Monday, December 18, 2017

Budgets and Budgeting: Part II

Koenig, Michael. “Budgets and Budgeting: Part II.” Special Libraries, July/August 1977, pp. 234-240. Budgets and Budgeting Part II Michael Koenig Institute for Scientific Information, Philadelphia Pa 19106
• Two principal questions are addressed: how to construct a library budget and how to justify that budget. In addition, various techniques for navigating the political shoals surrounding budgets are discussed. 
THE first basic questions: How does one put the budget together? How does one arrive at the appropriate figures? 
Putting the budget together
Use the program budget concept. When you are next faced with the necessity to compile a budget, or better yet, sometime in advance of that necessity, try the concept of program budgeting, break down your operation into the appropriate programs or budgets, then cost out each program and do it without reference to what your present budget is. This process is called “zero base” budgeting. In other words, do not simply start with last year’s budget and modify it, start from scratch. Once these calculations are tempered with the political and financial realities of your organization, they are the basis of a sound budget presentation.

The most common approach is to use standards to determine the size of the library budget. Typically, these are standards of library services stated as some function of the community served. The standards need not be official to be useful. For example, what do other libraries supporting similar organizations spend? If published figures are not available, make some phone calls and compile them. Even in an industry like pharmaceuticals where confidentiality of information is a byword, such figures can be easily obtained; in fact, they are maintained by the professional trade association. In the pharmaceutical industry a figure of 3% of the research and development budget is a typical figure for library support. Other industries or other fields will have different norms, probably quite different. Standards will not be pertinent, unless they are derived from institutions similar to your own.

Standards, however, even if derived from libraries serving similar institutions, will be approximations only. Different organizations have different internal structures, different philosophies, and different ways of operating. In one company, for example, lab technicians may be expected to do the bulk of the literature searching. Another company may not be so generous with technician support. Thus the library may have to do substantially more literature searching. The function and the service supplied within the institution is similar, but the organizational structure and the budgets of the libraries will be radically different. Standards must be tempered to reflect the role of the library within the higher organization.

There are a variety of other standards that one can use. One norm, for example, is one library staff member for each 60-80 active borrowers. Another is that the ratio of clerical to professional staff should range between 1 to 1 and 3 to 1. The best exposition of general standards applicable to special libraries is probably that by Gordon E. Randall entitled “Budgeting for Libraries” (Randall, Gordon E. / Budgeting for Libraries. Special Libraries 67 (1):8-12 (Jan 1976). Such general standards, while typical, may not be applicable to a specific situation. It is useful, however, to know if a library is typical of its type, and if not, why it differs.

Most important, however, while standards may be quite useful for estimating your budget preparation, do not count on them to serve as justification. Administrators will probably not find them convincing. In general, your management will probably not be at all interested in standards (except accreditation standards for academic institutions). It is more likely that they will be interested in how well the members of their community think the library is providing service.

Build and maintain what might be called an “ammunition file.” When an article appears in a library journal calculating the percentage increase in the costs of serials or monographs, keep that information. When an article (Williams, Gordon et al. / Library Cost Models: Owning versus Borrowing Serial Publications. Office of Science Information Service, National Service Foundation, November 1967. 161 p. (NTIS PB 182304) appears reporting that the Center for Research Libraries has calculated the cost of interlibrary loans versus subscription to a journal, keep that information and cite it when appropriate.

The Incremental method
One method of constructing and also justifying a budget is what is called the incremental method. First define a basic minimum core level of service which the institution cannot afford to be without. That may be, for example, simply acquiring and processing a certain number of journals and books, making them available for the users, and maintaining some sort of circulation system to monitor their whereabouts. Determine the costs for that minimum core of service. Then define additional tiers of service above that core. For each tier define the new services, the benefits that will be achieved, and the incremental cost of these benefits. Recommend one particular tier as the most cost-effective for the organization and give some justification for your opinion. While the more elaborate the justification the better, involved arguments are not necessary. For example, simply state that up to a specific tier each new tier achieves a major improvement in service with relatively small incremental costs. Show that additional tiers above that point require substantial increases in services. It is wise, however, that your presentation is constructed so that you are not recommending the top tier. Show your administration that you are rejecting some higher priced alternatives.

Justifying the budget
Now for the second big question, “I’ve got a budget, how do I justify it?” Obviously the points mentioned above for determining the budget are the bulwark of the justification for the budget. There are, however, additional points that you can make.

