For the first in a series of articles focusing on different areas of the RIPE NCC’s Draft Activity Plan and Budget 2024, I look at the budget to explain how and why it’s being reduced and what steps we’ve taken to ensure we can increase cost control while supporting the future financial stability of the RIPE NCC.
Our Draft Activity Plan and Budget 2024 sets out our plans for the year ahead along with the associated costs. It has now been published in draft form and a consultation has opened to hear your views on our activities and where the money is spent.
We will also host an open house to present the activity plan and hear feedback on 1 November. If you want to have a say on what the RIPE NCC does and the associated expenses, being involved in this discussion is the best way to do it. The draft will then be discussed at the RIPE NCC General Meeting in November before last changes are made and a final version is approved by the Executive Board and published in December.
Changing financial tides
Historically, the RIPE NCC has enjoyed a high income from membership fees due to a number of factors - i.e. the possibility for members to open multiple LIR accounts, the perceived availability of IPv4 resources, a stable economy, etc. This income has been more than enough to pay for the costs of running the RIR, and from 2015 to 2021 the financial surplus was redistributed to our members annually in amounts ranging from 4 to 13 million EUR (see table 1). The fluctuation of income and the amount redistributed, even before COVID-19, is indicative of the strong influence an influx of new (multiple) LIR accounts have had on our income/Charging Scheme in recent years.
The redistribution model makes sense given that we’re a membership association, as it essentially gives the membership the power to decide what we do when faced with an excess (or shortage of) funds.
In 2021, with our income having been well over our budget since 2015, we proposed lowering the sign-up fee from 2k to 1k. More recently, from 2022 to 2023, we have seen a jump in the cost budget - from 35.6 million to 40 million. Factors affecting our 2023 budget included high inflation and costs related to major projects, especially the planned migration of some services to the cloud. Our workload also remained high in our Registry and in our legal and compliance activities, in large part due to the number of sanctions investigations we had to perform.
In recent years, the tide has turned and we’re now facing greater uncertainty in terms of our finances. IPv4 run-out has resulted in fewer new LIR applications and in addition the consolidation of multiple LIR accounts has led to a reduction in expected income. These developments were expected and we were able to make good forecasts for the relevant changes and plan accordingly.
What was much harder to predict were various events that have occurred in our service region over the past few years, such as the war in Ukraine and the increased pressure of sanctions. Our inability to collect fees from members in Ultra High-Risk Countries and sanctioned members due to restrictions from our banks have had a considerable impact on our activities and budget.
With these factors in mind, we were already expecting a reduction in income at the beginning of the year and were starting to take a close look at options to make savings. When the Charging Scheme consultation opened earlier this year, we also got a clear signal from members that we should increase focus on cost efficiency and reduce total spending. This was followed by a clear decision from NCC Management to keep costs within the forecasted income of 38 million in 2023 and we took immediate action. As a result, throughout the planning of our budget and activities for 2024, we set a high priority on saving on costs wherever possible without compromising the quality of our services - a tricky task which I will go into later.
‘No Change’ charging scheme
Having foreseen the coming income reduction, one solution we pursued was to revisit the charging scheme model discussion which began at the May 2022 GM. This was then postponed due to the Ukraine war and restarted in early 2023. Drawing on input from members, we put together three draft models that we then shared on the Members Discuss mailing list. The options were also put to discussion at an Executive Board Meeting and at an Open House session dedicated to the topic.
The models aimed to fulfil a budget roughly the same as the 2023 budget plus general cost increases based on an expected inflation of 5% - so EUR 42 million. Additionally, we proposed a fee for ASN assignments and a transfer fee, which, when combined, could generate an additional 3 million EUR in income. Our calculations indicated that a combined approval of the additional charges would meet the potential budgetary requirements for 2024, 2025 and 2026 while retaining the option for members to redistribute any excess contributions should we have received excess funds.
The draft models were as follows: the category model (according to which members fall into different fee categories based on what resources they hold) and the current model plus price increase of either 5% or 10%. Each model included an option to vote for an ASN fee and Transfer fee.
Alternatively, members were given the option to vote for no change to the charging scheme used in 2023. This is the option members voted for at the May 2023 GM.
Charging scheme history
This isn’t the first change to the charging scheme to come about in recent years:
2021 - Members approved the proposal to lower the sign-up fee from 2kEUR to 1kEUR
2022 - Charging scheme discussion postponed due to the Ukraine/Russia conflict
2022 - Members approved the proposal to increase the service fee by 150 euros (from 1400 to 1550) for the Charging Scheme 2023
2023 - Charging Scheme Model Consultation for Charging Scheme 2024 (category model, ASN charge and transfer charge proposed)
2023 - Members voted to continue with existing Charging Scheme 2023
A clear financial message
After the GM vote in May, the reduction of income became an inevitability as members would continue paying the same fee they’d paid the year before with fewer LIR accounts in total paying the fee.
The consultation we’d carried out with the membership in drafting the charging scheme models gave us a clear message that we need to increase focus on controlling costs and spending - before proposing raising our budget and we cannot expect members to approve rising fees every year.
