Very…but let’s elaborate.

Professor Bill Massy, professor emeritus of education and business administration and former vice president and vice provost at Stanford University, states in his book “Resource Management for Colleges & Universities” that all colleges and universities are governed by an “internal economy”, which he defines as:

“A university’s internal economy is the network of decisions, processes, incentives, and information that governs the scale and quality of what gets done, what it costs, and whether the resulting pattern of profits, losses, and cross-subsidies is sustainable.”

He further states that “Presidents, provosts, deans and other academic leaders set the structure and boundaries of their institutions’ internal economies. They seek to steer behaviors in desired directions, but they do not and should not attempt to micromanage individual actors. This is because the nature of expertise within universities requires decentralization of decision-making, particularly to faculty but also to key members of non-academic staff. Decisions about what to teach and how to teach it can only be made by faculty in their respective disciplines for example, and the same is true for research.”

Most university decision makers lack essential information, i.e. how their actions impact others in the institution. Universities are complex organizations with many-to-many relationships between programs and courses and lots of cross-subsidization between schools / faculties and teaching/research. Decisions in one faculty can impact multiple other faculties. Therefore, universities need a comprehensive model of their entire organization including all research, community service, commercial and every course instance (when, where and how it’s taught), rolled up to programs, schools, faculties, campuses and institution. This will provide insight into their internal economy, which is usually hidden in standard financial reports, or misrepresented in high level models, or isolated in detailed islands of analysis in spreadsheets of individual areas.

In their book “How to run a college” Brian C. Mitchell and W. Joseph King state that “For any higher education institution to survive, it must first know what it does not know.” They also discuss the importance of faculty being actively involved with the administrative processes of their institutions, in a true shared governance model.  They describe faculty as the “keepers of the flame”, they are the resident experts. “To be effective, however, faculty must move beyond wish lists to understand how programs relate to staffing and facilities within an operating budget. The most successful faculty leaders learn how budgets affect strategic direction without attempting to serve as backup administrators on matters outside their purview.” They discuss the importance of financial literacy for faculty where faculty are not just aware of the budget but involved with the process. “Faculty can do their own analysis and present their own conclusions. For example, new programs are often proposed by faculty only to have administration demonstrate all of the financial reasons why they will not work. In this active model of shared governance, the faculty leadership presents the program along with the financial justification, including costs and revenue. The responsibility shifts and is shared equally.”

On this point, we have specifically developed a tool for academic leaders called Program Insights, which provides an instantaneous five-year financial forecast of newly proposed programs that calculates full cost, revenue, margins and a break-even analysis, that can be bundled with the new program proposal.

Mitchell and King also go on to state that “..any debate about college finances mandates good use of data in which the key – transparency – can also force an institution to become more analytical and strategic…the goal is to use resources wisely.”

In his book “Reinventing the community college business model”, Christopher Shults states that the major challenge for community colleges is how to operate in a manner that delivers an exceptional education experience without allowing the financial conundrum to become the driving force for strategic and operational decision making. “This is the crux of the profit formula – determining how to reduce costs and increase revenue to ensure resources are available to fully and effectively support the delivery of an exceptional value proposition.”  Shults also states the importance of fully understanding this internal economy “community colleges must consider the centrality of the cost to the delivery of the product. In other words, both the direct and indirect costs associated with the delivery of the educational experience must be accounted for. This requires an in-depth analysis of the costs associated with the key resources and the product to determine areas where costs must be reduced as well as areas where costs need to increase to more effectively support student success.” This is not a simple process “Although improving efficiency and productivity is difficult, this reality does not abdicate community colleges’ responsibility to tackle this challenge.”

To make it a little easier, faculty and administrators must have access to centralized and detailed financial data, right down to the individual subject instance (when, where are how it’s taught) and as Shults states “Reflected in the terminology of strategic pruning, reduction tools need to look more like scalpels than butcher knives. The cuts, while necessary, should focus on areas less associated with student success while sparing or, ideally, growing the resources most directly associated with student success…it is about better deploying resources in support of the educational experience while ensuring financial solvency.”

Robert Kelchen, in his book “Higher Education Accountability” has a similar construct to the “internal economy” described by Massy. He defines it as an “internal accountability system” which three main purposes:

1. Building trust with institutional stakeholders,
2. Support the more efficient use of scarce resources, and
3. Used to satisfy external stakeholders, that wish to hold colleges accountable for their performance.

On the third point, Kelchen states “Given that many stakeholders are charged with monitoring a large number of institutions at the same time, a college that has a strong self-regulation structure may be subject to fewer additional oversight requirements. This gives the institution more autonomy to operate as it sees fit.”

