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Thought Leadership Series: Budgeting For Innovation (Part 1)

July 17, 2023
This entry is part 1 of 5 in the series Budgeting For Innovation

Series Overview

‍Setting budgets is one of the most important responsibilities university leaders must shoulder. Budgets serve as the practical manifestation of a university’s mission and goals, so pursuing the process thoughtfully is critical to driving innovation the right way at any institution. There is a lot more to budgeting than the numbers on the page. Successful senior leaders recognize it is one of the primary instruments they can use to shape  change, both now and in the long-term, across campus and beyond.

Recently, Vinay Ganti, Senior Vice President, Strategy at Noodle, sat down with Richard (Rick) Matesar. Rick’s career spans four decades, where he served in senior positions both in central administration (10 years) and as a law school dean (20 years).  Most recently he was the Senior Vice President of Strategic Initiatives and Institutional Effectiveness at Tulane University, and before that as the Vice President for University Enterprise Initiatives at New York University. His time as a law school Dean included stints at the Chicago-Kent College of Law (Illinois Institute of Technology), the University of Florida Fredric Levin College of Law, and New York Law School.

He brings to the table considerable experience developing revenue-generating programs, discovering new ways to do traditional programming, and leveraging existing assets.  Vinay and Rick discussed the state of universities and the need to evolve given our rapidly changing society. 

Today is the first in a five-part series that will provide a comprehensive approach to how to do budgeting in a way that promotes innovation and growth in higher education. In today’s article, we will focus on establishing the appropriate mindset for the budgeting process. The full series will be as follows:

  • Mindset: Chart a Vision and Plan for Budgets that Drive Innovation and Growth (Today)
  • Culture: Understand an Institution’s Culture and its Impact on Budgeting (July 31st)
  • Revenue and Investment Capital: Fund Your Institution’s Mission (August 14th)
  • Expenses and Priorities: Spend Strategically for the Long Term (August 28th)
  • Leadership: Align Stakeholders to the Budget’s Vision and Establish Protections for the Vision (September 11th)

Part I: Mindset: Chart a Vision and Plan for Budgets that Drive Innovation and Growth

This is the first of a series of discussions with Richard Matasar, who deeply understands the administration of universities and the steps which need to be taken for them to flourish. 

Could you explain in a nutshell how you calculate a university’s finances?

In short, it is the number of students enrolled multiplied by the tuition, subtracting any discounts,  then adding in other income and government support. From that gross revenue is deducted the expenses for facilities, personnel, etc. Hopefully, if the revenue exceeds the expenses then what remains is a surplus which can be put into a number of places, such as the investment portfolio (where it is treated as unrestricted funds) or future expenditures.  

Is there one particular budgetary model that is generally favored by universities?

No, there are few institutions that use just one model. There are basically two options: the centralized control model (often at public universities) or the decentralized control model (often at private universities). Usually, it is an amalgamation. I like to think of budgeting styles like religion. If you are Jewish, there is Orthodox, Conservative and Reform. The best models create incentives for unlocking the potential of the community to innovate and generate resources. 

More often than not, that depends on some Responsibility Centered Management (RCM). This is where a university’s individual schools keep the lion’s share of the resources they generate. It allows the Deans of those schools to be innovative without the approval or funding from the central administration. RCM also unlocks a revenue share model, between the school and the university. 

Are there downsides to a model bestowing too much control to individual schools? Or, given the changing needs of today’s student and the learning experience, is RCM the most appropriate option? 

‍I have lived in centralized control systems and decentralized responsibility environments. Systems work best with people who are entrepreneurial and yet have fealty toward the overall interests of the university. They work terribly when the individuals involved are more risk averse than willing to take a risk. They work even worse when people think they know a great deal and will take a risk even when it makes no sense whatsoever. So the converse of RCM is irresponsibility centered management (ICM). 

In most universities, if there is a space for hybridization, it’s in the degree to which the Provost and the President have established rules for the game that do not allow the schools to “go off the range” with an independent streak that undermines the overall mission of the university. 

