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Sort Out the Inefficiences

See how several institutions are tackling tumbling budgets. Using a diagnostic model, they are flattening organizational bureaucracy, centralizing and streamlining efforts—and saving a bundle in the process.

By Jeff Denneen and Michael Mankins

*To survive in an era of slashed state funding, diminished endowments, and economic uncertainty, colleges and universities must start running their operations more efficiently. Skeptics question whether cost savings can be accomplished without affecting a university's core mission of delivering a quality education and conducting pioneering research. But, by analyzing the common sources of inefficiency, institutions are discovering that they can more effectively manage costs—and do it in a way that preserves their core mission.

The stakes for getting this right have never been higher. It's no secret that state funding is plummeting. At the University of California, Berkeley (UC Berkeley), for example, state funding—adjusted for inflation—is half what it was 10 years ago. Tuition increases at public universities can't keep pace with state funding cuts, and at independent institutions tuition already is at record highs. The global financial crisis crushed endowments at many schools, and time will be required to replenish them. As a result, both public and independent institutions are coping with unprecedented budget deficits, and to pay for operations many are taking on massive amounts of debt.

Identifying Excessive Costs

To be more effective at managing costs, both public and private universities must identify the major sources of inefficiency in their administrative operations. In our work with some of the nation's top universities, we begin by conducting diagnostic assessments of their operations. Using our assessments, we've been able to quantify the cost of some key challenges: redundant administrative support, burdensome management hierarchy, lack of discipline in procurement, fragmented information technology infrastructures, and widely varying financial incentives. These operational challenges produce needless complexity and inefficiency.

Three highly respected, change-oriented institutions—Cornell University, Ithaca, New York; the University of North Carolina (UNC) at Chapel Hill; and UC Berkeley—are using a systematic approach that's uncovered multimillions in potential operational cost savings. While we've only worked with large, multischool universities, the same issues are in evidence at many smaller institutions.

By using a diagnostic assessment to closely examine the current situation and see how to improve upon it, these three universities are well along the road to identifying—and capturing—sustainable, long-term savings. To improve efficiency across their administrative operations, they are targeting savings in the following areas:

  • Academic support: Build shared services or outsource elements that aren't vital to the institution's core.
  • Facilities and utilities: Optimize the workforce balance between internal and outside personnel. Institute smart metering and performance-based contracts for energy efficiency. Most universities are not metered, so they don't know how much energy is being consumed.
  • Finance: Invest in the appropriate systems and platforms; build shared services.
  • Human resources: Invest in the appropriate systems and platforms; build shared services.
  • Information technology: Build scale operations like data centers and outsource where possible; leverage external application solutions versus custom builds, and obtain software from cloud-based services where appropriate; get desktop support costs under control through standardization and process improvement.
  • Organization simplification: Streamline the structure to flatten the overall organization, eliminating bureaucracy and empowering people.
  • Procurement: Consolidate all spending and build strategic sourcing capabilities.

The results of unearthing excessive costs can be dramatic. For example, UC Berkeley determined that every incremental $25 million in savings is equivalent to avoiding a 13 percent increase in student fees, or 10 to 20 furlough days for 13,000 employees and faculty, or adding an additional $500 million to the endowment.

UC Berkeley has committed to a three-year program to implement changes that will yield at least $75 million in operating cost savings annually. The major targets are reducing duplication and complexity in the university's highly decentralized operations such as administration (including finance and HR), IT, and procurement. For its part, Cornell has identified nearly $90 million in potential annual savings through centralizing desktop support and limiting computer models, securing competitive procurement vendor contracts, improving energy conservation at facilities, and reducing management spans and layers.

While procurement is an effective area for pursuing quick operational savings, it is organizational simplification that often generates even greater efficiency gains.