He outlines ten lessons learned from previous and current accountability efforts:

1. In order to be effective, accountability systems must be reasonably aligned with a college’s mission,
2. Data limitations restrict the ability to accurately measure many short-term outcomes of interest,
3. It is important to consider proxy variables for outcomes that take years to unfold or are difficult to measure,
4. Data used in accountability systems should be audited for quality assurance,
5. The “Performance Paradox” makes assessing true performance difficult,
6. Avoid accountability systems that are too complex,
7. Unless appropriate safeguards are in place, colleges may respond to accountability systems by restricting access,
8. As more money is at stake in accountability systems, colleges will target resources toward cases on the margin,
9. Holding individual faculty and staff members accountable is a difficult task in higher education, and
10. New accountability systems should be implemented gradually.

Point 10 is particularly important and we have learnt that lesson ourselves. When we first started building models for organizations, starting with the Australian Military and US Military and then moving over to Higher Education, we would build very detailed complex models that could address “everything”. The problem with this is that if users of the model don’t understand the model, they don’t trust it and if they don’t trust it, they won’t use it.  This also relates to point 6 on complex systems. We take a different approach now and start with a simplified model and ensure key stakeholders are actively involved right at the beginning, so they can learn and then suggest changes over time as the model grows and evolves with the institution, these key stakeholders then have ownership over the model and the results.

Kelchen poses the question “Will accountability policies be implemented at the institutional level or at the program level” and says that most accountability efforts to date are set at the institution level, but program-level efforts are becoming more common. From an internal accountability perspective, our models go beyond program level and down to subject instance (when, where and how it’s taught) but can support the Australian Department of Education reporting requirement at the Field of Education (FoE) level – which is a categorization of programs. It is difficult to have a direct program to program comparison, so using the FoE is a good work around.  He also discusses the issue that moving to a program level accountability system might encourage a move to responsibility center management (RCM), but RCM has been “criticized for duplicitous course offering and administrative positions within a college as every unit scrambles to maximize revenue at the possible expense of other departments within the same institution.” This is the key point of having a model that covers the entire institution, every program and subject instance. It contains all of the many-to-many relationships between programs and courses and the cross-subsidization between schools/faculties as well as teaching/research so that management can see the impact of decisions made in one department on other departments.

As an aside, Kelchen also states in his book, that the sheer magnitude of data collected through IPEDS makes it a valuable resource to researchers and analysts, but at a substantial compliance cost to colleges. We anonymize and aggregate data from all models and provide this directly to all institutions that have models and also to key research partners like the University of Melbourne Centre for the Study of Higher Education and it is zero burden to the institution. This data contains low levels of detail that were never previously available including a range of financial and non-financial metrics and are presented as benchmarks but also a consolidated pool for analysis as well as a very large pool of data for AI tools.

Now, we’ll bring it back to Australia with a book by Glyn Davis, former Vice Chancellor of the University of Melbourne, “The Australian idea of a university” where he states “In an age of regulated assimilation to a standard model, Australian universities have become more alike over time. In a world of global opportunity and flexibility; this makes them vulnerable.” There are some fundamental problems with the way Australian universities are funded “The funding regimes for both teaching and research in Australia’s public universities pay little attention to the actual cost of either activity. This has a chilling effect on diversity. It requires that universities provide ‘profitable’ courses to help fund expensive specialist offerings and subsidise research…In a market, universities would develop specialisations and support these by charging the real cost of course delivery. Since Commonwealth regulations prohibits this, it is imperative that course fees authorised by Canberra pay close attention to the actual cost. Otherwise, every public university, as at present, must hedge its bets through complex internal cross-subsidies.” And as stated earlier the current systems in place at most universities don’t explicitly highlight these cross-subsidies, so universities are trying to manage this without the data required.

This post has primarily focused on the teaching side of the institution, it becomes even more complex when you need to balance teaching, research and community support. So what are the key take aways?

College and University leaders (both academic and non-academic):

• Must understand their internal economies / internal accountability systems,
• Need to collaboratively work together in a true shared governance model, but decisions on what and how to teach/research is the responsibility of faculty,
• Need detailed, centralized, consistent, high quality, university-wide data to support decision making.

Here are links to all the books I referenced:

Resource Management for Colleges & Universities – William F. Massy

How to Run a College – Brian C. Mitchell and W. Joseph King

Reinventing the community college business model – Christopher Shults

Higher Education Accountability – Robert Kelchen

The Australian Idea of a University – Glyn Davis