While most colleges and universities saw stable growth over the last several decades, many now face significant downward pressure on revenue. By one estimate, nearly one in ten institutions face significant financial stress from declining revenue or poor operating performance.
With limited potential for significant new revenue growth, academic and business leaders agree that spending on new initiatives must come from a reallocation of existing resources.
Moving beyond incremental budgeting
However, actually reallocating resources from one area of campus to another remains difficult. In particular, the traditional model of incremental budgeting, which served institutions well in times of growth, is ill-suited to meet today’s demands for smarter resource allocation.
Given sustained downward pressure on revenue, however, this model faces three critical challenges:
- First, equal sharing of resources promotes stability, but it does not create financial incentives for unit leaders to grow revenue or cut costs. Instead, units are encouraged to pursue business as usual while the institution as a whole is financially stressed.
- Second, incremental budgeting makes equal “bets” across campus, rather than channeling resources to areas with greatest potential for impact or financial return.
- Finally, the model is difficult to maintain without growth. Little funding is available to launch new programs or change with market demands. When faced with deficits, institutions must often deploy unsustainable across-the-board cuts.
RCM: Solution or fad?
These problems have led growing numbers of institutions to wonder if they would see better results under a different budget model, with most considering some variant of responsibility centered management (RCM).
RCM does create powerful incentives for deans to seek out new opportunities to cut costs and grow revenue, but comes with its own challenges and limitations. Converting to RCM typically takes three to four years. Even then, revenue growth and cost savings may be offset by hold-harmless periods and stop-loss measures.
More importantly, RCM typically decreases rather than increases the funding central administration can access for institution-wide priorities. So for institutions whose greatest opportunities for growth lie in entirely new programs or cross-disciplinary initiatives, RCM may actually be more of a hindrance than an advantage.
A false dilemma
When institutional leaders debate budget models, they often focus on the wrong set of questions. RCM has advantages and disadvantages, but no budget model provides an off-the-shelf solution to all of an institution’s budgeting challenges.
Instead, underlying RCM and any other budget model are a set of budget model elements that specify how to allocate revenues, how to distribute costs, and how to define and operationalize institutional priorities. Focusing on these elements and the specific activities to encourage or discourage is generally more productive than debating the overall merits of RCM.
Isolating the Most Impactful Elements
Our infographic provides a roadmap for this process, highlighting the 29 individual budget model elements institutions can adopt or layer in to their current model.
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Additionally, our study, Optimizing Institutional Budget Models, provides detailed case studies and implementation guidance for all 29 elements, as well as executive lessons on budget design. Access the study.