Operational Plan Workshop 05 March 2009 Mexico City, Mexico >>KEVIN WILSON: Good morning, everybody. This is Kevin Wilson, and I'm the chief financial officer for ICANN. Today I will be presenting a workshop on the proposed framework for the fiscal year '10 operating plan and budget. And it looks like the gala was very successful. So I will go ahead and do the presentation because this is going to be recorded in the transcript on the public record. Thank you all for coming. The purpose of this workshop and this discussion and the related activities this week is to kick off the operating plan and budget development for fiscal year 2010. The fiscal year 2010 is the period from the 1st of July, 2009, through the 30th of June, 2010. Its primary purpose is to engage the community in refining our key assumptions, getting our priorities in spending activities lined up with the strategic plan, and making choices over -- making the choices for that operating plan and obtaining the community input into that process. And, lastly, the purpose is to launch this process, which ultimately leads to the plan and budget, which is approved in the June meeting, the Sydney meeting in June 2009. As a brief overview of the fiscal year '10 framework, the expenses as proposed are 54.3 million. And this is a 4.9% growth over the fiscal year '09 budget as compared to the 30% growth that we saw in last year's budget and the prior year's budget as well. And this is reflecting what is believed to be the approaching operational maturity in many areas of ICANN. There is some growth planned for in this operating plan and budget. And, primarily, those in the areas of compliance, completing the compliance buildout of that team, the technology operations for things such as DNSsec and the scaling and in preparation for the new gTLD IDN efforts, and then some base hiring for the new gTLD efforts, which I'll explain more in a bit. This framework also describes a separate budget amendment which would be provided for the new gTLD program. So it's carving the -- the budget as proposed is carving out a section for the new gTLDs that would be actually proposed about 90 days before the launch of the actual new gTLD program. So this budget -- this framework describes that, but the actual numbers would not come until that budget amendment that would come later in the year. This -- the framework also includes a three-year projection, which shows the impact of the new gTLD and other initiatives on ICANN from a longer term perspective. As I mentioned before, we're seeking feedback on this framework and, particularly, its alignment with the strategic plan priorities. And we're particularly reaching out and seeking community feedback on input -- given the world economic environment, we're seeking input to obtain ideas and thoughts on how we can priority our activities, cut, defer, and ensure that we're only spending money where it's absolutely necessary. As I mentioned the consultative process -- as I mentioned, this is the second year we've rolled out a framework this early. And the framework also is more comprehensive, more detailed to allow more community feedback. So we're encouraging that feedback. I think it's a little over four months of opportunity for the community to provide feedback both here and the workshop. We met with several constituencies in Mexico City as well as having conference calls set up with the constituencies. And then, of course, the online public comment sections on the both the framework, which is posted on the 17th of February -- or sorry, excuse me, yes -- the 17th of February and then also comments on the draft plan which will be posted per bylaw requirements on the 17th of May. The operating plan and budget would then be -- the final would be considered by the board after a further community input and adopted in Sydney at the June meeting. The ICANN planning cycle is a year-long effort. And, essentially, the first six months of the fiscal year, in other words, July through December/January period, is the development of the three-year strategic plan, which sets up the priorities for the organization overall. And then the more detailed operating plan and budget is developed in the second half of the fiscal year, in other words, the January through June period. So we are just developing this fiscal year '10 operating plan and budget at this time. This chart, the three-arrow chart, is a brief depiction, overview depiction of the way the budget and operating plan and budget are developed. And I wanted to point out a few things on the slide. You'll notice that the top arrow reflects the efforts that went into creating the fiscal year '08 budget. The middle arrow is the effort to create the fiscal year '09 budget. And the bottom blue arrow is the description of the development of this fiscal year '10 budget. And the -- really pointing out a couple things. One is that the new gTLD cost and fee consideration paper, that was posted in October of 2008 in alignment with the new gTLD guidebook -- application guidebook posting first draft was -- and the comments received were heavy influencers of this -- the development of this budget. And then, obviously, the strategic plan was posted in January, as I mentioned. And then we've -- in February we posted the framework that has fairly comprehensive analyses and assumptions so that the community provides more feedback. And then the other point on this chart to highlight is the four months of community feedback provided. As mentioned, the strategic plan was completed for the 2009/2012 strategic plan period. And it has nine