What is the right budget model for your university to achieve its mission?

By Paul Taylor and Francesca Catalano

Delivering on a mission while competing in a dynamic market is a challenge for every university. It requires keeping a close eye on academic values and the bottom line. At the heart of the challenge is to drive long-term sustainability by delivering quality while managing cost and margin.

With significant change across the higher education sector following the pandemic and major policy shifts, many institutions are looking to better align budget model and institutional strategy. Some are considering adjustments to their current budget model, while others are considering more dramatic shifts.

Institutions are rightly asking, does our budget model help or hinder our strategy?

Recently we have released a white paper: “Is your university budget model helping or hindering your university strategy and mission?” (You can download a copy of the paper now at the bottom of this article.)

This white paper, based on our experience working with universities across the world on budget model design and review, identifies the key considerations for a budget model and shows how they can be applied in practice.

In this article, we are pleased to share the three things every university should consider as it redesigns its budget model.

The budget model can be a powerful tool to coordinate action toward strategic goals. But many university budget models fail to reinforce institutional objectives, instead promoting the wrong objectives or no objectives at all.

In too many cases, university budgets lock in sub-optimal cost structures, underfund strategic priorities and incentivise the wrong activities. Increasing competition and constrained government funding mean that budget models need to support the university to direct limited resources to the highest-value use.

Good resource management – and therefore budget models – should do several things:

1. Maintain financial sustainability and mitigate financial risk by building up adequate operational reserves.
2. Align leaders with the strategic goals of the institution by rewarding and providing incentives for good performance.
3. Invest in successful activities and programs and disinvest from unsuccessful ones.
4. Stimulate growth by encouraging entrepreneurship and alternative revenue streams.
5. Improve the university’s long-run performance by providing enough support to critical strategic projects.

Broadly, there are three approaches to budget models in universities differentiated by their primary focus in determining budget allocation: on past revenues and expenditures, on revenue allocation, and on revenue and expenditure.

Within these three approaches are six budget model archetypes. Each archetype creates different incentives that drive different behaviour. No university budget model perfectly exemplifies one of these archetypes. Instead, universities typically adopt a model that blends elements of each archetype, to design a model that fits the institution.

Socialising the model types, strengths and weaknesses can engage the leaders tasked with designing the budget model in an early discussion of the incentives the university seeks to create.

Experimenting with simulations of the budget allocation outcomes under alternative models can provide an early view of the magnitude of change that different models can generate, before you choose a direction to take.

The budget model can create incentives and control costs. But beyond the budget model lies the strategic and operational planning and budgeting processes that should work together to support effective resource management. Strategy, planning and finance functions typically face several limitations:

• There are gaps in strategic analysis capability: Universities typically underinvest in strategic analysis capabilities and do not use data as well as they could to identify opportunities and risks at the institution level and faculty level.
• There is a lack of clarity on where strategic planning takes places: Units can develop strategies that duplicate other work and sometimes significant effort is directed toward strategic planning activity that is not genuinely strategic.
• There is a disconnect between strategy and budgeting functions: Strategy teams and Finance teams are often disconnected and do not share terminology. This is a key barrier in combining strategic planning and budgeting to direct resources toward strategic goals.
• There is underinvestment in operational planning: Operational planning at the institution and unit level is underinvested and uncoordinated, which impacts the ability for planning to reflect strategic priorities.

To respond, universities should develop processes that reduce unnecessary duplication and achieve better integration across strategic, operational and resource planning activities.

We have partnered with universities to evaluate their existing budget model for alignment to university priorities, define the pathway forward for budget model change, and guide leaders through the budget model change process.

While some universities opt for no change, others seek to adapt to the new insights and even to fundamentally rethink the structure of their model and process.

Whichever path they take, universities navigating budget model redesign should tailor the model to their institution. Leaders need to be engaged in data-informed decisions, using scenario models to illustrate the effects of alternative budget models on allocations to guide decision-makers.

Done right, a university’s budget model can be an essential tool for achieving its strategy.

Get in touch to discuss how we can support your budget model redesign.

Connect with Paul Taylor and Francesca Catalano on LinkedIn.

Prepared with input from Peter Wiseman.