Everything you do has some type of cost associated with it. If you want to drive to the shops, you need a vehicle which you either purchased with cash, or you are paying off a loan, or you leased the vehicle. Then the vehicle requires fuel, oil, water and associated maintenance. All the things you tell your teenage children when they are planning to leave home and suddenly realize that it’s not all free. Also that there are no magical pixies that wash and iron their clothes! The vehicle, fuel, oil and water are all resources that are used to get you to the shops. Maintenance is a service that you pay for with another resource – cash. You “consume” resources to achieve what you want to do and those resources have a cost associated with them.
Likewise for Higher Ed – you want to provide high quality teaching and research but to do this requires the consumption of a vast amount of resources including cash, people, buildings etc. and each one has some type of cost associated with it. Cost Management is not just the responsibility of financial managers, if you use a resource inside the institution then you will influence the overall cost to the institution depending on how you “consume” resources to do what you want to do.
Financial Managers will be responsible for coordinating budgets and reporting expenditure but when it comes to the actual operations of the institute then it should be the responsibility of anyone who consumes resources to use those resources in an efficient way in order to manage costs appropriately. As an example, if you are responsible for managing the delivery of a number of Courses, then you get to decide when, where and how it’s taught and by whom it’s taught. Each decision has resourcing implications which are usually well know because it forms part of the planning process – Which rooms are available? Who usually teaches this subject? Are there any labs associated with this course? What is often not explicitly calculated is the cost associated with each of these resources.
A budget is just a forecast of what you plan to spend. It’s not a cost management tool. Cost is derived from the consumption of resources and cost management is about consuming those resources efficiently. If you don’t have full visibility of all of the resources you consume you cannot manage cost effectively. Therefore you need to map every resource in the institution, through the activities performed to the final “outputs”, which in the case of Higher Ed would be primarily Teaching and Research, but also covers things like commercial programs, community support and sports programs.
High cost isn’t necessarily bad cost. If you are delivering a superior teaching experience and the students have exceptional outcomes, then this comes at a cost and this could be quite a high. The same can be said for world class research, it can be very expensive. The next stage is to introduce revenue and see whether this high cost is covered by the revenue received or whether it is being subsidized by another part of the institution.
So now the manager will have a picture of all of their direct resources, how these resources are used, the associated cost of these resources and whether the revenue received is covering the cost or not. The other part of the cost equation is overhead which includes all of the services provided by HR, Finance, IT, Facilities, Student Services etc. Some Higher Ed institutions will charge an amount for overhead on top of the managers budget, like a tax, but it doesn’t highlight what overhead resources are actually being consumed.
It is important to make this overhead transparent and map it all the way to the outputs, to ensure revenue received is covering the full costs of the outputs. For the manager, being able to see this overhead, could influence some decisions to control these costs, but generally overhead transparency is very important from an institutional perspective for longer term planning.
At the moment Higher Education institutions around the world are in the middle of a financial crisis brought about by the pandemic. Cost management is vital to ensure the long term viability of their institutions. Proper cost management requires the efficient use of resources. Managers need to know the costs associated with all of the resources they use, which means all resources and associated costs need to be mapped to all of the activities and outputs managed by these managers and made completely transparent.