events management, warehouse and marketing).

In the past, ASME has not operated using the concept of indirect costs and has frequently not even charged all of the direct costs associated with operations to a particular project or revenue stream. This has led to situations of significant misunderstanding about whether a program or project was actually operating in a positive or negative net revenue mode.

As a part of our realization that we need to look more closely at our revenues and expenses, the Board of Governors has decided that we also must establish a true cost recognition system that will allow us to better understand exactly what it costs to operate our Society, including all programs and services. The BOG has further decided that we must have this system in place in time to plan our budget cycle for the 2008 budget year.

Toward this end, as your president, I have appointed Past President Bob Nickell to chair the FAIR Task Force and develop a system for assigning expenses within ASME in a fair and equitable way.

It is my hope that the system resulting from this group's work will allow us to reward and encourage those activities that generate positive net revenue and will give us the tools to make knowledge-based decisions about activities that are not producing strategic value. You should be seeing the results of this task force's efforts very soon. When the system they recommend is in place, it will allow us to make more thoughtful financial decisions and clear up a number of past misunderstandings. I welcome this change as a more responsible way to operate our Society, and I hope that our members, volunteers, and staff will give their support and cooperation to this new approach to our business. After all, the future of our Society is at stake.

— Terry Shoup
ASME President 2006–2007

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