Responsibility Centered Budgeting
By Terry Halbert, Forrest Huffman, Douglas Wager and Jonathan A. Scott
In light of Provost Dai’s presentation on the move to Responsibility Centered Budgeting at the last Faculty Senate Meeting, we decided to ask several faculty members who have expressed an interest in, or had some background thinking about, this model for their reflections on its possibilities for Temple. Perspectives from Terry Halbert, Forrest Huffman, Douglas Wager, and Jonathan A. Scott are included in this article.
Terry Halbert, Professor of Legal Studies, FSB
Our university will begin a multi-year process of transitioning to a new budget system. Temple’s appropriation from the Commonwealth of Pennsylvania has been shrinking. The number of high school graduates from the regions where Temple recruits has been decreasing. These pressures threaten the university’s central “access to excellence” mission. We are moving to a new budget model in order to deal with that pressure, and to sustain our ability to provide high-quality education at an affordable price.
Under a decentralized budget model, the schools and colleges will receive the tuition revenue they generate and from that revenue pay both direct expenses (faculty/staff salaries) and indirect expenses (space, utilities, computing). In most decentralized systems, the schools and colleges must also contribute to a fund that the provost manages, which can be used to advance university-wide priorities or collective endeavors that require the participation of more than one school or college—an Honors Program, for example, or interdisciplinary projects. A decentralized model shifts control of many budgetary decisions from central administration into the schools and colleges, to the deans and faculty. It encourages deans and faculty to focus on efficiency, and to be entrepreneurial, identifying ways of generating new revenue.
This fall, President Englert asked Provost Hai-Lung Dai and Executive Vice President Tony Wagner to co-chair a committee that would study the effect of moving to a more decentralized budget model, and to begin planning for Temple's transition. When this committee was established, Hai-Lung Dai asked the Faculty Senate Steering Committee to recommend faculty members to participate. My name was provided, I was invited to join, and I agreed. I am looking forward to working with many others, soon.
The initial process will take several months, and will be open and transparent, with both faculty and administration working together. Faculty advisory committees will be set up in every school and college. The Faculty Senate Budget Committee, which has been part of early discussions, will continue to be fully involved. After the planning stage, Temple will be working to develop the decentralized model for FY 2015 in a hold harmless manner. The idea is to do this right, not to do it fast.
Temple is not blazing any trails here. Decentralized budgeting has been around since the 1970’s. University of Michigan, University of Florida, Kent State, Indiana, Ohio State, Oregon, Virginia Tech and Arizona all operate under a decentralized model. Indiana University has been using—evaluating and adapting—the model for 20 years. So Temple has plenty of experience to refer to and to learn from. We will want to develop a version of decentralized budgeting that is driven by our central values, and that creates incentives and rewards for the behaviors and outcomes that we have decided we want.
This budgetary transition could be a defining moment for our university. We have an opportunity to investigate, together—faculty and administration—the best way to keep high quality education accessible for our students. The first step will be to decide together a set of guiding principles, the values that will drive the model. What are the public goods that we agree must flourish? Then we will need to study how Temple operates now, how decentralized budgeting has worked at comparable institutions. Finally, we will need to create a model for Temple that fits Temple. Ideally, this budget transition will resemble a strategic planning exercise, but with teeth, as we connect our primary values to financial consequences.
Forrest Huffman, Professor of Finance, FSB
One benefit attributed to RCM is the ability to engage in “entrepreneurial activity” that allows the retention of the majority of revenues generated “for reinvesting.” The entrepreneurial aspect of RCM, one might suspect, would result in winners and losers as some schools out-compete others. One might also suspect that business schools might have an upper hand in such an environment; however that need not be the case. Innovation, risk taking, and strategic management of resources need not be solely the province of any particular academic unit. Nonetheless one might ask whether too much success by a single unit under a RCM system might be detrimental to the overall educational objectives of the academy.
