Case 22-5Case 22-5Piedmont UniversityPiedmont University

Craig EnnisCraig EnnisKanwal KohliKanwal KohliJames StaceyJames StaceyJordan WrightJordan Wright

OutlineOutline

• Introduction

• Case Context

• Analysis of the Issues

• Concluding Remarks

Problem StatementProblem 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 ObjectivesPiedmont 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 IssuesRelevant 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

ContextContext

Early 1994• Declining enrollment

and increasing costs• Quasi-endowment

fund almost exhausted

• New president, Hugh Scott, 1991

Financial Control - PresentFinancial 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 ScottPresident 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 MalcolmNeil 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 - ProposedFinancial 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 1Exhibit 1Revenues Expenses

Profit Center:

Undergraduate liberal arts school

Graduate liberal arts school

Business school

Engineering school

Law school

Theological school

Unallocated revenue

$ 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

--

Total, academic $ 113.1 $ 112.3

Other:

Central Administration

Athletics

Computers

Central maintenance

Library

$ 14.1

3.6

4.8

8.0

4.8

$ 14.1

3.6

4.8

8.0

4.8

Total, other $ 35.3 $ 35.3

Piedmont Community ReactionPiedmont 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 DisagreementAreas of DisagreementCentral Admin Costs

Proposed formula unfair to Grad School. Deans did not 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 fees (annual and/or usage fees) would increase paperwork

Cross Registration

Complex formula for transferring revenues & expenses between schools

Question #1Question #1

How should each of the issues How should each of the issues described above be resolved?described above be resolved?

SolutionsSolutions• 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)

SolutionsSolutions• 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 #2Question #2

Do you see other problems with the Do you see other problems with the introduction of profit centres? If so, how introduction of profit centres? If so, how

would you deal with them?would you deal with them?

Additional Problems Additional Problems • Profit Center approach doesn’t recognize non-

monetary 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 2Additional 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 #3Question #3

What are the alternatives to a What are the alternatives to a profit centre approach?profit centre approach?

Performance MeasuresPerformance 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 GoalsLink 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, don’t kill it

• Rebuild quasi-endowment

Question #4Question #4

Assuming that most of the issues could be Assuming that most of the issues could be resolved to your satisfaction, would you resolved to your satisfaction, would you recommend that the profit centre idea be recommend that the profit centre idea be

adopted, or is there an alternative that you adopted, or is there an alternative that you would prefer?would prefer?

ConclusionsConclusions• ‘Profit centre’ approach appropriate; not

necessarily ‘profit focus’ approach– “Profit” 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