Previous to this message, we had already been thinking about our finances in light of growing economic uncertainty, and in 2020, we implemented a new model of financial governance and brought in initiatives to increase cost controls and focus on efficiency and effectiveness. We increased the control of finance across all departments and included subject matter experts in our budgeting and procurement approvals so that there was less of a silo between our finance team and the activity leads with the introduction of Strategic Expense Advisors. When Hans Petter joined as MD, he strongly supported the new financial management model in place, which meant we have been on solid ground moving forward.
With the ball already rolling, we were in a good position to act fast after the vote at the May GM in using the financial controls implemented in 2020 to control costs, highlighted by the cost savings already achieved in 2023. We had already started cutting costs (supported by the Financial Governance) based on the forecasted income for 2023 and an executive decision ensured that we would not exceed the projected income already established for 2023.
We are not out of the woods yet though. We’re still looking at the income of three to five years into the future and further changes will be needed to balance our books. We are expecting members to merge their multiple LIR accounts over time (consolidation risk) which will cause a further reduction in projected income in future years.
As I noted earlier, our plan is to make all areas of the organisation more cost efficient rather than cut particular services or FTEs while also being mindful not to affect the quality of our services across the board. We are very mindful of the 2023 membership survey results which highlighted that the provision of registry and information services are seen as the RIPE NCC’s most important functions and that working to defend the global Internet registry system is also seen as a critical activity by many members. There is definitely a balancing act between providing the services members feel are important while also keeping costs under control. With over 20,000 members, we as a member organisation receive many different opinions which need to be served but compromises will be unavoidable as we look down a path with inevitable budget cuts.
2024: A year of cost savings and efficiencies
All divisions in the activity plan see a budget reduction. With cooperation from budget holders, we have taken a critical look at all costs and budgets and defined what is essential and where we need to make tough decisions. From here, and where possible, a number of budgeted items have been removed. We are fully transparent on what is being cut in the activity plan and how this is affecting next year’s activities.
The top five areas for cost savings compared to the 2023 budget are:
- 1.8 M EUR (36%) Consultancy
- 0.8 M EUR (18%) Information Technology
- 0.4 M EUR (14%) Outreach and Public Relations
- 0.3 M EUR (19%) Contributions
- 0.2 M EUR (20%) Travel
It has not been easy to cut these costs but it was a conscious effort and decision by the Executive Board, Hans Petter, and the Executive team. We had already started these cost cutting activities in 2023 which provided a good starting point for 2024.
2024 will be a year of cost savings and efficiencies across the board and we will focus on concrete outcomes for the activities in the plan. As CFO, this is by no means a bad thing, since efficiencies have the effect of creating a more focused working environment and better goal setting. However, as a membership association, a focus on a more efficient service delivery is not as clear cut as it is with for-profit and commercial organisations because commercial operations can focus on the profit margin and increasing efficiency usually means increasing the profits, cutting costs or investing to increase revenue.
As a not-for-profit, we do not have the possibility to focus on increasing revenue so there is only an indirect link between optimising our services and increased revenue. Excellent services and available IPv4 resources can increase new LIR and member applications, which can in turn increase revenue, but this is not a direct relationship and is also not why we exist. We are also Secretariat for the RIPE community, so beyond delivering membership and registration services, we also need to ensure we are meeting the needs of all members and the community by providing a range of valuable services and activities. The only option that remains is to focus on efficiencies and focusing on the priority of delivering valuable services to our members and the community. There will always be a balancing act between these two priorities.
I am confident that the RIPE NCC can face uncertainty as we have in the past. However, many questions remain on how we solve issues of uncertainty around a reduction in the number of active LIR accounts in the future. This consolidation will continue to reduce to the point where LIR accounts will inevitably equal the number of members at around 20,000, which is expected to be in the next couple of years and we are looking at a 31 million (20,000 LIR accounts x 1550 EUR) income budget (excluding the effects of inflation). This is compared to 33.3 million (21,500 LIR accounts x 1550) budgeted for 2024 due to this consolidation. Uncertainties in our service region also seem to increase and inflation will continue to be a factor - the hope is that inflation will stabilise.
Looking at the financial forecast for 2025, if we do not take action to change the Charging Scheme for 2025, we will be forced to cut activities or take other drastic actions. Cutting costs is not something we can do year on year without eliminating activities and if the membership, represented by the Executive Board, requests that we cut activities, we will need to find consensus on what to cut. Looking at the membership input in the RIPE NCC Survey 2023, it looks as though reaching consensus on this will not be easy.
As CFO, I will always focus on efficient and effective use of membership funds but there are only so many efficiency gains we can achieve without reducing the quality of our services and asking too much from staff. Balancing these cost efficiency efforts with providing effective and high quality services to our membership is a challenge since significantly reducing the value and dependability of our services could in turn reduce the role we as the RIPE NCC play in the community. In 2024 and beyond we will certainly be balancing more than the books.