Optimizing Institutional Budget Models

Strategic Lessons for Aligning Incentives and Improving Financial Performance

Topics: Academic Affairs, Budgeting, Administration and Finance, Budget Models and Cost Allocations, Debt Management, Facilities and Operations, Space Utilization, Revenue Enhancement, Tuition and Fees, Library, Research Enterprise, Strategic Planning

Executive Summary

Moving Beyond Incremental Budgeting

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. 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 illsuited to meet today’s demands for smarter resource allocation.

RCM: Solution or Fad?

Seeking new budgeting methodologies, many colleges and universities are exploring Responsibility Center Management (RCM), which gives units greater control over the revenue they generate and costs they incur. While RCM can create powerful incentives for unit leaders to seek out new opportunities for revenue growth and cost control, it also has four key limitations:

  • RCM requires a significant investment of time and resources to implement
  • RCM precipitates leadership turnover
  • Top-line impacts of RCM on enrollment and revenue are unclear and difficult to measure
  • RCM reduces central resources for strategic investment

Leading Better Budget Model Conversations

In reality, no single budget model provides a complete solution to all of an institution’s financial challenges. 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 more productive than debating the overall merits of an off-the-shelf budget model.

Resources to Guide Budget Model Design

To help colleges and universities develop more strategic resource allocation systems, the Education Advisory Board offers two resources in this publication. The first resource outlines four executive-level lessons on budget design. The second resource provides a compendium of 29 budget model elements with detailed descriptions and case studies.

Download Our Related Infographic

Discover 29 budget model elements you can use to incentivize revenue growth, control costs, set performance targets, and support strategic priorities.

Access the Infographic

Budgeting in an Era of Change