priorities. I won't go into them, other than just to say they're fairly consistent with the strategic plan from prior years with the heavy emphasis on the -- complete the implementation of the IDN and new gTLD programs. The timeline, as mentioned, is that, once the strategic plan is posted in January, now we're in the proposed framework period, which is -- was posted in the Mexico City meeting. We're now in that consultation. And now the 17th of May is when by bylaw the draft operating plan and budget is posted for further community feedback. That's finally synthesized for the final adoption at the Sydney meeting. This is a snapshot of the operating plan and framework, and I want to emphasize a couple things. The first is on the format. This is an evolved format, which reflects the functional reporting, which is now on the dashboard, so the 10 major areas, the 15 categories which are shown on the dashboard and which we're now reporting on on a regular basis in development with the board finance committee and community input and in response to the community wanting to know what ICANN spends their money on and -- both in priority as well as efficiency. So that was the effort here. And so this budget aligns up with that. So you can see that. This highlights the new gTLD implementation. And then also the growth and compliance technology and operations and security. Yes, Craig. >>CRAIG SCHWARTZ: Craig Schwartz with ICANN staff. What I heard over the last couple days in a number of constituency meetings is an interest in getting more drilled down information about development costs for the ccIDN process and wanting more detailed information about that. Has -- has ICANN made a plan on when that kind of information might be made available, the timing of that? >>KEVIN WILSON: We certainly have been working on that. That's a common comment, and I'll mention that more as well. But, yes, there is a plan. We're working with the board finance committee. We worked on the board finance committee to come up with kinds of the top level. And the thought being we'd be able to show in more detail that effort. So, for example, the ccIDN cost analysis in preparation for other analyses is planned to be discussed and released in the next trimester. Okay? Yes? >>RON ANDRUFF: Thank you, Kevin. Ron Andruff, RNA Partners, member of the BC constituency but speaking in my personal capacity. Just wanted to ask a quick question on the 90-day before, will there be some budget finalization? What's the rationale for that? Why do we -- what's happening in that period? >>KEVIN WILSON: Is your question why is it 90 days or why is it not included in this budget? >>RON ANDRUFF: What is it that we need to know that we don't know that we're going to be doing an amendment there? That's what I need to know. >>KEVIN WILSON: Yeah, there's -- I actually have an amendment slide. We can go over that. But the short answer is there's so much variability going on. The implementation specifics on things like auctions and other things are still being finalized, so we didn't want to include that. And then the other reason is we just don't need that money. And so to show -- you know, if we assumed, let's say, 500 applications coming in at $185,000, that's a very large revenue number. And to put that in a revenue budget now when we -- you know, it's not really required. So we wanted to wait until we're required. And then the other aspect of it is there's a scaling aspect of this, too. Right? So we need to be operationally ready for that. So there is -- we need a little bit of time to make sure that we get that process in. But that concept being that, rather than hiring a full staff to process 500 applications or a thousand applications or a hundred applications, we would staff to handle a core number of applications and then there would be an outsourcing process, so it's a variable cost to handle that. Thank you. So just walking through the operating plan. Functional areas, one by one, the first one and the largest one, new gTLD implementation. And this really is assuming -- that the fiscal year '10 that the gTLD implementation project would be completed in fiscal year '10, that the gTLDs would launch. And it also assumes that there's support processes embedded throughout all the ICANN functions whether it's finance, human resources, compliance, legal. Each of those operations would be -- would start the process of preparing for that. And then there's also -- this is a subtlety of the budget amendment that Ron mentioned. But there is also an assumption in this budget that a portion of the application processing cost would be included in this fiscal year '09 -- fiscal year '10 budget, excuse me. So the point being that we would not want to wait until 90 days prior to, say, for example, hire the key program application processing director. We want to hire them earlier, because 90 days wouldn't be enough time to hire them, on board them, and get them ready to process those applications. So the -- in terms of cost, it's about $7 1/2 million for the staff, professional services and other costs to complete that implementation. Just a quick point on that. That's a decline in percentage in dollar amounts from the fiscal year '09 amount for the new gTLD. And this is a combination of a couple things. One is the program is completing in fiscal year '10. So that's, you know, reflecting the scaledown of that. There's also the assumption and fact that the fiscal year '09 forecasted cost for the new gTLD program are quite a bit less than the fiscal year '09 budgeted amount. And that's primarily due to