Piedmont University Group 4 (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

 Individual Schools  ± Ensure quality education  ± Maximize throughput

 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¶

 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 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