UNC has pinpointed more than $150 million in potential annual savings. That included up to $45 million in savings from more disciplined procurement, as much as $19 million from streamlining IT operations, and another $12 million by simplifying the university's administrative organization. Armed with a possible game plan for reaping those savings, the university is now determining where to begin. UNC Chancellor Holden Thorp says the diagnostic approach, which took five months to conduct, helped the university more clearly understand where the problems existed in organizational complexity and what options were available. "I felt there were too many layers, but I didn't know exactly what and where," he says.

The Biggest Areas for Improvement

In our experience, procurement is a relatively easy but highly valuable area to tackle—and it rarely involves reducing workforce. Procurement may represent up to 40 percent of a university's cost improvement. "We work with, and buy from, thousands more vendors than we need to, raising costs and increasing complexity," says Frank Yeary, UC Berkeley vice chancellor.

Universities typically take three approaches to improving procurement. First, they consolidate spending, focusing on negotiating better deals with fewer vendors. For example, they'll use strategic sourcing agreements that require all laptops to be purchased from a single vendor; they make exceptions for special needs. Second, they'll aggressively enforce compliance with those strategic sourcing agreements. That means not reimbursing people for items that are bought off-contract. Finally, they'll attempt to take advantage of e-procurement, which makes the process of invoicing less expensive by reducing the cost of purchase orders.

While procurement is an effective area for pursuing quick operational savings, it is organizational simplification that often generates even greater efficiency gains. Organizational simplification, which spans all administrative operations to include everything from finance and human resources to academic support, can deliver up to 45 percent. To simplify, universities do everything from the somewhat-daunting challenge of reducing administrative layers to the relatively easier move of outsourcing noncore activities.

Organization simplification involves three activities:

  • Streamline the administrative structure to flatten the organization and increase efficiency. Across the universities we've analyzed, supervisors typically had fewer than 4.5 subordinates—and often 2 or fewer. By comparison, their counterparts at organizations in the private sector had a broader span of control: about 7 or 8 employees. The average university also had too many administrative layers—more than 10 layers of supervisors between its top executive and front-line workers, compared with fewer than 7 in private organizations of about the same size.
  • Create shared-service clusters to improve the quality of service delivery and eliminate redundancy. Most universities have a highly fragmented structure for delivering services. Within a single academic department, there typically is someone who's responsible for finance along with other duties, another person who handles HR, and yet another who takes care of IT. At UNC we found there were around 400HR liaisons who spent 10 to 40 percent of their time doing HR tasks within a department. Consider the way foreign visas for students and faculty are typically processed at higher education institutions. Because there's not enough visa work for a full-time HR representative, departments frequently assign the task to someone juggling other responsibilities. The more effective and efficient solution is creating a shared responsibility—one expert who handles visa requests for all departments. The same centralized approach works for other functions.
  • Simplify and automate processes. The combined strategy of flattening the organization and creating more shared services will generate the opportunity for the bulk of all operating cost savings. But to achieve those savings, universities must invest in streamlining and automating processes so fewer people do the work. While this is among the most effective ways to reduce costs, it's also the hardest. There's no overlooking the fact that simplifying the organization involves dismissing people, which never is easy or pleasant to do. But it's essential for survival, given the financial pressure universities are under.

The universities we have supported have developed individual plans incorporating these three steps, with each plan designed to meet the institution's specific challenges.

UC Berkeley: Complex Administrative Structure

At UC Berkeley, the costs of operating a highly decentralized organization are staggering. The university spends more than $700 million on its operating personnel, a broad and diverse group that encompasses health care, HR, museum services, performing arts, IT, communications, facilities development, and sports. Several root causes have contributed to a structure that's riddled with inefficiency, complexity, and a lack of standardized processes. Since 1990, many centralized services have been eliminated due to a series of budget cuts. As a result, some functions were farmed out to local departments—and not everyone was satisfied with the remaining centrally provided services. So costs crept back in as departments created their own administrative organizations.

To determine how to reduce the complexity of UC Berkeley's administrative structure, we performed a six-month-long diagnostic assessment that included a "spans and layers" analysis—a tool that analyzes the complexity of an organization's structure. The analysis looked closely at a supervisor's average number of reports (spans) and how many supervisors lie between the chancellor and nonsupervisory employees (layers).