the -- some to cost saving measures, but a lot of it is to the revised timelines and the delay in the -- in some of the activities for that. And then, just to emphasize, again, the separate new gTLD budget amendment would be proposed something like 90 days prior to launch. And that would cover costs of the application process and the variable costs that I didn't mention. The second category on the operating plan is the IDN implementation. And this includes both IDN, ccTLD, ccIDN fast track process as well as the IDN support for the G side. The IANA technology operations is showing costs of about $5 million, which is about a 17.8% increase over FY09. And this is reflecting the operational readiness of IANA and other technology operations for the increase in the TLD side as well as rolling out DNSsec support and other ICANN services. Next one is security and stability and resiliency. This is reflecting the operating plan that Greg Rattray and others have shared this week on continuing to define ICANN's role in the security and stability of the Internets and its role of the unique identifiers, the coordination of that, and also includes some costs for capacity building through training programs and the like for the TLDs. Most of the growth, the 10.9% growth is in the strengthening of business continuity and completing the plan for the core ICANN systems. Contractual compliance is the largest growth area over FY09. And this is really just reflecting the completion of the plan for compliance -- contractual compliance, including the hiring and staffing plan and things like the WHOIS accuracy study. Next one is the core meeting logistics. And this reflects the -- the budget reflects that the meetings program continues on with the three annual -- the three meetings a year. And it also includes some costs for exploring new approaches to meetings. But no plan in the fiscal year '10 framework to -- no financial assumption is included to reflect some of the ideas on changing the structure and style of meetings at this time. The constituency support reflects the continued effort at supporting the various constituencies of ICANN and the stakeholders. There's some growth, particularly to increase the staffing to support constituencies in Asia. Policy development support is -- shows a $5.28 million amount, which is at a 2.5% increase. That's relatively flat. There are some efforts in training future policy leaders, developing tools and programs for that. Yes, Ron? >>RON ANDRUFF: Thank you. Ron Andruff. Just regarding the -- first on compliance, I'm very pleased that there's larger numbers in compliance, that we have a new compliance officer. This is -- more compliance staff, maybe put it that way. That, obviously, is going to be a critical factor for us going forward. And it's one of the weaknesses. So this is very good. But, with regard to constituency support, as we all know, we're going through the GNSO reform now. And the commercial stakeholders group is merging together. And there will be a lot of demand or need for more staff support there. And I'm sure it's been discussed. But I just want to go on record that, as a member of the working teams and OSC and so forth, we really will need good staff support. Not just a half person, half day a week kind of thing. We'll really need full support. So, hopefully, that's in the consideration. And, if it's not, you might just want to think about that or have more dialogue with the working group on the CSG particularly. Because this is a body that's going to really be involved much more in outreach, much more in doing a lot of the things that we haven't been able to do because we just haven't had enough staff support to do it. Thank you. >> KEVIN WILSON: Great. Thank you for that. The next functional area is global engagement and increasing international participation. So this reflects the continued support of the fellowship program and the continued efforts at ICANN's efforts around the globe both geographically working with the various governments as well as other organizations, IGF, et cetera. There's also almost a million dollars in translation work reflected in this budget as well. So that totals $6.8 million with a 6.8% change from FY09 just reflecting the continuation of the plan to cover the global marketplace. One area of active community discussion, at least for me this week, has been travel support for the ICANN community. So this framework assumes -- has the financial assumption that we will continue to provide air, hotel and per diem funding for some community members per the travel procedure, which was posted last August and has evolved. There is an active request for community feedback on that and that will be posted as well in the next couple of days. That assumes a 1.47 million which is essentially flat, as I said, but waiting feedback from the community to ensure that's reflecting community's wishes. Other programs, the ombudsman, essentially flat. Continued on for the assumption here. The board support, supporting 21 members on the ICANN board and includes their travel costs, their other meetings, their board workshops, in-person meetings and conference calls, et cetera, as well as training for board and support costs. And that's about 2.4 million. NomCom continues to support ICANN's various structures including the board. DNS operations shows about a 20% increase but it is on a relatively small base. This is really just developing, as I mentioned before on the security side, the operational readiness for DNSsec, signing of the root zone, coordinating with other roots, providing support