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Outline
Introduction Case Context Analysis of the Issues Concluding Remarks
Problem 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.
Individual Schools
Ensure quality education Maximize throughput
Support Functions
Support University objectives and minimize costs
Relevant Issues
Meeting universitys 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
Context
Early 1994 Declining enrollment and increasing costs Quasi-endowment fund almost exhausted New president, Hugh Scott, 1991
President Scott
Since 1991, implemented short-term, stop-gap measures
Increased tuition Implemented hiring freeze Curtailed operating costs
Neil 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
Exhibit 1
Revenues Expenses 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 $ 42.0 7.8 21.4 23.8 9.4 1.7 7.0 $ 113.1 $ 40.9 16.1 17.2 24.2 9.1 4.8 -$ 112.3
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 Athletics Maintenance Computers Library Cross Registration Too much authority for president; some way of reducing presidents discretionary powers sought Goal of self-sufficiency risks student dissatisfaction, as well as causing much new paperwork Schools seeking authority to outsource maintenance to reduce costs Fear that usage fees and computer regulation would discourage computer usage Proposed fees (annual and/or usage fees) would increase paperwork Complex formula for transferring revenues & expenses between schools
Question #1
How should each of the issues described above be resolved?
Solutions
Central administration Revenue centre
Administration accountable for University costs (no allocation to schools)
Solutions
Maintenance Expense centre
Cost-based billing for schools Schools may seek outside bids; sub-optimization risk
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 doesnt 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 presidents 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 (schools 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 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
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
Profit centre approach appropriate; not necessarily profit focus approach
Profit is the achievement of schools objectives Financial management must still be a priority