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._:;;,; : , Ash hlm a question... .., and lie Wris BAeNl MEET _LENEE'rl out symbol for L&N's new ~ Data-Spot Direct Inquiry Service. Shippers, using their own Telex, make car tracing mquiries dtrect to L&N computers, receive replies riglil iolbeir own office ... instantly! It's another L&N exclusive to provide better service for our shippers. l !~.-J~/ V, / ~ BFADr !O8 ~f \\._.Jf NMORROW G ASXVI LL RAILRQA_,il~,:~;~ In top form for that business meeting? Let Hilton worry about it. The Perils of Running a Nonprofit eont,,,r,ee clients. And much of the unclassified research that S.R.I. does is clearly solid and useful; some of it is exciting. But the visitor is likely to get a depressing sense that problems of intense concern to millions or hundreds of millions of people are in too many instances being ignored, even though an institute like S.R.I. might be able to contribute_ significantly to their solution. In the field of housing, forr example, one can speculate about the enormous benefits that might flow from a carefully thought-out attack on the rehabilitation of slum dwellings, in which unconventional engineering and architectural teeh- niques could be tried out experimentally, and their effect on the character of a neighborhood observed over a period of time. One can also imagine a research program aimed at t trying out alternatives to the kinds of communities that commercial builders now provide forr elderly people. The difficulty of getting financial support for such programs is no reason for ruling them out. Indeed, it can be argued that the existence of organizations like S.R.I. is justified mainly by the fact that, having no stockholders to worry about, they need not concentrate their efforts on lines of work that yield the highest return. Rather they can, from time to time, perform such extremely useful services as demonstrat- ing the value of a form of research for which little or no fi- nancial support has previously reviously been available. If a not-for- profit institute is to be solvent, most of its work must of course consist of services that can be sold at a modest mark- up, and for which there is a a-ell-established market. But the real measure of an institute's success is the quantity and quality of the work it does that in all likelihood acould not be done at all if profits were the principal aim. END The Negro Middle Class Is Right in the Middle coutirnucdJranpapc180 that white Americans_ are not a homogeneous mass, but also frequently belong to groups with strong ethnic, religious, or - . .--. -. -'- r,o...l~ .in not. howerer, Prpt'ent their k

Y The Perils of Running a N®npr®f it Stanford Research lnstitute was purring happily with a $50-million business until it began to ask what its business really was. by Spencer Klaw In recent years there has,been a rapid growth, both in numbers and' in size, of a curious class of'organizations known as independent, not-for-profit research institutes. Since World War II their number has increased from five to fifteen and their annual revenues from $7 ' million~ to $235 million. Their main stock in trade is eontract' re- search, which they typically stand ready to carry out in a wide variety of fields. The IIT Research Institute of Chicago, for example, which is affiliated with IDinnis Jn- stitute of Technology, lists nineteen major areas in which it is active. They include astro sciences, electromagnetic compatibility, geophysics, medicall engineering, produet' development, and water research. As the adjective "in- dependent" suggests, institutes like IIT Research differ from so-called captive organizations, such as the Rand Corp. and the Institute for Defense Analyses„in that they were not established to work largely or exclusively for a single government agency. Instead, they seek business wherever it is to be found, often pursuing it just as ener- getically as though profits were their goal. The independent research institutes are, in fact, a new kind of quasi business enterprise. In many areas of re- search they compete vigorously with firms like Arthur D. Little, Inc., Nchich~do contract research omwhat they hope is a profit-making basis. They also compete with manage- ment' consultants. (IIT Research has a profit-making subsidiary, Corplan Associates, whose sole business is management consulting.) Moreover, although, the insti~ tutes have no stockholders, and are not allowed to distrib- ute earnings to their employees in the form of bonuses, 158 FORTUNE NvvemDe.1966 they often worry about net income almost as much as their commercial competitors. For most' of the institutes have little or nothing in the way of endowment funds, ' and they can afford to invest in new equipment and build- ings;, and to develop new research programs, only if they can contrive to have some money left over each year after they have paid their operating costs. Yet one of the main purposes for which not-for-profit institutes are founded is to do research that is in the public interest but that, in many cases, would not be done if the researcher's only goal was profit. This is also one of the reasons, of course, why the institutes are generally exempt from paying fed- eral income tax. - In these eircumstances; the director of a research in- stitute is free from some of the pressure to maximize profits,that a corporation president is subjected to. But at' the same time he faces certain difficult problems that busi~ nessmen do not ordinarily have to cope with. Unable to use profitability as its chief guide in choosing between al- ternate courses, how does a research institute decide what kinds of clients it should seek, and what kinds it should shun? On what'rational: basis can the management decide on the fields of researchdn which,the institute should'con- centrate its efforts? What are, or should be, the goals of a research institute, and how cam they best be attained? If making money is not the name of the game, what is? Questions such as these are being explored with spe- cial urgency at this time by the Stanford! Research Insti- tute of Menlo Park, California. In some ways S.R.PL has been the most successful of the not-for-profit institutes. Founded in 1946 as an affiliate