One example is if three different schools within a university are highly independent and autonomous and all believe they are in the best position to take advantage of search engine optimization (SEO) and are bidding against each other for keywords. All they are doing is driving up the price for all three schools to obtain the search terms and each will likely be building a separate digital portal, instead of a single portal with multiple exit points for applicants. 

Another example also involves the use of funds. What if you are a successful entrepreneur in academia? What do you do with the excess revenue that is generated by your school? Some portion will go back to the university “as tribute”, but other portions are going to remain in the hands of your school’s unfettered discretion to pay higher salaries or increase the budgets for travel or research or hire for people in niche subjects. Schools that make a bad decision often choose to use those resources to increase permanent expenses, like personnel. 

There needs to be a dialogue between central administration and the individual school to ensure whatever excess funds are generated at the school level are wisely spent and wisely invested. That is why there are very few pure RCMs. Deans come and go, Presidents and Provosts come and go, but the university and the schools remain permanent. Unless you take a long-term fiduciary approach toward your finances, short-term decision-making, even medium-term decision making, is not likely to be in the best interests of the university over time. That is the kind of dialogue that needs to take place under RCM. In a central system it needs to have the same thing because the same incentives exist to make short-term expenditure decisions that in the long run will not make sense for the university.

This is like the “you use it or you lose it” scenario. The following year you’re going to try to make your school look as bloated as possible because that gives you the best chance to get more resources. Would you agree?

About the worst system you can possibly imagine is the “use it or lose it” scenario. In contrast, any sensibly run system takes profit or surplus in year one and makes it available in years two, three, four and five, knowing there are cycles to how successful any enterprise can be. 

What is the appropriate amount that schools should be contributing to the central university administration?

The “tax rate” imposed by the central administration is indicative of the relationship between the school and the university. The better the university, the better it is for the school. In most cases, the university’s brand contributes more than a school’s brand. This can be hard for many Deans to acknowledge. In certain cases, the “tax rate” is used for cross-subsidization for emerging schools (such as in the biotech area). So, cross-subsidization can be a strong justification for tax rates. However, the “tax rate” sometimes acts as a disincentive for the schools to be innovative, and can sometimes be driven by a distrust of what the individual schools are going to use surplus funds for. Given that in an RCM the Provost does not have any funds of his or her own, a tension can arise on the amount of that “tax rate”. For a Dean, any “tax rate” is too high. For someone in central administration, any “tax rate” is too low. Finding the right balance really depends upon proper leadership within the university and transparency. 

There needs to be an internal balance that the Provost and President must seek with their entrepreneurial school leaders, to find a “tax rate” that is mildly painful but not so much that it drives an entrepreneur to look for other kinds of resources that can’t be touched. 

Is a failure of leadership the primary reason for a breakdown of effective budgeting?

Most school leaders’ outlook is short-term. Much of this is because those individuals are still building their careers so their goal is to build their accomplishments as quickly as possible, to become as famous as quickly as possible, to build their school’s brand and their personal brand. In contrast, Presidents of universities are going to be judged by how well they have positioned the university for the next 30 years. It is clear that one does not become President or Provost for short-term glory. Those are long-term building opportunities. 

The goal of a senior leader in a university is to help mid-level leaders, the Deans, to understand that they have several responsibilities. First, they need to apply resources to serve the needs of their students. Second, they need to make sure they have built a solid “unit” that will survive and prosper in the years ahead. Third, they need to help to strengthen the university. The Deans need to align their unit to serve its role within the university’s overall long-term goals. Unfortunately, this does not successfully take place in many universities. Probably the best are the most effective up-and-coming institutions.  

What else is important in this dialogue between a school and the university?

