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Business Officer Magazine

Eight Common Obstacles

At many colleges and universities, administrative cost reduction is the centerpiece of a long-term strategy to balance budgets and reduce pressures on tuition. But, the very nature of a higher education institution can make this process very challenging.

By Rowan A. Miranda

Several characteristics of higher education organizations make it difficult to control administrative costs at an enterprise level. On the one hand, these eight characteristics create large opportunities for cost savings. Yet compared to the private sector, the characteristics also make it much more difficult to transform administrative service delivery models in higher education—unless you acknowledge them and knowingly develop strategies to address them, while remaining focused on long-term cost reduction and service quality improvement. Following are the eight characteristics.

Weak hierarchies and culture of consensus. Universities are notorious for their diffusion of authority and reliance on consensus-based decision making. Although university presidents play a key leadership role, their authority relies much less on hierarchy compared to the CEO of a private corporation. Even provosts and CFOs must carefully seek the consent of boards, deans, department chairs, and faculty governing bodies before enacting major new initiatives. Some universities also take into account the views of prominent legislators, donors, and alumni.  

Decentralization in decision making and service delivery. Universities place significant decision-making authority for academic programs "locally" at the college, school, and unit level. Autonomy of academic units helps ensure programs remain agile and relevant to the marketplace. At the same time, however, decentralization fosters autonomous administrative services; this situation raises costs and poses compliance challenges for the institution as a whole.

Diffusion of budgetary authority. Tuition attribution and indirect cost recovery under responsibility-centered budgeting essentially enable each unit to declare, "Let us spend our own money as we see fit." This often encourages organic staffing growth while discouraging units from participating in institution-wide strategies whose success depends upon the participation of a critical mass of schools and units (for example,  sourcing of commodity purchases through select strategic vendors). Many institutions also have budget models with complex chargeback processes, which raise administrative costs. 

Labor intensity of business processes. More than half the cost of producing administrative services in colleges and universities is personnel related. There is also a tendency to staff for peak volumes, which adds an additional element of inefficiency to a business process.

Process variability. The autonomy of administrative functions leads to a lack of process standardization. In turn, this variability in business processes raises costs, weakens controls and compliance, and makes it difficult for customers to receive consistent service. Even when units such as central accounting have built standard processes, the unit-level operations may still use processes of their own making.

Administrative and management acumen. Senior university administrators rise to their positions foremost because of their excellence in scholarship, not necessarily because of their managerial skills. While presidents, provosts, and deans surround themselves with specialized managers in fields such as budgeting, human resources, and facility planning, they typically defer to their administrative staff more so than private sector business executives in similar roles. Meanwhile, local administrative staffs tend to be generalists rather than specialists. The variation in managerial skill in academic units and a reliance on generalists impacts an institution's capability to implement organizationwide policies and practices.

Suboptimal use of enterprise systems. Over the past 15 years, higher education institutions have spent vast sums of money on ERP software products that integrate functions and processes under a single vendor platform. Often, however, these systems have not totally eliminated stand-alone or "shadow systems." The persistence of shadow systems at the school and unit level increases IT spending on software, hardware, and staff support by duplicating what central enterprise systems often do already.  

Regulatory compliance challenges. As the volume of regulations increases each year, compliance issues grow for colleges and universities. Fragmentation of administrative support organizations, variability in processes, and weak hierarchies makes full compliance more difficult, if not impossible, in areas as diverse as athletics, sponsored programs, teaching, patient safety, use of human subjects and animals in research, tax administration, and conflicts of interest.

The University of Michigan is engaged in a four-phase strategic effort to achieve administrative services transformation. For details, see "Remodeling in 3-D" in the January 2012 issue of Business Officer.

ROWAN A. MIRANDA is associate vice president for finance at the University of Michigan-Ann Arbor. He teaches in the university's Gerald R. Ford School of Public Policy and in the UM Law School.

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