of Stanford University, with modest financial backing from a small group of Cali- fornia businessmen, it has grown in twenty years into an organization of more than 3,000' people. Its current activities include mapping the density of electrons in in- terplanetary space, planning a highwayy link between Tan- zania and Zambia, developing a machine to read' visual patterns (e.g., in aerial photographs), helping plan a world's fair to be held in Tokyo in 1970. evaluating U.S. defenses against ballistic missiles, and studying ways of improving racial balance in San Francisco public schools. Over the years S!R.L has carried out thousands of projects such as these for most major federal agencies, the governments of some fifty foreign countries, and hun- dreds of business firms in the U.S. and abroadi Its indus- trial clientele has included more than half of the hundred largest U.S: corporations, and S.R.I. engineers were re- sponsible for developing, among other things, the first praetical~ system for electromechanical processing of bank checks. S:R'.I.'s receipts fromicontract research are now running at a rate of' $55 million a year, which is about $20 million more than Arthur D. Little, Inc., the oldest and biggest of the profit-making research organizations, will gross this year. For a time, S.R.I. al5o did! more business than any of its not-for-profit competitors, the biggest' of which is the Battelle Memorial Institute of' Columbus, Ohio. Last year, however, Battelle doubled its $40-million annual gross by taking o.•er the management' and opera- tion of the A~tomic Energy Commission's research facili- ties at Hanford, Washington. Executives of S.R.I. now

f r Q Some Glimpses of the S.R.I. Scene Left: With government support, S.R.I. Is studying how, sea lions use sonar to navigate and find foodi. The spheri¢al object is a hydrophone encased in pias- tic„ in which sea-Iion whiskers have been~embedded' Righh. The blurriest of the three objectsftying through the air is a metal holder containing x-ray film, used~~by~S.R.I. to study what~, happens in explosions. Below:. CandyLinvillJ who is blind, triesas device that trans, lates print into vibrations that can be "read"'by touch. It was developed byherifather,.Stanford Professor John Linvill (left), and James Bliss of S.R.I. (right). ,- -- - `; _ ..- ~i' ~-" r 'c ~Y'1Z111) t; a,. L . Above: Th'iss cannon-like device is a lidar,, orr laser radar, built at S.R.I. forr atmospheric studies. It can, detect~ invisible atmospheric discontinuities, such as so-called sea~breeze fronts. Left: Thee tinyy oylinde:ron the man's wrist is a transducer, de- velbped for NASA, that gives a continuous and virtual ly errorless reading of the arterial blood pres- sure of astronauts. Right: S.R.I.'s. Acania: a.127-foot converted yacht crammed with electronic gear, is used mainlryy to study ' radio+wave phenomena.. 1 t a rr , EI,ILL f'pol ~~ 7~1T`['IT17^~f'Yyl_.~~,.-~ ..jl.. ~ FORTUNE Nnrembes 1966 159 1000311098

r A Delicate Exercise ln Collaboration The new duumvirate at the Stanford Re- search Institute consists of a businessman and a scientist, Ernest Arbuckle (far left) is a former executive of W. R, Grace & Co. who has been dean of Stanford University's Graduate School of Business for the past eight years. Karl Folkers.isa chemist andindustrialiresearch administrator whosesci- entifice aehievements have included the isola- tion of vitamin B-12. Folkers was hired from Merck to be presidentofS.R:It in 1963, and was given,a.fairly free hand to run the institute as he saw fit But, like many scientists, he is better at dealing with things.than with people, and last spring the institute'sdireetors elected. Arbuckle as their ctiairman„and authorized him to take a direct hand in the management of: S.R:I.'sa8airs. Arbuckle hasbeens less concerned,, however,, with . day-to-day operations of the institutee than with conducting (with Fol+ kers' cooperation) a research project of his own-a study, long overdue, of how S.R:I. shouldbe.managed, and what! kind5 of re- searchh it should emphasize. . describe their institute as "one of the two largest organi- zations of' its kind in the world." Yet despite S.R.I.'s rapid growth and blue-chip clien• tele, some members of its board of directors, a body that includes such well-known businessmen as Edgar Kaiser, Frank Stanton of C.B.S., and Monroe Spaght, managing director of Royal Dutch/Shell, have had serious reserva- tions in recent' years about the way things were going at the institute. Last winter many directors concluded that what S.R.I. needed was a new chief executive to replace KarI1 Folkers, a distinguished chemist whom the board had brought in as president only three years before. Among the counts against Folkers was the fact that he had antagonized some important people at Stanford Uni- versity; a matter of some importance since the univer- sity's trustees elect S.R.I.'s directors an& are ultimately responsible for its policies. In the end, Folkers kept his job, but only after agreeing to share its responsibilities, at least for the time being,.vith the dean,of the Graduate School of Business at Stanfordl Ernest Arbuckle. In April, Arbuckle was elected chairman of the board of' S.R.I.-a job pneviously held ex officio by Stanford's President Wallace Sterling-with the understanding that for the next eighteemmonths to tivo years he would give half his time to the institute's affairs. It struck Arbuckle that while S.R,I'. was clearly in need of strong leadership, it would never be really well managed until the board had agreed on what it should be managed for. According- ly, in cooperation with Folkers and other members, of S.R.L's management, he began a careful study, which he hopes to finish early next year, of the questions about S.R.I. that' have been kicked around at board meetings for so many years. The most important task he has set him- self is to explore the potentialities of research institutes, and to arrive at a set! of' standards to guide the future development of S.R.L "There's no point' in just being, a great big institute with, a growth of' 10, to 15 percent a year," he said recently. "Volume is not the point. We need to develop more precise criteria for selecting or rejecting