Keep another sort of ammunition file. In it include such things as testimonials from users and examples of specific projects undertaken for your clientele. Ideally, of course, try to document cost savings, i.e., that such and such a search has saved X department tens of thousands of dollars. This is not always possible. At the very least be well armed with examples of what has been done for use when presenting budgetary requests. Do not try to dredge these things up at the last minute. The trick is to treat projects as future examples and to evaluate them when they are completed, or soon enough afterward that the results are still fresh. Quotes that such and such a project saved X many weeks of work, or made the completion of the project within the funding agency’s deadline possible are convincing. This statement may be self-evident. Yet it is often ignored because it seems slightly immodest to ask for accolades. Do not be reluctant, the questions can be asked in relatively objective terms, such as “How effective was the search?” If presented as part of a standard program of feedback and evaluation, users will perceive and accept such questions as the norm.

Performance figures
As described in performance budgeting, keep performance figures. Know how much it costs you to perform certain functions. Do not expose all those performance costs to the unenlightened whose reactions may be negative. Keep them to be used when it is in your best interests. For example, you can say, “Do you know how much it costs to compile a bibliography for Dr. X,” when questioned about the cost of bibliography compilation or of reference services. (Dr. X is, of course, a rising and productive star in the organization.)

Quantify what you do as much as possible. Obviously it is useful to be able to document an increasing level of circulation or of reference questions answered. Set this information out graphically. A few minutes spent doing histograms or graphs can be time well spent. Keep such diagrams relatively simple however. The point of a histogram or graph is its clarity. A graph made for analysis may look like a road map, but a graph made for presentation should be simple and clear.

Fixed versus variable costs
A basic concept in accounting is a distinction between fixed costs and variable costs. Variable costs are costs that change with small changes in the volume of production or of operation (services rendered). Fixed costs are those costs that do not change with small changes in the volume of production or of operations. It does not mean an immutable cost. What is a fixed cost in one context is not necessarily a fixed cost in another context in which major changes in operations are contemplated. This distinction is important because it is frequently useful to analyze budgets or proposed operations in terms of fixed costs and variable costs.

It is typical of libraries that a high percentage of costs are fixed—principally payroll. This fact can frequently be used to good advantage. It can show, for example, that a 10% reduction in a library budget would have a major effect upon variable costs including such things as the number of journals subscribed to. On the other hand, it can show that a relatively small increase in the library budget could have an equally major effect upon the subscription or other services that the library can purchase. This observation, and a proper display of it, can be useful to argue against a relatively modest budget cut. Although minor somewhere else, it could be debilitating to the library and that, therefore, the organization ought to seek its economies somewhere else. Conversely, it can be used to make significant improvements in the library’s ability to produce a service. Obviously this argument can only be pushed so far—for example, to the point where one has to add or reduce staff. However, in the right context it can be useful.

Unchanged performance budget versus proposed budget
A useful technique in this era of substantial inflation is to compare the proposed budget with the budget required to continue the present level of service. Be sure to incorporate the necessary expenditure increases to cope with inflation. If you are proposing new services, such a comparison can make the point that a significant portion of the dollar increases results from inflation and that the new services you propose are not nearly so grandiose as the increase in dollars would have it appear. If, on the other hand, you are not so lucky as to be able to propose new services, such a comparison can document that a no growth budget (no growth in the eyes of the administration) is in reality a decrease in library services. Your administration may not be as aware as you are that the prices of journals and monographs is increasing faster than the general rate of inflation. Such a budget comparison can help you make that point more vividly.

Related items
There are a variety of items that, while not relating directly to the two principal questions discussed, are quite pertinent to budgeting and should be considered.

Financial Politics. Be aware of and use the politics in your organization. Politics is defined here in a broad way, including what might be called financial politics. Obviously if you are preparing budgets you know what the fiscal year of your institution is. Make use of that information. Check the political wind, particularly before the end of the fiscal year. In both profit and not-for-profit organizations there may well be situations at the end of the fiscal year in which the treasurer may not be at all adverse to spending money. In profit organizations, for example, present circumstances may be for reasonably good, and the projections for next year not quite so favorable. Therefore, anything that can be spent this year rather than next year will help maintain that appearance of a uniform and consistent rate of growth which companies like to be able to present to the financial public. In not-for-profit organizations it may be that money not expended this year will not be available next year. In addition, insufficient expenditure may be used as an argument for appropriating less money next year. Therefore the surplus ‘needs’ to be spent. In any case, ask questions and be aware of such situations. A purchase that may fill the treasurer with horror this fiscal year may be quite acceptable the next, or vice versa.

