College Budgets Need a Sharper Knife

July 31, 2012

Earlier this year, President Obama issued a challenge to institutions of higher education to do what they can to make tuition more affordable to students. Many in the higher education community dismissed the call to action, saying that the ongoing fiscal crises facing most states have already forced them to cut their budgets to the bone. This, they say, forces them to pass more costs on to the students.

A report issued in July by Bain & Company (yes … that Bain) shows otherwise, in great detail. The report, titled, “The Financially Sustainable University,” documents the many sources of financial waste at institutions of all sizes and missions. It notes that while tuitions have been steadily rising, most of that money has been used to pay for additional administrative and support costs rather than instruction or student services.

The sources of waste would make any business leader cringe, with money flying out of the window due to fragmentation, redundancies, unnecessary hierarchy, misaligned incentives, and needless complexity. For example, most companies have a central purchasing department for all their needs. In this way, they can leverage their scale to get a better deal and negotiate contracts with vendors. At most colleges, however, they leave purchasing up to each department, creating enormous waste. When the University of California – Berkeley centralized their purchasing, they found an annual savings more than $25 million.

When it comes to instructional budgeting, there seems to be little strategy involved. Since academic value is difficult to quantify in the absence of any measure of student performance (which is absent from most schools), institutions simply give each department the same amount of money each year, with a little extra to offset inflation. According to Bain, this led to a department at one school having a faculty-to-student ratio (not a misprint) of 5:1, including graduate and post-graduate students. Worse, when cuts need to be made, they make across-the-board cuts so as not to offend any given program. This practice is ignorant of the real-world value and needs differentiation of the various academic programs (i.e. the engineering department clearly brings more value to a school than its philosophy department, yet would be cut by the same percentage.)

Ultimately, there are literally dozens of ways that institutions of higher education can do more to keep tuition in check. Unfortunately, these continue to go unemployed and underutilized. This does, however, create an excellent opportunity for business leaders seeking to assist their local colleges and universities. Offering a scant amount of time and expertise in systems management or accounting, for example, can be every bit as valuable as writing an annual check for tens of millions of dollars.

This article appears in ICW's July 2012 newsletter.