projects. S.R.L should! have a cohesion, a character that is distinctive. The main purpose of the study we are under- taking is to find out what this should be." A slow start in an Army hospital. . The purposes of S.R.h seemed; clear enough in 1946. Like a number of other not-for-profit institutes, it was founded to promote economic development in its regiom This was certainly the idea of Atholl McBean, a wealthy California busincssmon n-ho: became convinced after World War II that California would benefit greatly by having a research institute that coul& give technological help to existing local industi•y, and at the same time seek out and point up opportunities that would attract new in- dustry to the state. >tlcBBan thought such an institute shoul&be sponsored by a university. This would make it easier, he believed, to bring in faculty members as con- sultants, and would give the new institute the advantage of starting out' in business underr an established name. \IcBean broached his idea to Cal Tech and to the Uni- versity of California, and n'henneither showed any inter- est he t'uurned'to Stanford. As it happened, Stanford was, looking,around for ways of emerging from its traditional genteel seclusion, and was already thinking about setting up an institute of applied research. From Stanford's point of view, this seemed likely to have two main advantages. It would provide faculty members with interesting con- sulting jobs. And it would strengthen Stanford's ties to the business community by making people and! facilities available, under Stanford auspices, for the solution of problems whose scientific or educational interest was too ~ 160 FORTUNE. Ndvembee I956.

I slight t'o warrant their being tackled in the university's own laboratories. And so when :llcBean said he was pre- pared to raise $100,000 to start such an institute, Stan- ford was happy to accept his offer. Offices and laboratories were established~ im a small wooden building„about two miles from the Stanford cam- pus, that had been, the headquarters ofl a wartime Armyy hospital. But few clients showed up, and'.at the end of the first year the institute was running out of' working cap- ital. If it was to survive, it clearly needed someone at its head who knew how to go: out and, get contract's. In~ the spring of 1948, therefore, the board hired a new execu- tive director. He was an electrical engineer named Jesse Hobson, who for the past four years had been running the Armour Research Foundation, as the IIT Research, Insti- tute was then called. Hobson was confident that he could put S.R.IL in the black within two or three years, but argued persuasivelyy that if he was,t'o do soa a lot more money would have to be invested in S.B•IL thanibtcBean andithe Stanford trustees ha& thought' would be required. Stanford:agreed to ad- vance the instit'ute $500,000, and when this money ran out in less than a year an additional $G00;000 was bor- rowed from, a group of San Francisco, banks: Part of the money was used for promotion. The institute hired a New. York public-relations counsely, Edward Pendray, stepped up its output of reports and brochures, and began to spon- sor conferences and symposia on subjects,in,which there was growing public interest-e.g., smog,controUand auto- mation. Hobson also invested heavily in people, hiring ex- perienced scientists, engineers, and economists who he thought'~ had the entrepreneuriall drive to bring in new business of their own. Prayer meetings with, the master salesman Hobson himself spent much of his time on the road telling prospective clients what S.R.I. could do for them, and when he was in \Ien1b Park he periodically called his associates together for what some of! them called "Hob- son's prayer meetings'"andiexhorted them to do likewise. "Hobson was a master salesman," Weldon Gibson, the executive vice president of S.R.I. (and one of its first employees), recalle& recently. "He put a wave of energy into the institute that has never been equaled. When peo- ple woal•d'tiring intheii• plans for the coming year, Hob- son was likely to say, 'That's wonderful, but you ought to be doing twice as much.' He wanted leaders here, and if they were not leaders, they dropped out of'the picthire. We had to have people with both promotional and research ability. We were looking, for people who could conceive, write up, sell, and execute a project." By the middle of 1950, , as Hobson had predicted, the institute was breaking even, and new business was pour- ing in. Hobson had foreseen, that many companies would need help if they were to take advantage of their oppor- tunities in the developing field of electronics, and soon aft'er his arrival in Menlo Park he had begun to hire people qualifiedit'o give such help. By 1952, government and indust'ry were spending more than a million dollars a year t'o support electronics research in S,R.I. labs. S.R.I. was also one of! the first research institutes to emphasize what came to be known as techno-economic st'udies-research done jointly by economists and scientist's or engineers to~ determine, for example, the feasibility of a projected pipe- line, or what impactcertainitechnolbgical development's are likely to have oma particular industry. AlthoughiS:R.I.'s literature carried for many years the slogan "The Research Center for the West," Hobson saw no reason why S.R.I. shouldn't carry out t'echno-economic studies anywhere in the world. In 1951 the institute undertook, for the Italian Government, an economic studyy of Italy's heavy-machin, ery manufacturers, and within the next five years it carried out projeet's in~twenty-one other countries. Wlarket' research for a gambler Hobson's health was not good, and at, the end of 1955, a year in whichiS.R.I.'s revenues exceeded $10 million, he resigned! (He is now an educational consultant in New York.) To succeed Hobson, the board picked, Finley Car- ter, a former Sylvania: executive, and under his manage- ment the institute continued to,grow rapidly. But as revenues rose, many members of' the board com- plained that the institute seemed to have lost sight of the purposes for which it was founded- They were particular- ly bothered! by the fact that so much of S.R.I.'s effort was going into government