Similarly of course, the company may be tight on money at the end of the year or may want to cut back on purchases halfway through the year. If you have discretion on when you can make purchases or undertake programs, do it early while you have the money in your budget and before the organization decides to tighten its belt. This applies to such things as the purchase of major indexes and back-year cumulations, and to such things as travel or management development courses which are favorite areas for retrenchment.

Take an accountant to lunch. The advice may seem superficial, but it is not. If you are not part of the financial communication channel, you will not be privy to the information that will allow you to operate most effectively. In addition, having a channel to the financial office will make it easier to acquire the figures that you need and assistance in interpreting them. Budget information, with its accruals, transfer changes, distributed labor accounts, burden rates, etc., can be difficult to interpret without a friend at court, and your friendly (only if you make him or her so) local neighbourhood cost accountant can be a godsend.

Money versus People. Objectives of course can be accomplished in different ways. One way may be to add new staff, another way may be to put dollars in your budget that can be used to purchase outside services. There are obvious political tradeoffs here, one facet of which is that once you have a person on your staff, the person is there, the slot is there, and it acquires inertia. It is a major decision to cut back or eliminate the slot. For just that reason managers frequently tend to ask for increases to staff when other ways of achieving the same objective are available, for we feel we have achieved a long-term increase in our resources. For precisely that same reason, however, organizations tend to be resistant to hiring new staff. People are long-range commitments, commitments that can be cut back only with difficulty, and frequently with unpleasantness. Conversely, particularly in the case of for-profit organizations, your request for dollars is not likely to meet with such resistance, for the very reason that should the situation change, the faucet can be turned off easily. My personal opinion is that given the choice between asking for people or asking for dollars, one is better off asking for dollars. Granted the dollars are less irrevocable, yet one is far more likely to get what one wants. In fact, one can probably get more resources than if one asks for people. Furthermore, dollars are more flexible. A person only provides so many person-hours per week, but dollars spent on bibliographic on-line searching or dollars spent on information service bureaus can be spent precisely when needed.

One reason, but not a valid one, for the preference of librarians to add staff rather than dollars, is perhaps that our profession tends to measure the size of an organization by the size of its staff, not by its dollar budget. The budget of the information center of a major pharmaceutical company, for example, is not unlike the budget of a major university library. The tendency to measure size solely by the number of people directly employed, rather than by dollars, contributes to this myopia and unconsciously prejudices decisions.

Make or buy. In general, one should question seriously whether to perform a service that can be bought. If someone is selling a service, it is probably because that person or that organization thinks they can do it more efficiently and effectively by spreading costs over a larger economic base. Frequently they can. In economic terms this is described as the “make or buy” decision. When evaluating the make or buy decision, make sure that one is including all the costs involved in making it oneself.

Extra-Organizational Support. Don’t be hesitant about crossing organizational lines to seek extra support. Review what your library does and for whom. Is it providing services for people other than the organizational unit that picks up the tab? If it is, who are those people and what can be done to get some measure of support from them? Frequently in such a situation, if you can demonstrate that you are doing such work, you can get those organizations outside your own to support your operation, at least partially. Frequently that support will not be enough to completely cover the costs. Any degree of extra support, however, makes your budgetary life that much easier, not only because you have eased the load on your own organization but because you have demonstrated that you are cognizant of where your services are going and that you have the initiative and the fiscal intelligence and responsibility to seek appropriate additional support.

Library Committee/Customer Support. If you have a library committee or any sort of advisory committee, use it. If you do not have one, consider one. Consider carefully the people who will be on that committee. Do not necessarily go for the biggest and the most prestigious names. They may not have the time or the inclination. Do, however, deliberately try to pick the rising stars and the opinion leaders within your users. Not only are such people useful now, but they may be of major importance in a few years.

