Fund-Finding Missions

Responsibility-centered management is one of several funding models business schools have used to stay fiscally sound in a changing educational environment.
Fund-Finding Missions

The changing nature of business education is self-evident, as market forces have been pushing business schools persistently into online delivery formats, different disciplinary specialities, or new geographical regions. But perhaps no development has affected business school programs more comprehensively than changes in traditional funding models. Business schools the world over face a reality check: The days when revenues flowed into their programs largely unimpeded are at an end.

For business school leaders, finding new sources of revenue can seem like running an obstacle course. But administrators who learn to navigate the obstacles successfully not only secure their schools’ economic futures, but also strengthen their operations, programs, and relationships. The schools profiled here all had to adopt dramatically different financial strategies, whether due to an unsustainable model or even governmental collapse. Their leaders offer sound advice for others who face similar changes to their institutions’ financial circumstances—and who want to achieve similar success.

THE FINANCIAL MAKEOVER

BUSINESS SCHOOLS MUST BE BOLD YET REALISTIC, PATIENT YET PERSISTENT, AND CREATIVE YET FOCUSED ON THE PATH TO FINANCIAL INDEPENDENCE.

BY PETER TODD

As dean of the desautels faculty of management at mcgill university in Montreal, I often was accused of being “resource obsessed.” But business school leaders, especially those at public universities, have to be preoccupied with managing change and adopting alternative financial strategies. As governments continue to cut funding for higher education, new dollars—especially dollars that don’t compromise program quality or cost 99 cents each to obtain—have become increasingly hard to come by.

At Desautels, we have had to transform our programs while simultaneously changing our income models. We have diversified our revenue sources, decreasing the portion our budget derived from government funding from approximately 75 percent to about 25 percent, and we have doubled our modest operating budget from approximately CAN$20 million to $40 million per year. Perhaps most important, we have done so while reducing the number of students that we teach and increasing the number of professors who teach them. We now invest more in the experience of each student. We have a richer intellectual and scholarly environment, more satisfied students, and more involved alumni.

In our most significant initiative, we redesigned, repositioned, and privatized our MBA program—a move that we believe will pay us the greatest dividends over time. We also expanded our executive education offerings, raised tuition in select areas, and formed partnerships in new geographical markets, so that if one strategy failed, we would have alternative paths to success. We complemented these efforts with major fundraising and alumni engagement initiatives.

Throughout this process, we’ve learned 11 important lessons that could guide other schools seeking out alternative funding models.

LESSON NO. 1: GET THE CURRICULUM RIGHT FIRST—THEN DETERMINE HOW TO PAY FOR IT.

Prior to its reinvention, our MBA program was completely unsustainable. We admitted about 120 students per year to our two-year full-time MBA program, for which government-regulated annual tuition and fees were less than CAN$2,500 (about US$2,198—no, that is not a typo). We received an additional $7,000 government subsidy per full-time student per year. However, it cost us approximately $20,000 per student to deliver the program, which meant that we lost nearly $10,000 each year for every MBA student we admitted. The government would not allow a substantial tuition increase due to a powerful student lobby and strong public opposition to higher tuition rates.

By my estimate, the optimal class size for our MBA program was zero. Something had to change.

First, we launched an Executive MBA in partnership with HEC Montreal to show that the local market would pay for a premium program. Delivered in French and English and based on Henry Mintzberg’s managerial mindsets, the program recently graduated its fifth class. It served as a springboard for what we ultimately would do with our full-time MBA.

Next, we launched a new MBA curriculum under the existing government- subsidized $2,500 tuition rate. We asked faculty, students, and alumni to help develop a new curriculum for the full-time MBA, without regard to resource constraints—we wanted them to be creative, unbound by what we couldn’t afford to do. Based on their feedback, we designed a curriculum based on “integrated management,” which relies on a streamlined core that teaches across functions. We also introduced mandatory internships and international trips, developed more professional development activities, and reduced the number of program concentrations.

It was risky to roll out these programs without a funding model to support them, but we needed to prove to the university what we could accomplish with more resources.

LESSON NO. 2: BE PREPARED TO MAKE TOUGH DECISIONS.

To mitigate our losses from an underfunded program, we reduced the size of the first full-time MBA class that enrolled in the new program, from 120 down to about 60. This tough choice paid off in improved student satisfaction and job placement results. We also chose to suspend admissions to our fragmented part-time program. We did this to focus our attention on our new direction and make the idea of exiting the market a reality.

