“Don’t Be Wedded to Any One Model”
Responsibility center management (RCM) isn’t for every institution. A business officer at a large independent research university explains the reasons why.
By Margo Vanover Porter
Business officers need to carefully consider the culture of their institutions before changing their planning, budgeting, and resource-allocation models, urges Linda Kroll. "I have talked to peers who are extremely happy with RCM, but it's not appropriate for every institution." (For a discussion of RCM approaches in place at several colleges and universities, read "Variations on a Theme of RCM.")
In a recent conversation with Business Officer, the associate vice president for finance at the University of Notre Dame, South Bend, Indiana, explained how and why she reached this conclusion.
What budgeting approach does your institution use?
We plan our resources and make decisions in a centralized way, which is part of Notre Dame's culture. The university was founded by a Holy Cross priest, started as a small college, and grew into a university. Because of its religious basis and founding as a small college, there is a sense of making decisions as a community about the best and most strategic use of resources. We have a centralized culture for making macro-level decisions about resources, but we allocate those resources to vice presidents or deans, who have a large amount of discretion in moving those resources around in the areas that report to them.
We are primarily centralized in the budget and decision-making processes that relate to our undergraduate activities, traditional graduate programs, and auxiliary operations.
When you say "primarily" centralized, what exceptions might there be?
We do have responsibility-centered attributes in our budget around some of our professional masters' programs, including business, law, professional patent law, architecture, and a few science/technology/math masters' programs. Generally, students in these programs have been in the working world for a while and are coming back to enhance their professional careers. In such cases, we have created a hybrid model with revenue sharing, which has allowed these groups to expand and support their programs.
Has Notre Dame considered a full implementation of RCM?
We have not. Our culture has always been one of making decisions as a community around the highest and most important use of resources. We have a board comprising two components—a lay board and a board of fellows, who are members of the Holy Cross community. Our president is a Holy Cross priest. Our roots are still very prevalent in our traditions. For us, making centralized decisions for our broad allocation of resources fits.
With each group thinking independently, it can be difficult to get all groups focused on the overall success and direction of the institution.
We have looked at the use of RCM in targeted areas where we felt it made sense to create incentives for an entrepreneurial spirit or behavior. For example, as I mentioned, to develop and expand our professional masters' programs, we've used a hybrid RCM model in which a unit receives a share of its revenue and is responsible for supporting all related direct costs. We don't do any indirect allocation of overhead to these programs. With this approach, units can take the risk of starting a program, see the reward of revenue, and use that revenue for the expenses needed to support the program. The program size can expand—or contract—based on their resource expectations and program demands.
What are the advantages of a centralized model?
As we go through tough economic times, our centralized nature makes it easier to get people to comply with the change necessary to be more efficient with resources. For instance, we expanded universitywide procurement programs, asking people to make full use of preferred vendors, allowing us to aggregate spending and negotiate deeper discounts. A universitywide travel program allows people to use an online booking system and a centralized resource for travel. These decisions result in lower prices, and we can target spending to a more consistent set of vendors.
Another advantage: Our decisions on salary increases and merit budgets are consistent across the university. Because people know salary-setting decisions for the whole university are being made consistently across campus, this contributes to employee satisfaction.
Do you ever reallocate existing resources?
Yes, we explore opportunities for resources allocation on a regular basis, including a couple of times when that involved as much as 5 percent of our budget. Annually, when unit leaders have conversations about new priorities with the budget working group, which is our internal macro-level budget planning committee, we ask committee members to identify opportunities to self-fund their requests for new resource investments. In recent years, typically, about half of the new proposals that come forward annually are funded by reallocating existing dollars to those new strategic priorities.
How can you encourage creativity and entrepreneurship in a centralized environment?
In a variety of ways. We initiated a program, Advancing Our Vision, in February 2010, in which we reviewed all areas of the university, looking for opportunities to do things in different ways and free up resources so that we could reallocate them to new strategic investments. We put everything on the table.
Together, our employees and university leaders submitted more than 100 ideas. We reviewed and analyzed each suggestion and, ultimately, decided to implement nearly 50 of them. With these changes, we created a recurring pool of dollars that was approximately 2 to 4 percent of our $1.4 billion operating budget, which equates to about $20 to $40 million of recurring money that will be redirected to new strategic investments.