projects. Again and! again, board members pointed out to Carter that S.R.I. had been,estab• lishe& to serve industry, not to become an appendage of the federal government. Nevertheless, the proportion of S.R.I.'s revenues derived from government contracts (in- cluding subcontracts) rose from 50 percent'~ in 1955 to 75 percent in 1960, and! Carter seemed unable or unwilling toxeverse the trend; To many directors, the institute ap- peared to be expanding for expansion's sake, and becom- ing in the process a kindi of service station, ready to take on any job, however routine it might be, or however tenu- ously related to serving the public welfare. Their suspi- cions could not'have been allayed by the disclosure; in a Harper's article published' in 1962, that S,R.L had re- ceived $16,000 from a.vell-known professional gambler. william~ Harrah, who had commissioned! a study of Cali- fornia bus riders in the hope it would help himdraw big- ger crowds tohis casinos at Lake Tahoe. It was agreed that what the instit'ute needed was a new and more forceful chief executive, one who would be able to jack up ~ its scientific standards and at the same time eontinued'page 212 S.R.IJ's chief promoter was Atholl SlcBean, a clay-prod'ucts manufac- turer (Gladding, JlcBean. & Co.)', and land developer(lewhall Land & Farming Co.)'„ and an influential director of Standar& Oil of Cali- fornia. A leading mover~ and shak- er in the San Ftancisdo business. communityfor more than fifty years, he iss now eighty-seven and livingg in semi-retirement.. But hee has reniained in close touch with S.R.I.',s affairs, and in lastwinter'st hassle over themanagement.of thee institute he was instrumental in liningup~ support for President Karl Fulkers.. 1000311100 FORTUNE Novamber.1966 161 I

The Perils of Running a Nonprofit ra+linnedJrom paye 161 . which cone has the candy? The one on, his righ't, His other fist holds G-B fiber glass. It not only looks like cotton candy but is even made in a like manner.. By'a "centnfugal" process. Gustin- Bacon spins glass fibers from molten glass much' as candy threads are whirled out of melting sugar. But there the similarity ends, for cotton candy is but a fragile con- fection. G-B fiber glass serves as durable insulation,in houses, mobile h'omes„appliances, etc. From the. "centrifugal" process and others. Gustin-Bacon makes a variety of fiberglass products. Some insulate against heat and cold, others, reinforce plastics, beautify. ceilings, absorb sound, convey,ain and even control erosion!! Gustin-Bacon also manufactures organic fiber paddings for autos, bedding and carpets;,couplings and fittings for pipe systems; safety, brakes for trucks, and mechanical accessory items, for the railroads. You'll find our offices in major cities, our catalogs in Sweet's files and~our distributors,nationwide. We welcome your inquiry. ~ GUSTIN'-BACON ~l~' ManufactttTing Co. v. di,-i.inn ol C. rtwn.r. rJ fr.>J~rr. C. ~.o. P. 0. Box131C6-T- Kansas City, M1fo.. First fiber glass insulation made especially for mobile homesG-B MOBILITE'Mbbdutemak'esmoboe homes's mor2 com- torta0le Itprovdes tulll protect~on aga,nsti heaC eold. and. mo,stune con4ensat ,on. won't, sag or setll'e wnen~the mobilie home is mo,ed o,er the road. It's madee ol 11berglass,.so .1 can't rot or corro0e.Mobrlile comesin convenient wrQths, rotls out belween studs and structurali membees fast. Sarves production time wtrdee g,Wmg perma- nent protection. 212 FORIUNENcrember 1%6 find ways in which it could better serve indhstry. Folkerq, who took office in 1963, seemed well qualified for the job. A former president of the Americani Chemical Society, he had for many years been in charge of fundamental research at'' Merek. But his experience had' not prepared him to navi- gate the treacherous waters in whioh, he soon found himself. The immediate cause of Folkers' difficulties was a series of misunderstandings and disagreements about fund raising. Under Hobson, S.R.I. had begun to solicit eontributionssys- tematically, and' in relatively small amounts, from both in- dividuals and eorporations. Since 1950, S.R.I. has raised more than $3 million in this way, most of which has been put into buildings and equipment. Uhtil a few years ago this program~met with no objections from Stanford University. But in time Stanford's fund raisers began to look on S.R.I. as a serious rival. In 1961, when the university launched a$10U-rmllion fund drive, the institute undertook not, only to make a sizable contribution, but also to refrain from putting the bite on potential donors from whom Stanford hoped to get contributions. However, to the annoyance of! President Sterling;and of the Stanford trustees, after Folkers took office he persuaded the S.R-I. board to discontinue the annual gifts the institute had been making to Stanford. He also began talking with McBean, and with other businessmen, interested im the iitst'itute„ about raising an endowment fund that would enable S.R.I. to do more self-sponsored research. That annoyed Sterling and the trustees even more, and precipitated the decision by the S.R.I. boardl that installed Arbuckle at the institute as a kind of viceroy. Sponsoring~ unsponsored research Self-sponsored research, is still a live issue at S.R.I-, however, and one of the questions Arbuckle is considering is how S.R.I. can contrive to do more of it,without putting on a ftuid'drive. Some of' the research that S.R.1. and other not-for-profit institutes do on their own hook is quite basic. The 154 projects that S:R'.I, is sponsoring this year include, for ex- ample, studies of antiviral substances found in milk and of certaim quantitative relations between molecular structure and chemical reactivitv. Organizations like S.R.I. have several reasons for supporting work of this kind. One reason is to attract scientists who are willing to devote their talents to solving practical problems for clients only if they are free from time to time to tackle problems of their own choice that are of more scientific than practical interest. Another reason is that in a research organization in which no "pure" research is being done, people may lose touch with what is going on at the ft-ontiers of science. Most of the research~ that not-for-profit institutes carry out on their own is not basic;, however, but exploratory. It usually has specific praetical ends in vietc, and is undertaken in the hope ofconvinciiig an outside sponsor that a particular line of research is tnolrth supportiiig. Some of the most signifi- cant contributions madebyreseareh institutes-the devel- opment of magnetic recording by the Armour Research Foun- dation, foil instance, and of xerogl'aphic printing by Battelle -have resulted from research of this kind. S.R>I. is spending about $1 million this year on self.spon- sored research. Onl~• a fraction of this sum„ however, is S.R.L's own money in the sense that S.R.I. can use it for ron f in t<ed page 21'b