The diagnostic found 11 layers of management across the university—far beyond the average of 7 in a comparable private-sector organization. This meant too many supervisors relative to the number of individual contributors in functional areas such as HR, finance, and IT. And, supervisors were responsible for just 4.4 reports, instead of the private-sector average of up to 8 subordinates. More than half of the university's supervisors had fewer than 3 direct reports.

Among the effects of having too few direct reports per manager and too many administrative layers were slower decision making, excessive costs, and lower employee morale.

Even those involved seemed to be aware of the organizational complexity. As part of the diagnostic, supervisors and employees were invited to comment on their jobs. "It seems like my boss and I have the same job. [My boss] has just been here longer," observed one young supervisor. 

The diagnostic identified $40 million to $55 million that the university could save by simplifying its administrative organization, including finance and HR. To achieve those savings, UC Berkeley could increase spans by having supervisors oversee more subordinates based on educational benchmarks—6 or 7 reports for expertise-based functions and 11 to 13 for task-based functions. The university would also need to reduce layers by cutting the number of supervisors and reassigning direct reports. Following on those steps would be standardizing and automating systems, centralizing more experts, and implementing shared services to deliver economies of scale.

UNC: Streamlining Finance and HR

Whether it involves streamlining organizations or standardizing procurement, achieving operational excellence in higher education is a continuous process.

We performed similar work at UNC's Chapel Hill campus, which includes 14 schools and the College of Arts and Sciences, and where the many layers of management create a cumbersome bureaucracy. About 11,700 permanent employees are spread across 400 different departments. The majority—6,700 employees—fall under the State Personnel Act. As an example of the university's complex structure, finance manages the $2 billion budget, with funding from six major sources, each with unique rules and regulations. Finance's job is complicated by a decentralized structure and complex state policies; facilitators are able to spend only about half their time on core financial responsibilities. With so many different accounts, budgets, and unintegrated systems, efficiency plummets. "If my chair wants to know how much is in his research account, it takes me a couple of hours," explained a UNC business manager.

The university's HR organization faces similar hurdles. More than 375 HR facilitators are scattered throughout the university, with separate offices handling major processes such as Equal Opportunity. Several factors add complexity, drive up costs, and hurt customer service—complicated state requirements; a huge range in HR facilitators' experience and capabilities; systems that create hurdles, instead of enabling efficiency; and a lack of clarity among the roles and responsibilities of all the different HR offices and departments. One HR facilitator noted that the dense bureaucracy and multiple systems "prevent us from doing what we should do."

A five-month diagnostic of the UNC university administration and all the schools showed that between 2004 and 2008, administrative expenses per student shot up 24 percent faster than academic expenses (a 6.6 percent increase in administrative costs versus a 4.8 percent increase in academic expenses). It also found nine layers of management, with more than half of all managers supervising just one to three people. The multiple layers leave front-line workers disconnected from the university's strategy and decisions—and unempowered. And university leaders are too removed from what's happening on the front lines.

The diagnostic established a baseline for making administrative operations more efficient and effective. It identified, designed, and vetted several options. These include:

  • Establishing clear guidelines and poli-cies to head off formation of even more administrative layers.
  • In the short term, reducing existing layers and increasing the number of direct reports by restructuring where needed and charging managers with making improvements in their areas.
  • Setting long-term goals for flattening the organization through attrition.
  • Boosting efficiency in finance with streamlined processes and policies, and consolidating systems into a single, user-friendly platform. Additional options include centralizing finance's key tasks and strategic support and using shared services among some schools and divisions.
  • Increasing HR's ability to spend time on core tasks through improved efficiency and a flatter HR organization. Steps include creating a single, centralized, fully integrated platform for systems; eliminating university-created hurdles by clarifying and streamlining state policies; investing more in training and supporting HR personnel so they can assume more responsibilities; and simplifying the HR structure by using more shared services. Further steps include replacing part-time HR facilitators with dedicated HR employees in shared-services centers and transferring HR personnel from departments to more centralized schools and divisions. 