In addition, about five years ago, we launched an internal office of continuous process improvement that encourages faculty and staff to engage in practices that make their operations more efficient and effective. We sponsor "yellow-belt" training—a one-day class that introduces employees to the mind-set of continuous process improvement. We also offer "green-belt" certifications for employees who identify and capture data about projects in their areas and then set metrics and implement changes for improvement. We've certified close to 30 green-belt employees and have had nearly 250 participants attend yellow-belt training. We urge people to see opportunities to improve the way the university operates.
We have also created a program for sharing indirect cost recoveries on research grants with the colleges and individual researchers who are conducting the work, and we have created a program of sharing favorable year-end budget performance with the vice presidents and deans. This program allows vice presidents and deans to retain 70 percent of the total favorable performance on university-allocated funds for salary, benefit, and nonlabor expenses for the units that are a part of their division or school. The vice presidents and deans can then use these resources for one-time, strategic investments in their areas. This program encourages vice presidents and deans to operate efficiently and to maintain a favorable position versus budget in order to share in the rewards of this performance.
What features do you like about RCM?
The unit leaders are fully accountable for their decisions. They are free to pursue many things independently, creating new programs and growing enrollments.
What features worry you about RCM?
One of the biggest risks seems to be disparity in decision making. With each group thinking independently, it can be difficult to get all groups focused on the overall success and direction of the institution. Sometimes this can lead to duplicative administrative functions in multiple units, to inconsistency, and to internal competition.
The central tax can also become an issue. It's difficult—even when you have a legitimate need—to justify expanding your central scope and raising your central tax. For instance, Notre Dame averaged approximately $20 million annually in research 15 years ago. Now, it exceeds $100 million annually. Clearly, with that amount of growth, we've had to add administrative support in our controller and research offices, both on the pre- and post-award sides.
In an RCM model, adding this administrative support would cause a tax increase. As leaders are trying to do so many creative things with new money, it is difficult to make sure that needed central support for compliance and operations is funded at the right level.
Are faculty members on board with your decision to remain centralized in resource allocations?
They have a voice in the resource allocation process through their departments and deans. As needs arise, faculty work with these leaders in exploring options for generating resources to support new endeavors. This could include a funding allocation to support a new program, a reallocation of existing resources, or evaluation of an idea for revenue sharing. For example, the deans might receive an unrestricted allocation of funds from the university for certain programs or activities they might suggest.
We've also implemented a program with elements of RCM. We share with our researchers a return on indirect cost recovery on grants that we receive as an institution. We keep a small percentage centrally to help with the infrastructure associated with research. The research office receives part to deal with start-up costs and pre- and post-award expenses. The rest is returned to the deans, departments, and researchers.
A faculty member engaged in research knows that if he or she has an active research grant with an indirect cost component, he or she will receive a share of the indirect cost revenue on the grant. That allows faculty flexibility to support their needs. Also, the deans have typically used their incentive funds to create discretionary faculty research and scholarship accounts with an annual stipend for each faculty member. These resources create two options for direct financial support of research and scholarly endeavors.
How do you enforce budget accountability?
Staff in our office partner with each vice president and dean to conduct year-to-date monitoring of budget performance. We look at all the unrestricted E&G [education and general budget] and auxiliary activity. We review this overall every quarter and send reports out to every unit, asking leaders to discuss trends and expectations with us. This prompts them to conduct the same kinds of conversations with the unit leaders that report to them. Also, working in partnership with the controller's office, we monitor all restricted funds for any deficit trends and work proactively with units to address these situations.
Do you have recommendations for other business officers?
Don't be wedded to any one model. At Notre Dame, we centralize our decision making overall but have implemented RCM-type thought processes in certain areas to encourage growth, strategic invest-ment, entrepreneurial activity, research activity, responsible budget management, and savings.
My advice: Don't be afraid to use elements of several models that, given your objectives, might make sense. Evaluate what you are really trying to accomplish for your organization, and let the tools facilitate your success.
MARGO VANOVER PORTER, Locust Grove, Virginia, covers higher education issues for Business Officer.