f The Perils of Running a Nonprofit coutim(ed any purpose it chooses. Research institutes work on a, cost- plus-fixed-fee basis, and when they work for the governmentt they are generally permitted to include in their reimbursable overhead costs a part of what' they spend on so-called inde- pendent R. and ID; The exact amount an institute may charge off in this way is determined by negotiation; S.R.I. is cur- rently being reimbursed by «ashingtonifor two out of every three dollars itlays out for self-sponsored research. Under present government' policies, S.R.I. could continue to recover a major part of the cost of its self-sponsored': re- search even if it were to increase its spending for that pur- pose from 2 percent of its gross revenue, as at present, to 3 percent. But Arbuckle is inclined to think that even 3'pet= cent is not! nearly enough, and Folkers has said he would like to raise the figure as soon as possible to 5 percent and eventtr- ally to 8 or even.l0 percent. Ifi this were to be done, most of the extra money would'probably have to come out of S:R.I.'s own ~ pocket. The narrow not-for-profit margin _ At the momenU there is not much money in ithis pockeA To be sure, government agencies usually allow tax-exempt or- ganizations a fixed fee amounting to 6 to 7 percent of the costs of fulfilling a contract, and S.R.I. generally charges industrial clients 10 to 15,percent. But S.R.Us net earnings are much;smaller than these figures would suggest. One rea- son is that' some of its work is supported by government grants-in-aidiwhich cover only the direct costs of a project plus a small fractiom ofl the overhead costs. Other work is done for agencies that do not, as a matter of policy, pay any part of the cost of self-sponsored research, Even, under so- called full-overhead-reeovery contracts, the government does not reimburse contractors for interest payments, entertain- ment„and certain other expenses. Finally, S.R.L pays federal income taxes on a portion of its earnings. It has been doing so only since 1961„tchen there was a change in the regulations that govern tax exemption for organizations doing scientific researeh, The netv regulations clearly exempt from taxes the income that not-for-profit institutes derive from work done for the government and for certain other clients. But they are less : clear about income derived from~ proprietary research-that is, from research, done confidentially for a corporation hoping to profit by the results. A number of institutes, including,Batt'elle, take the position that because such research speeds up the int6•oduc- tioniof new produets and processes it is in the public interests and thus meets one of the criteria for exemption included in the new regulations. As a consequence, they do not pay taxes oniearnings from proprietary research. S.R.I., however, be- lieves such earnings are taxable, and will therefore pay some $600;000 in taxes to the government this year. For these and other reasons, &R.L's earnings have been slim, and Folkers and the boar& have felt it necessary to invest them almost exclusively in equipment, facilities, and working capital. Butthis may not be necessary in the future. As a result of tighter fiscal controls established at Folkers' direction, earnings rose from 3.2'percent of' gross in 1963 to 4.4 percent in 1965. This figure could be increased to more than.5 percent' if S.R'.I. were to accept fewer grants•in-aidi and fewer government contracts thati do not provide for full recovery of overhead costs. Members of the institute's board have also suggested 214 FORTUNE Nd-bar t95W that S.R.I. could~ greatly improve its earnings by going out and getting more nongovernment business. This notion iss based on the fact that'~ S.R.I. charges somewhat more for overhead when it' w•orks for industry and that the fees it gets are bigger even after allowing for taxes.. These advantages are largely offset by the fact that, in generaly it costs more to get industrial business. Partly this is because contt•act's tend to be of shorter dtrration~ and for smaller amounts than government contracts; and partly because corporations take more persuading than government agencies do before they tvill' risk money on research. As a result of improvements in reporting procedures at S.R.I., it has become clear that the net ret'urn after taxes on re- search for industry is only one or two percentage points high- er than the return on research that S.R.I. does for the government under contracts providing for full overhead recovery. There are other ways besides improving operating margins by which more money might be made available for self- sponsored research~at S.R.I. Arbuckle and Folkers are ex- ploring, the possibility of raising money by developing patentable devices and processes, and licensing their use for royalties. This has been done successfully by other institutes, notably by Battelle, which has realized a return of $90 million eontvttud page 213 The Independent Not-for-Profit Institutes Utdrersify R. & D. Z'ofumc Name - affiliation 1966 est. Battelle alemorial Institute Columbus, Ohio ......................... None......... $90,000,000 Stanford Research'.Institute . Menlo Park, Calif. ................,.....Stanford'........ 55,000,000 IIT Research Institute Illinois Institute. Chicago .......................... of Technology ..... 26~000,000 Cornell i Aeronautical! Laboratory Buffalo ............................. Cornell........ . 25;000;000 South'a•est Research Institute San :lntonio............................None......... 11,000;000 Mellon Institute Pittsburgh............................ None'........ 6,500,000 Franklin Institute~Research Labs~ PhiVadeVphia..._ ...................... .None:........ 6,000,000 Midwest Research ~ Institute _ Kansas City, \fo :..................... None ......... 6,000,000 Southern Research Institute Birmingham, afa .................... ..None......... 5,000,000 Research Tri~angleInstitute Duke, North~ Carolina, Durham, N.C ........... ......... ..North Carolina Stat.e.. 4,250,000 Spindletop Research Lexington, Ky ......................... .None......... . 2,000;000 Gulf South Researcfi~Institute Baton~Rouge .......................... ........None......... ...~ 800,000~~ Mississippi R. and D. Center Jackson .... ........................_..hfississippi'....... .. 750,000~ \orth Star R.,and D. Institute ilfinneap,olis~ ....... ......... .......... .blinnesota....... .. 650,000 University City Research InstitutePennsylvania, Philadelphia ......................Temple, others..... 500,000 ' llellon l trst it rde. is srhed+ded~ to ~be merged in 1967, uith Corneqie Teeh. This~list.inclodesonly, those.not-for-profit research organizations.that w'ere~founded to do work for a wide variety~of sponsors, and does not indude thosee~stablished since~World Nar.Il to:do research for a~~parv ticular goN ~ernn:env ageney-i.e., the.UlS: Air Force..Some ofithe latterl however,.such a:sthe~RandCorp- and System Development Corp:, have begun to do murk fcr a number of government, agencies and.even fur such nwngovernmental tlientsasfoundations and municipalities, and are:coming~.mure nea.rl}•to resemble the independent institutes.

The Perils of Running a Nonprofit coi<<inued , L J Says Joseph S. Armstrong, president' and general man• ager of Krafcor Corporation, one of the nation's largestt suppliers of raw materials to the independent corrugated paperboard box manufacturers. . •"Krafcor can serve a six state area in the Southwest from our central location„usingour own fleet of trucks over an~excel- lent highway system." •°. . . everything needed for spectacular success ... including room for additional expansion, which seems inevitable." •"Adynamic spirit aimed at achieving progress through'.unity -to help new firms get established-establish'ed firms ex-- pana,. We would like for you to know more about Waco ... Write mm ` ~ IIJDUSTPIAL DEPARTNEIJT L o WACO CHAMBER'.OF COMMERCE P.O.. BOX 1220 WACOs TEXAS 76703' AREA CODE 817 PLaza 2-6551 CONSULTING ENGINEERS SERVING BUSINESS o INDUSTRY o GOVERNMENT Investigations, Consultations, Reports, Design, Construction Supervision J. E. SIRRIN1E COMPANY GREENVILLE, SOUTH CAROLINA I Established~ 1902 ~ 218 FORTUNE Novemiber.I966 in cash and Xerox stock on the $500,000! that it invested in the development for xerography. Institutes like S.R.I. could also afford to sponsor nlore research ofl their own if they put~ less money into buildings. This point was, recently made by Paul W. Cherington, a Harvard Business School professor who was one of the founders of United Rt:searchy,and who is still associated with the company as a consultant. "In theory," he observed,. ."the nonprofit's should be able to: take the money they save on taxes and plow it back into research and clobber us. But I get the impression they put the money into brick and mortar instead." Cherington added'sardonically, "Once these nonprofits call in the interior decorators to redo the presi- dents office, we don't worry about' them so much." Folkers' office is not exceptionally big or eleganG. But. S.R.L has recently been spending well over a million dollars a year on land and buildings, and a master: plan, approved by the S.R.I. board before Arbuckle took office as its chairman, envisages the const'ruction by 1985 ot$30 million worth of new buildings. If S:R'.I. is to compete successfully with~ industry for the services of scientists and engineers, it must be able to offer a reasonably attractive environment. Arbuckle has said, however, that the masterplan~will be re-examined. "We should be providing the facilities we need at the lowest pos- sible cost," he remarked not' long ago. "And before we do any more building, we're going to take a close look at the possibility of leasing the space we need." How to help industry Even though doing proprietary research may not be so profitable as some of S:R:I.'s directors have assumed, the board has nevertheless made it plain toArbucklhthatitwould like S.R.I. to make itself more useful to industry. One way, might be for the institute, when and if more money is avail- able for self:sponsored research, to support a lot more explor- atory work on processes or devices that have commercial pos- sibilities. Another'way might be to organize more programs of industrial research to be carried out under multiple spon- sorship. S.R.I. does a good deal of paper-and-pencil research under sponsorship of this kind, and it has recently organized a major program that will bring to bear on certain, probiems in the field of housing the resources of both the social~ and the engineering sciences: One of the program's aims is to test oit, by constructing clusters of experimental housing units, the notioiuthat houses might profitably be built,out of discrete units that could be traded in for replacements when they wore out' or became obsolete. The program tc-ill also include experiments with ne«- methods of financing homeownership. So far„twent3• companies have agreed to put up $50,000 each to finance this program. Yet no matter how resourceful the instit'ute becomes in I thinking up ways to serve industry, the government will no doubt continue to be its prineipal client, if for no other reasoni than because the government'.sponsors sa lmuch mone research. I than industry does. ActUally; one of the most important ~ services an institute likeS.R,I. can performistohelpindustry ' i make use of technological advances arising out of research that the government has sponsored. To do this efiectively, ( it should, be deeply engaged in governmentsponsored sponsored work, preferabl}• of' an advanced kind. In many fields iir which S.R.I. does some work for industry-in microwave and high- I temperature technology, fon example-it has acquired thee ton/inued page 22!