Douglas C. Wager, Professor and Chair, Department of Theater, TFMA
“Though this be madness, yet there is a method in’t” Hamlet, II ii, 211
In my pre-Temple incarnation as a professional director, producer and artistic leader, I learned to embrace the notion that vision is destiny; this is the hope of the future. As the new Chair and Artistic Director for the Department of Theater, and FSSC representative of our newly minted Division of Theater, Film and Media Arts (TFMA) under the new Center for the Arts, I am no stranger to change. Change is uncertain; we live it moment by moment, the hope being that, in retrospect, the tumultuous adventure of change will reveal itself to have been a cycle of positive growth.
Our current situation here at Temple regarding how we have had to react out of necessity to the rigorous financial, administrative and resource challenges reminds me of a Sufi parable I tell my students. A man named Nasrudin one day was outside his house frantically searching for something. A neighbor came upon him and asked “What are you searching for, Mula?” Nasrudin replied, “My key.” “Where did you lose it?” the man replied. “In my house,” said Nasrudin. “Then why are you looking for it out here?” said the neighbor. Nasrudin answered, “Because it is too dark in my house. I fear the darkness.” Fear the darkness and you will never find the key. As an
artist, I have learned to embrace the dark; the unknown – the place of ‘not knowing’ --is the place where the potential for your highest creativity exists.
The advent of President Theobald and the implementation of a new University-wide shift to RCB (responsibility centered budgeting)/ RCM (revenue centered management) augurs an era of creativity and change unprecedented in the recent history of this esteemed institution of higher learning. After hearing early rumors and then more substantive news of this impending change, and hearing President-Elect Theobald address a faculty assembly, I recently took it upon myself to acquire Edward L. Whalen’s book, Responsibility Centered Budgeting (1991), an insightful, candid, readable and detailed accounting of the basic principles and implementation process of RCB at Indiana University. It actually has energized me. I now think it is a terrific idea for Temple – the caveat being that the root of that word ‘terrific’ refers to “causing great fear; terrifying” ; I also accept the fact that fear, doubt, confusion and resistance frequently accompany change and the exploration of the new.
Any management system can be mismanaged, but RCB/RCM is a powerful idea; it can empower academic leaders of colleges and schools to guarantee that their budgets will follow rather than lead their academic mission. By coupling responsibility with real meaningful and consequential authority, RCB can generate powerful incentives for deans and managers to accomplish their missions in ways that promote institutional objectives, rewarding success and creating strong incentives to think and operate entrepreneurially.
The success of the RCB/RCM model is predicated on the desire of a university to place the full force of its human and financial resource in the service of its academic priorities. The university must establish clear academic priorities and be willing to follow its academic priorities with its budget, not the reverse. It demands that the President and the central university administration effectively coordinate and support the work of all the constituent centers by designing a surgically mindful systemic allocation of available financial resources.
Most importantly RSB/RCM promises to bring critical decision-making power closest to the source; it places it squarely in the hands of those who know best, within each area of academic and professional study, what resources their individual discipline requires in order to enhance the student learning experience, to further research and to serve the community. To quote Whalen on the concept of proximity, “The closer the point of an operating decision is to the point of implementation, the better the decision is likely to be.” This is just one of a sequence of basic concepts endemic to RCB. “People play a better game when they own their own rules.”
Of course the central university administration will assess and tax responsibility centers for necessary general services, student support, facilities usage and the like. But it must combine these revenues with other sources of income/revenue such as state allocations, and other sources and disburse them in support of the academic mission to each constituent responsibility center. It must develop and implement a detailed taxation and reallocation process that is sensitive to the unique cost/revenue profiles of each and every center in support of academic programs that clearly serve the overarching priorities.
To make the budget process truly responsive to and supportive of our academic priorities will require strong, dynamic and visionary leadership – comprehensive vision and mission planning – active and ongoing long range/strategic planning at the university level and most critically, within each responsibility center.
