Business Today
Winter 1993 Page 13-14
FEATURES
BY CHETLY ZARKO

Although cooperation in research among universities, businesses, and government has incredible potential in renewing American industrial competitiveness, there are also some dangers and possible obstacles to forming these alliances. The most publicly discussed, and perhaps the most serious of these problems, involves the waste and misappropriation of university research grants.

This issue first exploded onto the public scene in mid-1990 when federal auditors discovered nearly half-a-billion dollars in questionable grant expenditures at Stanford University. According to Martin Anderson, Senior Fellow at the Hoover Institution in Stanford, the University charged the federal government 74 cents in "overhead" for every dollar in real research -- one of the highest overhead ratios at the time. The 1990 audit uncovered "research" charges for the administrative costs of running a shopping center, sending alumni to Paris, and depreciation on a faculty retreat yacht.

Until the Stanford debacle, very little public pressure to accurately account for expenditures had been exerted on the research systems of most universities. Afterward, however, federal auditors descended upon nearly 250 universities nationwide, informing them that their research charges would be subject to investigation. Of the first fourteen universities investigated, all were found to have improperly charged research expenses.

Among this group was the University of Michigan, which voluntarily withdrew about $300,000 of a contested $6 million in illegitimate expenditures. These contested costs included a Christmas tree for the President's office, expenses relating to Martin Luther King, Jr. Day celebrations, and trips to the Rose Bowl for a University administrator and his wife.

Such blatant abuse and waste of funds was immediately pared down by an irate Congress and executive branch. The resulting public pressure led to a nationwide cleansing of the more obvious forms of waste, but other serious issues remained.

Several Congressionally commissioned studies set out to clarify a variety of rules and ethical issues surrounding university research. Among those was a report released in May 1992 by the General Accounting Office (GAO), entitled University Research: Controlling Inappropriate Access to Federally Funded Research Results. The GAO study attempted to determine the extent and nature of linkages providing business with access to federally-funded university research, as well as potential conflicts of interest in such situations.

According to the survey, a conflict of interest may arise when a researcher has a vested interest, such as stock ownership or personal holdings, in a company purchasing the exclusive license to use university-developed technology. Since exclusive licens es may give the company an enormous advantage over its competitors, a researcher may be tempted to skew results or applications in its favor, or to give the company unfair access advantages over others in the market.

While the study "sought to avoid" uncovering specific examples of conflict of interest, it did highlight the fact that "the university scientist who developed [a licensed] technology was associated with the licensee in 61 cases, primarily as a consultant ." Nevertheless, the GAO underscored the importance of university-business industrial liaison programs. Such programs, which are designed to sell the rights to university-developed technology in exchange for a fraction of the resulting profits, accounte d for $113.1 million in university income annually at the time of the study.

The GAO's primary concern was that $82 million, or 73 percent of that income, resulted from university research that was heavily subsidized by federal grants. This cross-over raises questions as to what the proper role of government is in encouraging re search, and whether some companies are gaining an advantage over others at the taxpayers' expense. The GAO was also concerned with the small but not insignificant number of foreign firms that had access to federally funded research through liaison progra ms.

The GAO concluded that strict disclosure requirements to outside investigators should be implemented because "conflicts of interest or other relationships" might give business "inappropriate access to ... the results of federally funded research, and the refore unfair advantage in commercializing [it]."

Almost immediately following the GAO [page 14 begins] study, the Office of Management and Budget (OMB), in conjunction with various grant-making agencies, instituted strict controls which froze the percentage of available reimbursement to universities in each of the accepted overhead categories. One category of overhead covers purely administrative costs, such as paying employees and completing paperwork, while the other type covers costs associated with the space required to conduct research, such as f uel, heating, and electricity. The OMB capped administrative overhead at 26 percent of the total budget, a figure based on the national average for all major universities.

The OMB reasoned (quite logically) that setting a fee ceiling would encourage universities to trim wasteful costs, because they would have to absorb costs above the specified fee limits. This goal continues to largely unfulfilled, however, because unive rsities have begun a process known as "cost shifting." Under this tactic, costs that can be classified under either heading (such as the heating expenses of an administrative building) are simply transferred to whichever category is below the fee cap. The process does require federal approval, but is still reasonably accessible; U-M has negotiated a settlement with HHS that will allow some of its previously-labeled administrative costs to be recounted as space costs, taking advantage of the fact that t he University's space overhead is currently below the fee limit.

Such number juggling ignores the prospect of "real" cost cutting as a solution. True progress and economic competitiveness can only be attained if the university research process can be made more efficient. When asked what U-M is doing to achieve "real " administrative cost savings, Dr. Alan Steiss, Director of U-M's Division of Research Development and Administration, identified "over-decentralization" as a target for improvement. According to Steiss, this phenomenon creates "redundancies in the system" in the form of administrative task duplication across units. That is bureaucratic language for saying that anyone interested in researching has to first figure out a way of cutting through the red tape. Steiss noted that "improvements were being made in order to centralize information and data retrieval."

Steiss' criticism hints at the analogous problem of task and research duplication among universities nationwide. Although it makes no sense to conduct the same research two or more times, there is a tremendous amount of nearly identical research perform ed each year. It would therefore make sense to create an agency to help coordinate research and inform others interested in similar areas. Attempts at creating information networks, and plans such as President Clinton's proposal for an informational "superhighway," seek to create the necessary ingredients for a solution.

Simply creating a bureaucratic apparatus for coordination will not be enough, however, especially if the new agency suffers the same problems that plague university bureaucracy already. Ideally, most of the important duties of coordination should be taken up by private firms responsible for matching the demands of client businesses with the different types of research universities supply. This structure would improve the productivity of researchers, and enable them to identify the needs of business and adjust some of their plans accordingly. As a result, the large number of projects that are currently conducted with no particular end or goal in mind would be substantially reduced.

In conclusion, both business and government can take action to improve the university research process. Businesses that are currently engaged in liaison programs with universities need to be concerned about conflicts of interest for both legal and publi c relations reasons. Greater corporate scrutiny could help to prevent mutually damaging scandals. Equally important would be pressure on universities from sponsoring businesses to reform cost accounting practices.

Concurrently, the government should commit itself to making the necessary initial investments in information infrastructure, while at the same time encouraging private businesses to sponsor research. This could be accomplished through a combination of tax breaks and project investments. Better government clarification of proper accounting practices would make it easier for universities to understand exactly what their role should be.