The Perils of y Running a Nonprofit caRanued necessary equipment and capabilities only because it has had long-term government support in these fields. 'Moreover; the government is often readier than industry to support the fundamental research that may have to be done before new scientific knowledge can be translated into new prod= ucts and processes. "Commercial clients are skeptics," a pro: gram director atS.R:L points out. "It's the government that gives us our risk money." -, "Why aren't your people sold?" Another problem to which Arbuckle and Folkers have been giving a lot of thought is how to control'an organization like S.R.I. In the early years it was run with a fairly strong, .hand by Hobson, who not only had definite ideas about what the institute should and'shouldn't do, but who knew how to get them acceptedi But Hobson's departure inaugurated an era of permissive management. The entrepreneurial scien- tists and engineers he had hired went on pursuing new business wherever it was to be found, and although his ` uceessor, Finley Carter,, could have vetoed research pro- posals that he considered unsuitable, he rarely exercised this power. Program directors were judged less by the quality of their programs than by the number of their people whose time was being charged to clients, as against those who were "on the beach"-i.e., being carried on overhead. "The ques- tion that is most often asked around' here is;,'Why aren't your peoplesold?' " Nlarjorie Evans, a physical chemist' who administers the work of two large research groups, observed last' winter. "The scientist is top dog at the institute- provided he keeps himself supported. If, he does, he can write his own ticket." Within the past year„however, some steps have beenitaken to change this situation. Directors of research in eaeh, of the major areas in, which S:R'.PL operates are now responsible not only for seeing to it that a specified'pereentage of their people's time is sold, but also for making a specified'contri« bution to the institute's earnings. In general, the contribu- tions have been set at a high enough level to discourage an Area director from accepting grants-in-aid or government contracts that do not fully cover overhead costs, and to encourage him to get more work from industry. By improving S:R'.I.'s earnings;,these measures will make it easier for the management to shape the institute's charac- ter and guide its development. Earnings can provide the means for developing: capabilities and starting actual' re- search programs in field§ that', it' seems desirable for the institute to enter. But there remains the difficult job of deciding what kinds of research are desirable and what kinds are not. A rule that Arbuckle and many people at S.R.I.,would be inclined to fol- low would be to avoid whenever possible doing,jobs that can~ easily and efficiently be done by someone else. Techno- economic research is a case in point. S.R.I. played a big part, during the 1950's, in demonstrating the value of such re- search. Partly as a result, techno-economic research is now offered as a service to clients by a great many management consultants, engineering firms, and profit-making research organizations. This is not' to suggest that S,R.I. should get out of the field entirely. Because of' its size, and the range of its activities, it has certain capabilities that few of its competitors can match.lforeover, nb organization that must support itself by doing contract research can afford the continued page 222 EvIllaybe vRU sh®uld tiaQCs to hAm! His looks don't matter, neither does his name. What really counts, is his job: Because this man is a Merrill Lynch account executive. A man who really knows something about stocks and bonds . . . who likes to talk about them with anynno -ho asks . . . who has provided invest- ment guidance for people with a wide variety of problems but'a com- mon confidence in his judgment and his conscientious desire to help. He's one man who never makes you feelithat you'te wasting his time-or tha6you have to buyanything, either. Maybe he s the man you've always wanted to meet-the one to talk to about your own situation. Maybe you'd like to ask him just a few gen- eral questions about investing ... 11J Maybe you want some sound advice on how to invest in securities with good potential for future growth, Maybe you want'a seasoned opinion on some particular stock, current facts on a certain company ... Ur maybe you'd like to arrange for a thorough analysis of all the stocks you own. In any event, just ask. Because helping you is an account executive's job. He gets paid on the basis of how well he performs his job over-all and doesn't have to selli a thing to any particular investor. There's no charge of any kind for his services either6 except when you actually buy or sell. If' you'd like to meet him face to face, he's always here •waiting to help you in any way that he can. MERRILL LYNCHs PIERCE ~~--~ ~ W-J FENNER & SMITH INC MEVBERS N. Y. STOCK EXCHANGE ANDOTHER PRINCIPAL S70CK ANOiCOMMODITY EXCHANGES 70PINE STREET, NEW.YORK N:Ya0005 FOtiTUNENovennAer. 7%6nt -7 . . _ . . ..,~ :' _'. . _ -...