for the ICANN "L" root and coordinating with the other root zone operators. And it also includes the signing the ICANN controlled zones, including icann.org. Administrative improvement reflects 1.8 million which is about 400,000 in organizational reviews and preparing for the post-JPA environment. So this is a snapshot on the actual budget, and it shows the 4.9% growth in the operational expenses which we've talked about on the operational side and we'll talk about it from the accounting side in a minute. And then it also reflects about a $7 million increase in revenue, primarily from the dot com contract. The highlights of the budget on the revenue side are that, as I mentioned, the revenue would be going up primarily from the dot com fixed fee step-up per their contract. It also includes some growth in transaction volume. However, we've asked for -- especially in light of the current economic environment and the economic environment of our registrars and registries, we've asked for direct feedback on the revenue assumptions for that to ensure that's as accurate as we possibly can be. And then, once again, to emphasize, this fiscal year 10 budget does not include new gTLD application revenue that. That will be covered in the separate gTLD budget amendment. Operating expenses of, as I mentioned before, 54.3 million in fiscal year 10 reflecting a 4.9% growth over the fiscal year '09 period and that's -- is my microphone still working? Good. Reflecting the decreased increase of the budget over the last few years. And then, once again, just drive home this point that given the world economic environment and ICANN wants to be sensitive to that, that we consider the areas that ICANN could possibly defer or reduce the costs on certain activities. As CFO, I can't help but think about how to spend money more efficiently and more effectively and look at every way we can. We are happy to receive those comments, but we are particularly wanting to invite the tough decisions on places -- the activities that we can either delay or defer, defer or cut even. Once again, the highlight on the operating expenses, new gTLD and IDN at 8.7 million. Contractual compliance, as I mentioned. And then technology operations, just preparing for operational scaling for DNSsec and the growth in TLDs. As far as the bottom line, obviously ICANN is a not-for-profit but the strategic plan calls for reserve fund of one year's operating expenses within three to five years. That roughly translates to about $10 million per year contribution to the reserve fund. The last few years we've budgeted for less than that with the idea that that would be an investment in the new gTLD program, to spend that for developing the new gTLD program and the idea being that that would be recovered with the application fees -- part of the application fee would be used to recover that and replenish the reserve fund up to those levels. But this fiscal year '10 budget still factors in an element of that and that's why it is less than $10 million budgeted. It is 7.4 million in the current budget proposal. So, once again, to highlight the point about the separate new gTLD budget amendment, with the expected launch in fiscal year '10, we will plan to post the separate budget amendment about 90 days prior to launch. There is detailed information available on fees and costs in the cost considerations paper, which was posted in October 2008 and more detail after receiving about 300-plus responses. And quite a few of them -- I want to guess a third to half of them addressing fees or cost considerations. We also responded to that and posted that as part of the draft -- in alignment with the second draft of the applicant guidebook. So those are addressed in more detail. Again some new gTLD costs are included in the proposed FY10 budget framework, but most of them are included in the separate budget amendment. The other part of this budget framework and will continue on with the budget is to have a three-year model attached to it to forecast ICANN's financial position over the next three years, over the same period as the strategic plan. And primarily we did this to -- particularly at this time, to describe the cost recovery mechanisms, given that the new gTLD program is revenue-cost neutral. We wanted to make sure we had that model in place and then also to consider revenue sourcing strategies. So the model had a number of key assumptions. Among them was that the new gTLD fees and the refunds would be as described in the second draft of the guidebook recently -- recently posted for comment. And that included the registry fees -- the annual registry fees being $25,000 per year plus a 25-cent transaction-based fee after the first 50,000 transactions. So the first 50,000 transactions would not have a transaction fee, and after that there would be 25 cents. That's in the second draft of the guidebook. This table describes the cost recovery mechanism. So this is not the traditional accounting financial statements. This is describing the revenue cost-neutral aspect of the application of the new gTLD round. So starting over -- just following the columns real briefly, the first column is a start-up cost which is a historical cost and starting from about October 2007 when the GNSO set forth -- voted on their policy up until the application launch. And then working across the columns is the years, and this model is assuming about a three-year period that most of the applications would be processed in the first two years, and that's how that shows. So if you -- it is a little hard to see from here, but over there