LESSON NO. 3: KNOW THAT “NO” CAN BE NECESSARY TO GET TO “YES.”

We, along with university partners, lobbied government for greater freedom in our MBA tuition models. But while officials intellectually saw the need for changes, they saw no political upside—and significant political risk—in making them. Our lobbying failed, but it showed the university and our stakeholders that we had made every effort to work within the system.

LESSON NO. 4: DON’T LET A GOOD CRISIS GO TO WASTE.

The need to act became especially imperative when we fell out of the Financial Times’ ranking of the top 100 MBA programs. It was bad news, but it helped us persuade university leadership of the urgent need for change. Failure is a great motivator, and we returned to the top 100 the next year.

LESSON NO. 5: DEVELOP INTERNAL EXECUTIVE CHAMPIONS.

We went to our provost and president and argued our case for privatizing the MBA program, relinquishing all government support. This action would allow us to set tuition to cover our true costs and still have funds for reinvestment, student aid, and financial support that we pay back to the university. Convinced by our arguments, the provost and president guided us as we privatized our MBA program and helped us convince the university’s board that the risk was one worth taking.

LESSON NO. 6: TAKE THE PAIN ALL AT ONCE.

With the board of governors’ endorsement, we raised annual tuition for our full-time MBA from $2,500 to $32,500 literally overnight. The dramatic increase, which applied only to new students, was accompanied by student aid and student loan programs. Our decision fueled much debate on campus, and many argued for phasing in the increase over several years. But we believed that such a strategy would have left us explaining our pricing every year.

LESSON NO. 7: BE PREPARED FOR SETBACKS.

Eventually, the government in Quebec asserted that we had no right to raise our tuition and implemented sanctions against us. Some at the university felt that the only option for us was simply to desist. McGill receives hundreds of millions of dollars per year from the province, and our choice could have placed this funding at risk. But the university’s president and board continued to support our position.

LESSON NO. 8: MAKE FRIENDS ALONG THE WAY.

At this point, our previous efforts to re-engage with alumni and the business community became critical. Influential leaders from outside the university spoke on our behalf with government officials, publicly and privately, about the need for our business school to maintain quality and competitiveness. Their arguments worked—we resolved our differences in a couple of months, and the government lifted sanctions.

LESSON NO. 9: STAY FOCUSED—BUT KEEP OPTIONS OPEN.

Our broader intention was to reform the system, but political circumstances required us to focus on a local solution. It took too long (Lesson No 10: Be patient and persistent), and we didn’t get all we wanted (Lesson No. 11: Take each win you get step by step). But, eventually, we hope our success leads to long-term systemic changes for all universities in the same jurisdiction.

JUST THE BEGINNING

Students, alumni, the university, and the local business community have largely supported our adoption of a self-supporting funding model. Moreover, our decision to increase tuition all at once has paid off. Not only has demand for our program remained steady, but interest has increased, particularly from international students, as more prospective students give us a second look. It turned out that our previous tuition was so low that many questioned the quality of our program. Now, they assess our MBA based on its ROI. The tuition increase has allowed us to shift the conversation from what the program costs to what we have to offer. The size of our MBA class is now about 80, on average.

We have changed our approach to our part-time program as well. We once had approximately 50 part-time students enrolled at one time, all at various points in their programs. Today, our Professional Part-Time MBA is a lockstep program; it enrolls about 25 students per cohort who begin together and graduate together. Our admissions standards for part-time students are higher than before; our part-time tuition is privatized and set at the same rate as our full-time tuition.

My personal journey on this “road to resources” ended last April when I stepped down after nine years as dean— I must say, it delivered almost as many rewards as frustrations. But our school’s journey is just beginning. We are in a much better position today than when we started, but we must continue to change and adapt if we are to become ever more self-reliant.

Peter Todd is a professor of information systems and dean emeritus at the Desautels Faculty of Management at McGill University in Montreal, Quebec, Canada. He stepped down as dean in April 2014.

Below, more business schools share their stories of exploring and adopting new financial models:

FOLLOW THE MONEY

WHAT TO DO WHEN YOUR UNIVERSITY IS CHANGING ITS FUNDING MODEL—BUT THE TRANSITION IS SLOW GOING.