i I J ~ ' L_~_L.__ A funny thing happens in NORTHERN IRELAND In rather short order most U. S. companies expand their operations ! Take Du Pont for example:, , First a neoprene planr: then one fon istxyanates; nomr nco more in Novthern Ireland'for Orlon and L}'cra; ~ Ch'emstrand (5fonsanto) too builntheioAcrilan plant in \orthern ]tdand to produce 10,000000 0 pounds per year. Three expansions later, thep're up.toalmost 60;000;000; Not to forget Hughes Tooll cho've completed'several expansion . programs: Added a Heat Treat Shop. And~a forge.Shop. And; the ot6ers-I'PT, Ford Autolite IDiv:,, Bridgeport Brass, Bauschand Lomb; Berkshire knitting. Generous Gosernment assistance permitss industryy too loca.te in Northernlreland; .a~ilJt>niiriinurncask'outlay:. Cash, non-returnablegrants up to 95°0. on cost oE plant, mactiinery andlequipment; .\fodern netv plants renting for Z to 3 cents/sq. ft./montht . Labor training grants-and'more. For a copy of ourbrochure. "Proditce in Northern Ireland ......Sell thcWorld Oser",.scrite.or phone Mr. ]ohn T: B. Quan on Dfr. George \fcLaren, British Inditstrial Deselopimenr Officer 395 "-Tliird Ave...\ewYork;.\:Y: !00??. (?1Y).PLaza ?-3i00: UNITED KINGDOM o! Greaf Br/lain arvu NORTHERN IRiLAND 222 FORTUN(: November5966 The Perils of Running a Nonprofit ronlt,ttted luxury of working, exclusively on noveli and interesting problems. But it makes little sense for an organization like S.R.I. to employ large numbers of people to make studies, using widely kno«Tt techniques, of such questions as whether Boston can support a new sports stadium, or whether a hard top stiould' be put on the A1can Hightivay. The point is not that S.R.L has an unfair edge over its commercial com- petitors. Clients do not buy research on the basis of its price, and the slight advantage that S.R.I. enjoys, when bidding for a job on which: it will not have to pay income t'axes; rarely if ever eounts significantly. The point is, rather, that taking on too much routfine research may make it hard for an institute to hire people capable of doing anything else. People of reali ability do not go to work at' research institutes because of the money they can make there; apart from a few administ'ratols, only about a hundred of the 1,500 professionals on the staH of S.R.I. earn more than $20;000 a-year. What an institut'e like S.R.IL cart offer ann imaginative and' resourceful engineer or scientist or econo- mist' is the chance to work on more varied and challenging problems than he would be likely to encounter in a regular job in industry: If he is denied this,chance, he is likely to eonclude he would be happier somewhere else. It is easier to deeide what an institute like S.R.I. should avoid doing than to deoide what it should coneentrate on. One role for which S.R.Ii would seem excellently suited is that of idenGifying areas in «-hich difficult and w'gent prob- lems of a practical kind are beginning to take shape, and experiment'ing with ways in which such problems might most effectively be tackled. This requires a sensitiirity to change and a feel fa• the futtu•e-both of which were among Hobson's chief assets when he was Ivnning the institute. It also requires arnangements whereby finst-rate men can de velop, on institute time; strategies for attacking problen>; whoae dimensions are only dimly visible as yet to people who will soon be ciamoring for their solution. This, takes money, of course: Bttt if S.P..I. were to spend $500;000 a year less on new buildings, it could afford to pay a dozen men $20,000 to $25,000 a year simply to think ahead. It would'also seem reasonable for S.R.I. to put' more em- phasis on interdisciplinaty research, which is far easier to cat-ay out at a research institute than at a university, where collaboration between people in diffe•ent departments is difficult t'o arrange. S.R.I. ah'eady does a fair amount of interdisciplinary n-ork. Its housing-research progrlm, for in- stance, is being earried out; by a team that includes an archi- tect, an indhstrial designer, a chemical engineer, and a psyehologist„ and' is headed' by a civil engineer with an 1'I.B!A. frOm Harvard. To: date; fruitful' interdisciplinary «,ork has non been so common at S:R'.I. as its literature mightt suggest. "1Ce must iinprove the mechanisms whereby people can~bebrought in from other divisions to work on a prob- lem;" .lrbuckle says. "1j'e must not only encourage,, but reallydemand; interdisciplinarywotk."' " Upgrading the product line F inall -, iir deciding whether to take on a project or start; up a program, S.R.I. could «elllplace more stress on social utilit' than it has in the past'. \'Iuch of the classified wrork that S;R.L dbes in fields sueh as theevaluatio» ofl defense systems is highly valued by the institute's government' 4', corrt flured' pape 24 ~ C C C