The Problem

How can a university allocate its resources, and especially its unrestricted funds, to best serve the academic mission while ensuring financial sustainability?

Academic and financial officers find resource allocation difficult and time consuming because universities are extremely complex and highly decentralized organizations, which are driven by mission-based values rather than a financial bottom line. To make matters worse, budget-makers often lack comprehensive information about how budgeted activities affect outcomes, costs, and revenues. College and university computers are awash in data, but problems of accessibility and interpretability prevent decision-makers from gaining the information they need for effective resource allocation.

Yet, despite these difficulties, budgeting and financial planning must be performed every year. The cumulative effects of these processes do much to determine the institution’s long-term performance.

The Solution

A Decision Support Model (DSM) that enables provosts, CFOs, deans, department chairs, and their staffs to gain information about the effects of proposed actions on teaching, research, and financial sustainability.

An effective DSM for budgeting and financial planning will:

• Model the structural relations among budget allocations and restricted fund usage, academic and other activities, costs, revenues, and margins.
• Encompass the whole university, from top-level decisions to those for individual courses, departments, and degree programs, in a seamless fashion.
• Allow decision-makers at all levels to envision the university holistically, drill down to get detailed data, and test the consequences of “what-if” scenarios.

The Higher Education Decision Support Model (HEDSM)

Pilbara Group is configuring its enhanced activity-based costing model to provide direct decision support for university budgeting and financial planning. Some of the 14 institutions that employ the original model to analyze historical revenues, costs, and margins already have extended their usage to include resource allocation. The new configuration will add functionality to make such applications more powerful and user friendly. The resulting tool is unique in its ability to support budget and financial planning decisions.

The HEDSM is designed to provide:

• Enhanced Activity Based Costing (ABC) reports on teaching activities at the course level, driven by the university’s timetabling and student registration systems, which are supplemented by a comprehensive system of business rules and overhead allocations for all organizational levels.
• Detailed data about the costs, revenues, margins and (importantly) activity and outcome-related variables like class sizes, teaching loads, adjunct faculty usage, and student performance and attrition when these are captured by the university’s systems.
• Historical views of past performance, plus the ability to test alternative assumptions about future financial planning and budgeting decisions, based on forecasts of externally-determined factors like enrollment, government support, etc.
• User-friendly dashboards that display both the historical and forecast data, as well as functionality that allows staff to examine the underlying data and relationships in as much detail as desired.

Using HEDSM to Support Budgeting and Financial Planning

The HEDSM can support all four of the following processes, which are required for university planning and budgeting. Using a single model across all the processes provides data consistency, seamless shifting among types of decisions, issues, and operating units, and complete flexibility in the production of reports.

1. Prepare a baseline financial forecast to project the consequences of current strategies and policies in light of expected changes in external conditions.

Based on three- to five-year forecasts of enrollment and other revenue drivers, plus cost-rise factors  (e.g. inflation and salary increases), and assuming no material change in university strategies or tuition and other policies. The HEDSM can produce multiyear estimates of revenues, costs, margins (both direct and loaded with overheads), and key activity variables for operating units, degree programs, and university as a whole.  Performed by the central administration (the Provost, CFO, and their staffs).

2. Test alternative strategies and policies for improving academic performance and financial sustainability.

Make “what-if” adjustments (to the baseline forecast) for the effects of potential strategic initiatives: e.g., program expansion or contraction (and in extreme cases program or campus closures), efforts to penetrate new markets, and significant changes in tuition or academic staffing policies. The HEDSM can produce the same estimates as above for each scenario considered.  Performed by the central administration, usually in close consultation with the deans.

3. Finalize the budget by approving or rejecting specific general funds allocation requests, based on mission considerations, projected costs or margins, expected restricted fund usage, and an unrestricted spending limit derived from the chosen strategy scenario.

For each school or department (depending upon the university’s style of budgeting), the HEDSM can evaluate the effects of each proposed budget increment or reduction in terms of effect on margin and performance-related variables like class-size, teaching load, and adjunct faculty usage.  These results enable deans and department chairs to do a better job of maximizing performance within the available budget limit.

4. Plan departmental operations for each semester: e.g., determine course offerings, staffing, and facilities usage profiles.

The HEDSM helps chairs improve performance by adjusting course rosters and resourcing assignments in response to external events (e.g. unexpected enrollment shifts), given available staff, adjunct budgets, and facilities.

These improvements add to the substantial benefits obtainable from Pilbara’s original ABC model: e.g., for answering conventional cost accounting and benchmarking questions, and responding to external requests for data. The HEDSM provides functionality that is not practical in spreadsheet models. It has been described as a “game-changer” for higher education.

For more information about the processes of financial planning and budgeting, financial sustainability, and enhancements to the ABC model, see Chapters 4 and 5 of William F Massy, Reengineering the University: How to Be Mission Centered, Market Smart, and Margin Conscious (Baltimore: The Johns Hopkins University Press, 2016). The HEDSM can implement most of the recommendations contained therein.

Photo Source: The Australian Wednesday 28th September 2016