What are you being charged for? Be aware of what you are being charged for. For example, an overhead allocation may be based simply on the number of square feet that one’s department occupies. You may be able to point out that while that probably adequately represents the heating expenses for the library, it may substantially overcharge the library for telephone services or other support services such as janitorial services. Even though it may be suboptimal for the Accounting Department to change its method of allocation, you will at least be in the position of being able to explain why the allocation is so high and that, in fact, it overestimates the true cost of the library’s support services.

Controllable versus Non-Controllable. Along the same lines, make a distinction in your budget between controllable items and uncontrollable. For example, ‘books and subscriptions’ is a budget item that you control. The amount that you get charged by Data Processing, or for overhead, or distributed labor from other departments is probably an uncontrollable expense. Be aware of any of these uncontrollable items exceeding the budget estimate, and be prepared to point out that these are not items under your control. Divide your budget into two parts: a controllable part and an uncontrollable part. Then you will be in a position to demonstrate that the controllable part of your budget is in fact under control. If the data processing manager underestimated the effect of the new on-line systems upon his system throughput and has had to order four new disc drives whose costs have to be passed along to the customer, do not allow that happenstance to make it look as though you are going over budget. That is the DP Department’s problem, not yours. As an aside, when preparing a budget do not just extrapolate from last year’s charges for uncontrollable items. Get estimates from the DP manager, from the accountant, or whomever, as to what these items will be so that if something as described above happens, you cannot be accused of underestimating and underbudgeting.

Adhering to Budget. Know what the procedures in your organization are for adhering to budgets. In most for-profit organizations rigid adherence to the line items in your budget is not terribly important. What is important is whether you are staying within the overall envelope. Do, however, document why you are deviating. If your company has a budget updating cycle, request changes. Make sure that you and your boss have an understanding—whether that is a private understanding or whether it is a company policy—as to how the budget should be adhered to. Does he or she want to know of every minor deviation or is it acceptable to remain within the envelope? In governmental organizations, adherence to the line items of a budget is typically more rigid; modifications and exceptions typically have to be justified and approved. Do not hesitate, however, to go through the processes. Budgets should never be gospel. A budget is a planning tool and only a fool expects the world to stand still for a year. Do not be afraid to request budget changes. It is not an admission of poor planning or poor budgeting. Requests for budget changes, if done in a timely and well thought out fashion, can instead be an indication that you are staying on top of the situation and that you are maintaining your plans and your operations in as up-to-date a fashion as possible.

Confidence level
A major problem that we librarians face is the image that we have in the eyes of our managers or directors. Frequently we are perceived as professionals who know our field but who possess neither a realistic business sense nor financial acumen. This perception is frequently a serious constraint upon the librarian’s ability to adequately and efficiently perform the job. The budget is the ideal vehicle to dispel this conception and to build your superior’s confidence in your financial common sense. Demonstrate that you have in fact evaluated all alternatives. Demonstrate that you know that things cannot be justified on the basis of what has already been spent. Demonstrate that you know the conception of sunk cost and opportunity cost. As librarians, you are familiar with the concept of the invisible college. The easiest way to deal with programmers, for example, is to be a programmer, to be a member of that invisible college oneself. The next best, however, is to be able to speak the language. If one can demonstrate a familiarity with the field, then one will be accepted as at least an associate member. The same thing is true in dealing with those who will review and pass upon the library budgets. The community is not so clearly defined but there is obviously the same sort of sociological phenomenon working with managers, treasurers, directors, and administrators. If you can speak the language, and if you can demonstrate through your budget preparation that you are cognizant of the basic concepts of cost analysis and budgetary thinking, then you will have gone a long way toward establishing that confidence level. The budget will have been far more than just a delineation of what will be spent. 

Tudor Dean / The Special Library Budget. Special Libraries 63 (11):517-522 (Nov. 1972).

Kramer, Joseph / How to Survive in Industry—Cost Justifying Library Services. Special Libraries 62 (11):487-489 (Nov. 1971)

Lyden, Fremont J. and Ernest G. Miller / Planning, Programming, Budgeting—A Systems Approach to Management. Chicago, Markham, 1967.

Keller, John E. / Program Budgeting and Cost Benefit Analysis in Libraries. College and Research Libraries 156-160 (Mar 30, 1969).

Fazar, W. / Program Planning and Budgeting Theory. Special Libraries 60 (7):423-433 (Sep 1969).

Michael Koenig is director of library operations, Institute for Scientific Information, Philadelphia, Pa.

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