In this context, it is very important for the senior university leaders to be transparent about their priorities. They need to ensure that everyone knows that they have an important role to play in both individual and collective success and that every one of the university’s schools can “rise with the rising tide”. However, as part of that transparency, senior university leaders need to honestly explain that not all of the schools are equal. While this may invite controversy in the short-term, it leads to a team mentality in the long run. The best universities have that type of collaboration. Sadly, you don’t see a lot of this type of leadership today. 

In addition, no one is going to kill off the liberal arts even if the liberal arts is not the growth area it was 30 years ago. You are not a respectable university without a respectable, growing and healthy liberal arts. But you are certainly not a respectable university if you don’t pay attention to the needs that are growing in society and the emerging fields that are most important. Universities have to mediate between these priorities too. 

How is the distribution of funds changing? It seems that one of the biggest sources recently of higher education expenditure has been for non-instructional uses, like student support, academic support, and career support.  

‍Physical facilities, deferred maintenance and instructional personnel are a giant drain on resources. Student support and career support pale in comparison to other budget items. 

There also has been a debate on the highest use of a faculty member, which has raised the question of a transition from permanent hires and tenure track to a contingent labor force. In many situations, it became clear that faculty members were being used ineffectively so they brought in professionals, such as for admissions. The move toward professionalization is not a bad move. For example, it is very beneficial for mental health support. In turn, it allows faculty to focus on a speciality like research. We also have different students today with higher expectations. The consumer culture of today’s students (and their families) is radically different from the past. There are high demands for such high investments in education. 

The biggest growth in spending at a university remains human beings. You can’t scale human beings. You can’t make a faculty member teaching 20 [students] teach a thousand and expect it’s going to be the best experience for every student. So we are going to have continued growth as our student population goes up to service the students on their academic needs. That is expensive because we hire instructional personnel at much higher costs than other kinds of personnel. 

What is another variable in a university’s future business model? Do you expect costs to change in a university’s budget?

‍Universities struggle with tomorrow. For example, we have giant campuses. The giant campuses have empty buildings for substantial portions of the year. As we move from in-person instruction to online instruction, we will have empty spaces that don’t get used and those empty spaces need to be maintained (and in some cases paid for). We have not addressed the infrastructure of the university. That will be a huge issue.

One likely change is from two semesters plus summer (or three quarters plus summer) to a year-round experience of instruction. That may be one of the offsets that builds revenue and builds flexibility without necessarily increasing expenses. You may decrease expenses serving personnel online, serving students online. It’s a different model. For example, we do not presently know how to service the counseling needs or the academic needs of our online learners as a university business, whether it’s a full Online Program Management (OPM), service OPM or just a fee-for-service model. Ultimately, that responsibility has to be shared and directed by the university because there are certain standards. Universities must be able to address disabilities online just as they must handle alumni relations for online students. So, we are going to need to be shifting, reinventing and reallocating as our student population changes. While 18-year-olds are disappearing, the need for lifelong learning has not been fully theorized by most universities. For example, what do you do with people who train on technologies that don’t exist anymore? What do you do with people who don’t know how to deal with AI in the workplace?

What effect will budgeting play with regard to faculty?

‍The answer is that while there will continue to be tenure and job security, it is unclear what percentage of the teaching force will look like that. Probably less than today. Funding of faculty is another issue in play. Grant funding is now at a pretty good level, but it doesn’t support the arts. It doesn’t support the humanities. Society will be worse off if we don’t support those things. Universities have been funded through a research mission and funded faculty – probably less than we are right now because we have a surfeit of talent and fewer jobs to fill. Thus, universities will need to develop what our teaching personnel are going to need. 

Are there other key factors in budgeting?

‍Before budgeting a university needs to figure out its culture. Further, universities don’t know how to spend money even if they know how to make money. Thus, it is important to imagine the future to make your university great, then apply price tags to every single item on your list and then prioritize them. If you don’t do that, you can’t know how to accurately categorize them. You don’t know why you are generating money and you don’t know how to spend it even if you generate it. 

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This entry is part 1 of 5 in the series Budgeting For Innovation

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