University Budget Restrictions: How to Do More With Less Through Time-Driven Activity-Based Costing

Tim Goral's picture
budget restrictions
Monday, September 17, 2012

Collegiate institutions in the United States are experiencing a budget crisis, and the current state of higher education is more challenging now than ever before, especially for public institutions. States are slashing the higher educational spend across the board, ranging from high single- to double-digit percentages. Private institutions are also experiencing issues as annual giving has been reduced and endowments have not generated historic returns.

Over the last decade, many state legislatures are providing less than 30 percent of public universities revenues from more than 50 percent. An annual study of state-tax support for higher education conducted by Grapevine shows that funding for 2011-2012 has reached the lowest point in half a century. The drop in funding remains incongruent with most universities’ continued movement towards increasing enrollment and goals to stay competitive by offering more valuable student programs and incentives. As such, enrollment is at an all-time high; more young adults and their families view accredited degrees as more of a necessity than in the recent past. With this increase in enrollment and decrease in state funding, universities are under pressure to recover these lost revenues by a number of cost-saving moves—none of which are the best solution to such a difficult problem.

Tuition. Tuition is the first revenue source many universities contemplate changing when facing budget issues. The cost of tuition in the U.S. is rising, and has far exceeded the consumer price index over the last decade, putting the affordability of attaining a college degree without student loans out of reach for the average middle class family. Even families earning $100K a year are taking out more loans to send their children to college. Also, with these unprecedented high tuition costs, universities now have a higher level of accountability of costs and deliverables from politicians, the media, general public, parents and students.

University Staff. One of the most significant costs for universities is the educational staff. Trimming university staff and faculty results in larger classes, fewer options for students, and lower support levels for students and faculty. With enrollment on the rise, it would be prudent to at least maintain, if not grow (or enhance the capabilities of), the educational staff. Student programs are also at risk—colleges may place less importance on student programs, such as honor programs and outside education programs, and universities have been dropping such programs to save money.

Facilities and Programs. Another common mistake universities make when attempting to control costs is to neglect university facilities. Ceasing the restructuring and maintenance of current facilities and ignoring the need to build new ones could not only put universities’ alumni and other support funding at risk, but could negatively impact student learning environment and eventually enrollment.

Universities are facing a conundrum: Funding for higher education is on the decline, but enrollment is at an all time high—how can they do more with less?

Time-Driven Activity-Based Costing (TDABC) As previously noted, tuition spikes have caused universities to have a higher level of accountability as mandated by the government, and because of this, universities need to have the ability to accurately discern and analyze costs and compare this to what is driving demand. Currently, most colleges aren’t completely there, yet. For example, they might know how much certain departments are spending on which vendors, but they lack the ability to align shared services (duplicate services or programs) between those departments. Few universities have complete transparency into their cost structure, and even fewer have the ability to create new revenue streams and better leverage current revenue.

Most importantly, colleges need this type of modeling tool to better manage current resources, address transparency issues and identify new ways to limit tuition increases. All of this would be possible through a best-practice approach known as time-driven activity-based costing (TDABC). According to Professor Robert S. Kaplan and Steven Anderson, the creators of this costing model, TDABC accurately estimates cost and demand through measuring the unit cost of supplying capacity and the time required to perform a transaction or an activity.

Implementing a TDABC model will help universities take control of:

  • Financial Reporting: Universities can reduce costs while gaining efficiency through financial planning with real-time budget visibility and consolidated financial reporting. They’ll streamline cash flow activities and optimize financial transactions.
  • Cost Transparency: Schools will be able to gather insight into departmental activity cost details, which produce a more accurate and holistic representation of a department’s overall cost, capacity and consumption level. Instead of reducing staff and facility costs, they can recognize where support levels can be shifted without adversely impacting overall program and service quality.
  • Allocation of Resources/Budget Development: To help with accountability, universities can allocate interdepartmental costs accurately, which will allow them to understand the total resources consumed and create accountability in the budgeting process.
  • Shared Services: Through the simplified budgeting and reporting capabilities TDABC provides, colleges will be able to efficiently manage shared services and allocate costs and resources across all departments, without duplication occurrences.

Through TDABC, universities will be able to understand which activities drive what costs and prioritize activities that drive demand. They’ll be able to find a way to create a balanced, efficient budget during a time when state education spending is at its lowest in decades. Because of this, universities will be able to avoid raising tuition, cutting staff and eliminating programs and realize their academic and research goals.

You can read Kaplan and Anderson's paper on TDABC here (PDF download).

—Troy Stovall is a higher education industry veteran who has served as CFO at Jackson State University and EVP/COO at Howard University. Also a former McKinsey & Co. consultant, Stovall is now serving as a consultant at Acorn Systems, a cost and profitability management and software company.

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