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

Diminishing Returns to Complexity

USC simplifies cost accounting to improve acceptance

For costs where metering is not possible, the simplest allocation formulas have proven most effective.

As an example, when the University of Southern California implemented RCM in the 1980s, administrators created over 100 unique cost allocation formulae to distribute nearly every line item on the university’s budget to colleges. The system required significant effort to manage, and unit leaders found the model confusing and frustrating.

In the mid-2000s, leaders moved to a radically simplified approach based on only four cost categories, with each unit’s charge determined by a single, easy-to-understand metric.

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Lesson 2: Keep Cost Allocation Metrics Simple

Common Metrics for Major Expense Categories