on the right about halfway down the net impact is about 300,000. So this model here that we've put on the slide, which is one of many scenarios that we've run, shows that roughly the revenue cost-neutral would be about 300,000. The other point I wanted to show is that the amount of in the historical development cost would be used to replenish the reserve fund and wanted to show that. So this next slide shows the impact of the new gTLDs once they're operational, once they're delegated to the root. There would be revenue fees with a ramping-up assumption, and there would be both registry fixed fee, registry transaction fees, as I mentioned, and then the assumption there would be some growth also in registrar fees. And then the costs actually service those in the constituency support registry and registrar support as well as other areas of ICANN to support those. So this is showing the impact of that. Yes? And this kind of rolls it all together. I think this might answer your question, but hold on just a second. So the -- this chart is fairly complicated, lots of numbers. But hopefully it captures well what we were driving to which is what's the impact of the new gTLD program on ICANN? So the gray numbers on the top and the revenue and the operating -- and the expense area are the traditional core ICANN aspects. You can see the $68 million, for example, in revenue that we're showing in the FY10 budget. And then the bold numbers and the bold labels are the costs and the revenue and the costs associated with the new gTLD program. So those are layered on top of each other, and you can see that as we've discussed in the past, there is probably some opportunity for fee reductions in the future. Ron, did you have a question? Or do you want me to cover the implications of the model? >>RON ANDRUFF: If I may. It was simply -- you said the Number 146, 381. I'm sure this was a result of running a lot of scenarios to get to that. So was that kind of a middle line that you ended up taking there? Because they are just strange numbers, 146, 381 and so forth. >>KEVIN WILSON: What we did. We have run a number of scenarios. I wouldn't say this is our best estimate. I would say it's -- it's an estimate. But we wanted to show -- the reason why we ran many models, we wanted to see what would happen to ICANN in various scenarios. But, yeah, the reason why it's an odd number -- that's kind of your question, right? Why is it an odd number? Because there is a bunch of assumptions behind it in terms of probability. What's the probability of an application going through phase 1, through the initial phase, the initial evaluation phase? And what's the probability of it going through dispute resolution? What's the probability of it getting delegated? And then once it's delegated, what's the probability of it being up and running and providing registration -- transaction volume that's over 50,000. >>RON ANDRUFF: Considering there has been a few delays now, how will that -- will that impact these numbers or have you more or less accounted for that? >>KEVIN WILSON: Yeah, the model -- if you noticed on the top of the model, it says year 1, year 2, year 3. >>RON ANDRUFF: It is 12 months from the time we get started. Very good. >>KEVIN WILSON: We did have some assumptions on layering on the existing ICANN operations., but, obviously, we would scale that and that would be part of that -- the draft amendment. Thank you, Ron. So the implications of the model is some helpful results. One is that the revenue would cover the costs for the new gTLD application process. It also shows that we -- it's critical and important for us to have cost accounting -- detailed cost accounting and reporting of that to the community to develop the confidence and trust that the revenue cost-neutral model works and that we would be able to capture all the costs associated with the new gTLD program. It also shows that as the model -- as the ICANN model matures, ICANN should consider opportunities to reduce fees examine the mix of revenue sources. The last one is that the historical contributions to the reserve fund would be recouped and likely to retain full funding of the reserve fund. And I think it also invites the community and staff and board to consider what is one year of operations, to come in with a number of what the reserve fund should be as opposed to describing as "one year of operations." So what's next? As I mentioned and said and hopefully driving home the point that we -- that we're soliciting community input. This is -- we really want to make sure that we get lots of online comments, thoughtful input into that process and all aspects of this -- all aspects of the budget and operating plan, that at the meeting here as well as in Sydney we'll be inviting more comments and suggestions and we've asked for conference calls and scheduled some of them already with the various constituency groups and stakeholders. Moving forward, we'll refine those budget assumptions in terms of confirming the priorities and focus on how can we change our activities and prioritize them to either defer or reduce the costs, if at all possible. Synthesize that community feedback through the ICANN process and come back on this -- per bylaws come back on the 17th of May with a posted draft plan and budget for fiscal year '10. Further community input and feedback at that point and then submit the final plan and budget for final consideration by the board at the board's Sydney meeting in June. Okay. Thank you very much for the presentation. [applause] I would like to note that Jon Nevett gave a standing ovation.