Cornell: The IT Challenge

Like other institutions, Cornell University faced an unprecedented budget crisis. Even after making $80 million in cuts, the university was left with a deficit that threatened to reach $135 million by 2014. A five-month diagnostic identified between $90 million and $120 million that could potentially be saved by 2015 with an investment of $40 million to $50 million. Among the areas where the university determined it could aggressively act was the institution's sprawling and unwieldy IT operation. Cornell began the task by forming an IT governance committee to provide central coordination and strategic decision making, a move that put it on the path to cut millions.

Cornell's new centralized approach to IT accountability and decision making opened up a range of possibilities, including such elements as a centrally coordinated triage model for end-user support, a revised business model to buy rather than build applications, and a strict prioritization and approval process for application development. It also required the purchase of standardized personal computers, operating systems, mobile devices, and printers. 

Cornell's move to save on IT costs is a work in progress. The university still must finalize its IT governance details and create IT clusters—with directors and staffing for the clusters—as it implements a more-efficient remote desktop support solution and finalizes server and storage recommendations.

The Cost of Efficiency

Whether it involves streamlining organizations or standardizing procurement, achieving operational excellence in higher education is a continuous process that brings with it all  the challenges of any major change effort: creating sponsors throughout the organization, encountering significant resistance from virtually every corner, and tracking events to ensure that the changes stay on course. Success requires strong leadership and broad campus support.

And then there are the financial costs. To pursue $75 million in annual savings, UC Berkeley needs to make a one-time investment of up to $70 million over the first three years and about $5 million annually after that. Even with such an investment, many options for efficiency gains are time-consuming and difficult to implement. Organizations rarely achieve 100 percent of identified savings. At UNC, for example, 60-80 percent of the identified savings are likely to be achieved—for a variety of factors, including the ultimate decision not to pursue certain initiatives—and regulatory constraints could reduce that to as little as 40 percent of the identified savings options. But, even that amount is significant for any university seeking more efficient operations.

JEFF DENNEEN is a partner in Bain & Company's Atlanta office and MICHAEL MANKINS is a Bain partner in San Francisco.

Are Noncore Activities Adding to Your Financial Stress?

Like any organization, higher education institutions need to pay the most attention to the core activities that are aligned with their missions and priorities. Too often, universities lose focus and add-and nurture-operations that are both noncore and costly. In our experience, institutions are best served by evaluating their operations to determine which ones should be kept, eliminated, improved, or considered ripe for outsourcing.

First, determine which of your activities are core and which are noncore-which have a high degree of alignment with your mission and priorities and which have low alignment. Second, determine the relative cost of each activity, high or low.

  • High-alignment and low-cost activities: Keep in-house. You should champion such operations. They are your core.
  • High-alignment and high-cost activities: Re-evaluate. Are there ways to optimize these programs to provide maximum service at the lowest cost? How can you become more efficient? Can you consolidate functions and services to achieve scale? Are there ways to boost productivity through standardization or automation? And above all, is this something you can afford? 
  • Low-alignment and high-cost activities: Consider outsourcing. It's important to start by deciding on the service level you want to achieve, and then determine whether you're likely to get enough return on investment given that level. What is the risk and is there a guarantee of results? Does outsourcing give you access to best practices? Do the operations provide flexibility? Also factor in the often-overlooked benefits of outsourcing: It reduces operating complexity and frees up resources for higher value-added activities. 
  • Low-alignment and low-cost activities: Maintain, but monitor. These should be routinely evaluated from two perspectives. Are they adding too much complexity to your operation? Is there an opportunity cost in maintaining them? Ask yourself: By eliminating or outsourcing such programs, would you be freeing up resources for activities that better address your institution's priorities and advance its mission?
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