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C 4 Fast Group Team 1
Case 2222-5 -5 Piedmont University Craig Ennis Kanwal Kohli James Stacey Jordan Wright
Outline Introduction Case Context Analysis of the Issues Concluding Remarks
Problem
Piedmont
Prior
Statement
University did not apply sound management principles in an environment of declining enrollment and increasing costs. administration(s) expended the principal of the µquasi-endowment¶ fund to meet operating expenses.
Piedmont
Goals and Objectives
University Administration ± Financial health ± Reputation & growth
Support Functions ± Support University objectives and minimize costs
Relevant Issues Meeting university¶s 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 µother items¶
± Fundamental problems not addressed ± Long term strategy needed
Neil Malcolm Management consultant and alumnus Volunteered to analyze University finances
Piedmont
Recommendations: ± Increase student recruiting and fundraising activities ± Re-organize Piedmont University as µset 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 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
Revenues
Expenses
$ 42.0 7.8 21.4 23.8 9.4 1.7 7.0
$ 40.9 16.1 17.2 24.2 9.1 4.8 --
$ 113.1
$ 112.3
$ 14.1 3.6 4.8 8.0 4.8
$ 14.1 3.6 4.8 8.0 4.8
$ 35.3
$ 35.3
Piedmont
Community Reaction
Reorganization of university as µ Profit Centers¶ was most important and controversial recommendation University Council discussions ±
President,
Deans, Provost, Financial VP
± Support for µgeneral 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
Too much authority for president; some way of reducing president¶s discretionary powers sought
Athletics
Goal of self-sufficiency risks student dissatisfaction, as well as causing much new paperwork
Maintenance
Schools seeking authority to outsource maintenance to reduce costs
Computers
Fear that usage fees and computer regulation would discourage computer usage
Library
Proposed
Cross Registration
Complex formula for transferring revenues & expenses between schools
fees (annual and/or usage fees) would increase paperwork
Question #1 How should each of the issues described above be resolved?
Solutions Central administration ± Revenue centre ± Administration accountable for µUniversity¶ 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 doesn¶t 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 president¶s 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 (school¶s 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 ³profit´ 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 µprofit¶ focus in current environment ± Students already paying more ± Schools not allowed to increase faculty Allow Piedmont to focus on academics ± Support academia, don¶t 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 µProfit centre¶ approach appropriate; not necessarily µprofit focus¶ approach ± ³Profit´ is the achievement of school¶s 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