Four years ago, when Len Jessup became dean of the University of Arizona’s Eller College of Management in Tucson, he received two mandates from the university president: Transition Eller College to a self-sustaining financial model, with no reliance on state funding, and help the university do the same.

Jessup believed the best way to achieve that goal would be for the University of Arizona to adopt responsibility-centered management, or RCM, a budget model the institution has been moving toward over the past five years. (See “Cornering the Market” on page 18 of BizEd’s July/August 2013 issue.) Traditionally, public universities use a centralized financial system, in which they collect all tuition dollars generated across campus and allocate them to each department. Under RCM, each college or department retains control over at least some of the tuition dollars it generates and pays a percentage of its revenues—based on enrollments, credit hours, or other metric— back to the university.

Before advocating for RCM with the provost and president, Jessup and his vice dean, an accounting professor, analyzed the college’s finances, but they found that the numbers didn’t quite add up. “We knew we generated a greater portion of the university’s revenue than the numbers indicated,” says Jessup. “We didn’t want to make guesses, so we had to recalculate everything from the ground up.”

During Jessup’s second year as dean, he asked his leadership team to focus on the project. The investigative team from Eller worked with the university’s finance team and data warehouse to piece together as much accurate information as possible for the college, including enrollments, tuition, scholarships, and cash flows.

The team had regular meetings with the university’s provost, chief financial officer, and board members to present its findings and articulate the value that the college could bring to the university through an aggressive RCM model. The provost “was surprised at the level of detail,” says Jessup, but was also determined to move the entire university toward financial self-reliance.

 The process toward implementation has taken two years, but in July 2015, the University of Arizona expects to switch to an RCM system in which all units on campus will manage their own revenues while paying subsidies back to the university. Each unit’s allocation will be determined according to a formula that weights both a college’s total credit hours taught and its number of student majors.

During his time at Eller College, Jessup also helped the University of Arizona restructure its technology transfer and commercialization activities, which will make an even greater impact on its revenue-generating potential. Moving to an RCM model will be an important foundation to those efforts, he says. "Through our investigation of the actual enrollment and budget numbers, we have shown that the Eller College is clearly self-sustaining and generates more than it spends," says Jessup, who this month will assume his new position as president of the University of Nevada in Las Vegas. "As a business school, Eller is helping the university get to that same destination of self-sufficiency.”

RAPID RESPONSE

WHEN AN ECONOMIC CRISIS CAUSED STATE FUNDING SUPPORT TO DISAPPEAR, ONE SCHOOL DEVISED A CREATIVE SOLUTION.

Many of Venezuela’s higher education institutions have seen their financial circumstances change swiftly, as the country’s economy has worsened over the last few years. Many of Venezuela’s largest companies are government-owned, and as state funding has disappeared, business schools that rely on corporate donations have had to adjust their strategies quickly.

That includes the Instituto de Estudios Superiores de Administración (IESA), which is based in Caracas, Venezuela, with additional campuses in Maracaibo and Valencia. IESA, which offers graduate and executive education programs in business and public management, has strong ties to corporations. But in the current economic climate, many of the school's largest donors and executive education clients have been forced to re-examine their financial priorities after their state funding stopped. This has made it increasingly difficult to maintain fundraising, says Gustavo Roosen, IESA’s dean.

However, in 2012, the school reached a breakthrough when it changed the way it asked for funds. “We began asking corporate donors to help us assure that no student admitted to IESA is left out due to lack of economic resources,” says Roosen. The result was the creation of a new scholarship and loan program administered through the IESA Foundation.

The program relies on IESA’s partnership with two Venezuelan banks: Banco Mercantil and Bancaribe. Students can apply for soft commercial loans through a partner bank, which analyzes the student’s circumstances and determines the amount of loan the applicant can repay in 60 months. About 25 corporate donors contribute money to a trust at IESA Foundation.

If the bank is not willing to finance a loan large enough to cover IESA’s tuition, the foundation finances the remainder. Students begin to repay the bank-financed portion of the loan immediately; the foundation- financed portion, after they graduate. Students who complete their programs with exemplary performance are eligible to have all or part of the foundation-financed portion of their loans converted to scholarship. Loan payments are applied first to the bank-financed portion; once that debt is settled, all remaining payments are transferred to the foundation’s trust.

