Case 22-5 22Piedmont University

Craig Ennis Kanwal Kohli James Stacey Jordan Wright

Outline
Introduction Case Context Analysis of the Issues Concluding Remarks

Problem Statement
Piedmont University did not apply sound management principles in an environment of declining enrollment and increasing costs. Prior administration(s) expended the principal of the quasi-endowment fund to meet operating expenses.

Piedmont Goals and Objectives

University Administration
Financial health Reputation & growth

Individual Schools
Ensure quality education Maximize throughput

Support Functions
Support University objectives and minimize costs

Relevant Issues
Meeting universitys mandate
Goal is to educate and generate knowledge

University reputation
Whole greater than sum of parts

Avoid:
silos among schools faculty and support staff dissatisfaction student discontent

Ensure proper financial management

Context
Early 1994 Declining enrollment and increasing costs Quasi-endowment fund almost exhausted New president, Hugh Scott, 1991

Financial Control - Present

Annual expenditure budgets from Deans and Administrators of support departments Budgets usually approved with minor changes
emphasis on monitoring major items less focus on adhering to other items

Overall lack of budget discipline?

President Scott
Since 1991, implemented short-term, stop-gap measures
Increased tuition Implemented hiring freeze Curtailed operating costs

Small operating surplus @ fiscal YE 93 Not permanent solutions

Fundamental problems not addressed Long term strategy needed

Neil Malcolm
Management consultant and alumnus Volunteered to analyze Piedmont University finances Recommendations:
Increase student recruiting and fundraising activities Re-organize Piedmont University as set of profit centers

Financial Control - Proposed

Re-organization into profit centers Deans and administrators to submit budgets for both revenues and expenses General shift in responsibilities New procedures for:
Crediting revenues to profit centers which earned them Charging expenditures to profit centers responsible for them

Exhibit 1
Revenues Expenses Profit Center: Undergraduate liberal arts school Graduate liberal arts school Business school Engineering school Law school Theological school Unallocated revenue Total, academic Other: Central Administration Athletics Computers Central maintenance Library Total, other $ 42.0 7.8 21.4 23.8 9.4 1.7 7.0 $ 113.1 $ 40.9 16.1 17.2 24.2 9.1 4.8 -$ 112.3

$ 14.1 3.6 4.8 8.0 4.8 $ 35.3

$ 14.1 3.6 4.8 8.0 4.8 $ 35.3

Piedmont Community Reaction

Reorganization of university as Profit Centers was most important and controversial recommendation University Council discussions
President, Deans, Provost, Financial VP Support for general idea of Profit Center Administrators of non-core departments (e.g. Library, Maintenance Dept) not included in discussion

Areas of disagreement remained

Areas of Disagreement
Central Admin Proposed formula unfair to Grad School. Deans did not Costs want responsibility for allocated costs over which they had no control Gifts and Endowments Athletics Maintenance Computers Library Cross Registration Too much authority for president; some way of reducing presidents discretionary powers sought Goal of self-sufficiency risks student dissatisfaction, as well as causing much new paperwork Schools seeking authority to outsource maintenance to reduce costs Fear that usage fees and computer regulation would discourage computer usage Proposed fees (annual and/or usage fees) would increase paperwork Complex formula for transferring revenues & expenses between schools

Question #1
How should each of the issues described above be resolved?

Solutions
Central administration Revenue centre
Administration accountable for University costs (no allocation to schools)

Gifts and endowments part of Central Admin

Donations go to students University absorbs cost as part of administration Schools have input into allocation

Athletics Profit centre

Annual fee for users Break-even goal (cost-recovery)

Solutions
Maintenance Expense centre
Cost-based billing for schools Schools may seek outside bids; sub-optimization risk

Computers Expense centre

Improve records & assign responsibility to schools No monitoring; no control

Library Expense centre

Fixed annual fees included within tuition

Cross registration
Status quo; no charges (maintain spirit of collegiality)

Question #2
Do you see other problems with the introduction of profit centres? If so, how would you deal with them?

Additional Problems
Profit Center approach doesnt recognize nonmonetary factors (e.g. quality of education and scholarship)
Solution? Focus on core values (MBO & Balanced Scorecard)

Competing activities between multiple profit centres (e.g. student recruitment, fundraising)
Solution? Coordination needed under presidents leadership.

Additional Problems 2
What are the consequences when schools are unprofitable?
Solution? Some schools may never be profitable yet may still be essential to goals and objectives of university (e.g. Theological School) Profit centre approach not meaningful in this case, Discretionary expense centre more appropriate

Unanticipated risks (schools competing for students, staff strikes, student dissatisfaction, faculty disenchantment, reputation of university)
Solution? Measured approach to defining responsibility centres

Question #3
What are the alternatives to a profit centre approach?

Performance Measures
Define profit in non-monetary terms with performance measures Individual schools Performance Grades & their acceptability by reputed universities Graduates employment rates National & international scholarships, awards & accreditations Survey students and employers for satisfaction Trends in enrollment Support functions Historical costs Comparison to market costs

Link to Piedmont Goals

Minimize profit focus in current environment Students already paying more Schools not allowed to increase faculty Allow Piedmont to focus on academics Support academia, dont kill it Rebuild quasi-endowment

Question #4
Assuming that most of the issues could be resolved to your satisfaction, would you recommend that the profit centre idea be adopted, or is there an alternative that you would prefer?

Conclusions
Profit centre approach appropriate; not necessarily profit focus approach
Profit is the achievement of schools objectives Financial management must still be a priority

Common sense and organizational culture play a role

Making academia more difficult is counter intuitive/productive in university

MBO or Balanced Scorecard

Enhance management capabilities Ensure achievement of goals