A word of caution: this cannot be achieved overnight – indeed, according to Whalen's account, it took nearly two years of detailed planning, negotiation, education and careful implementation to finally achieve a fully functioning and productive RCB/RCM climate at Indiana University twenty years ago. We, too, will require strong executive leadership as well as time; Temple deserves the benefit of undertaking a well-managed, guided process of educating faculty and staff; a transparent, methodical and unconditionally inclusive process of planning and implementation leading to a dynamic 21st Century economic operating system that sets an example for the growth of resilient, sustainable world-class quality higher education in America that will remain accessible and affordable to all.
Jonathan A. Scott, Associate Professor of Finance, FSB
When I heard about President Theobold’s decision to move Temple to a decentralized budget model, my first thought was “RCM (Responsibility Center Management) version 2.0.” Back in the mid-1990s, Provost England attempted to launch version 1.0 when I was acting dean of the School of Business and Management. At that time the literature on the subject was sparse, and ironically, my assignment was to speak with the dean of the Kelley School of Business at Indiana University about his RCM experience. I was skeptical of embracing RCM (much to the irritation of the Provost) for two reasons. First, it was not driven from the President’s office; and second, no one provided a convincing explanation for controlling the moral hazard problem of deans acting in their own interest at the University’s expense. Since that time, a small cottage industry of literature arose around the topic that peaked in the early 2000s. If you undertake this search you will find that there are many different flavors of RCM, with the motivations for public schools coalescing around how to maintain access, quality, and efficiency in the face of declining public funding. In my search I hoped to find some rigorous empirical evidence documenting the success of an RCM model. Alas, none was to be found except some correlations between budget and enrollments before and after implementation at one university.
With this background, what can we as faculty realistically expect from an RCM budgeting model? In recent years, Temple has implemented a number of steps towards a full RCM model: enrollment-based budgeting, decentralized summer school budgets to schools and colleges, surplus carryovers, and expanded auxiliary programs that stand on their own bottom line. To close the loop, all revenue (primarily tuition), indirect costs (e.g. space, computing), and the Commonwealth’s contribution to Temple’s operating budget need to be allocated to the “responsibility centers” (think schools and colleges). While these allocations are a non-trivial exercise, Temple has made these allocations of indirect costs for many years through the Full Revenue and Expenditure and Evaluation System reports (at least as far back as the early 1990s). Thus from a pure operational perspective, most of us are likely to see no immediate change.
However, the process for RCM implementation could have an immense influence on Temple’s future and thus should be of intense interest to all of us. An important principle for successful RCM implementation is good governance (e.g., see Kent State’s RCM Manual Web for an excellent example of RCM budget goals and principles). Practically speaking, good governance means an open process where the revenues, costs, and Commonwealth allocations for all units, including the methodology for calculating these numbers is very transparent. With this knowledge, we should have a vibrant, fact-based, and frankly messy, discussion of what Temple will look like in the next 10 years, which includes what public goods are valuable to us and how much they should be subsidized, and how the budget should support our academic priorities. If you are skeptical of this outcome, include me as well. Nonetheless, my hope is that our new leadership will use the RCM model to assist us in navigating what my colleagues and I characterize as the “post bubble” higher education future that confronts us.
With all the potential benefits of the RCM model, my concern about moral hazard still remains. Well-managed profit (and not-for-profit) businesses would not give division heads profit/loss responsibility without strict accountability for their results that ensures consistency with the larger organization’s strategy. As faculty we should be concerned about the effect of decentralized budget responsibility on academic quality, the student’s best interest, faculty deployment, and program subsidies (e.g., undergraduate to graduate) at the school and college level. Some of this accountability may already be in place, but it needs to be transparent and part of the RCM implementation conversation. Once again, my hope is that University leadership finds a way to balance the moral hazard costs of decentralized budgets with its benefits. If they can, Temple is likely to look very different 10 years hence. •