The support provided by the banks was crucial, says Roosen. “We did not want to be analyzing student finances, so we asked the banks to look at this new model from a different perspective, based on social responsibility.” Had the school financed the loans, the delinquency rate could have been high, because Venezuelans are not accustomed to paying for education, says Roosen. “This way, the student sees funding only from the bank, and the bank takes care of the entire process,” he adds. “We don’t have to collect.”

Today, IESA is actually more financially secure than it was before the economic crisis, now that its student financing program is on strong footing. It not only has kept its programs running, but over the last two years it has increased the size of its graduate student body from 200 to 540. In addition, IESA’s executive education courses enroll 9,000 students each year. “We have seen an exodus of people moving from Venezuela, primarily to the U.S. and Spain. They do not want to continue to be exposed to the current conditions in the country,” says Roosen. “Companies here are struggling to retain talent, and one way for them to do that is by sending high-performance individuals to receive executive education.”

We did not want to be analyzing student finances, so we asked the banks to look at this new model from a different perspective, based on social responsibility.”
—GUSTAVO ROOSEN, DEAN OF IESA

IESA’s solution was born from unusual circumstances, but Roosen believes the approach could apply to other business schools as well. “If deans want to address the issues of inequality and attract students with less financial means, they should discuss this issue with donors,” he says. “The best advice I can give is: Don’t take no for an answer. We persuaded donors by discussing the quality of our programs, the need to produce new leaders, and the need to improve public management. Given the political and macroeconomic turmoil, companies want to preserve their own future.”

THE RIGHT MIX

To achieve more financial autonomy at their universities, business schools can choose from only a handful of basic strategies:

  • Raise tuition.
  • Admit more students to gain economies of scale.
  • Develop new products, typically through partnerships and niche programs.
  • Expand offerings off-campus and/or online.
  • Invest more in philanthropy and fundraising.

But b-school leaders must set their priorities carefully, focusing most on those strategies that promise the biggest payoffs for their schools’ circumstances, says Peter Todd of McGill University's Desautels Faculty of Management. Only by developing the right mix of strategies can business schools maximize their financial success.

Has your school developed a successful new financial strategy or faced a particular challenge as it adopts new financial models? Share your story at bized.editors@aacsb.edu or via Twitter @BizEdMag.

REAPING REWARDS FROM RCM

THIS BUSINESS SCHOOL HAS OPERATED UNDER RCM FOR NEARLY 25 YEARS, AND ITS CURRENT DEAN WOULDN’T HAVE IT ANY OTHER WAY.

Collegiality. Cooperation. Freedom. Innovation. All are benefits that business schools can expect under a well-designed responsibility-centered management financial model, says Idalene “Idie” Kesner, dean and Frank P. Popoff Chair of Strategic Management at Indiana University’s Kelley School of Business in Bloomington.

 “RCM opens up opportunities for us as deans. It gives us more authority and responsibility to control our own fate, in terms of how we accumulate resources, make investments, and plan for the future of the school,” says Kesner. “It’s very transparent and predictable, so I know what funds I will have each year. I cannot imagine operating in an environment that is not RCM-based.”

IU adopted RCM in 1990 and has been perfecting its formula ever since. Under IU’s current RCM model, each college receives both an allocation of the university’s tuition revenues and an appropriation of the university’s state funding. Both amounts are determined by the college’s “market share” of the total number of credit hours taught at the university in the previous year.

Each college retains control of revenues generated by its own master’s level programs—and, in Kelley’s case, by its executive education courses. Once all revenues are dispersed, each college pays the university an assessment fee, determined by factors such as number of credit hours taught, number of tenure- track faculty, and square footage of physical facilities. The university uses this fee to pay for utilities and maintenance, as well as common services such as the library, tech support, and enrollment management.

only other unpredictable revenue sources are those distributed by IU’s special Provost’s Fund. IU’s colleges and departments submit proposals for support from this fund to develop innovative new programs.

Even after 25 years, IU still is tweaking its RCM formula. Each college participates in discussions of the pros and cons of any proposed change. IU administrators now are debating whether to switch from a formula based on market share to one based on total credit hours taught. Market share is a relative number, so that “if one unit’s market share goes down by 2 percent, another picks up that 2 percent,” Kesner explains. If the university used credit hours as an absolute number, “we could predict our income even more accurately, because we know how many hours we teach.”

Each year, the transparency of RCM forces IU's deans to examine the numbers carefully. It becomes clear which areas are underperforming, so deans can make more informed decisions about whether a course or program should be expanded, discontinued, or subsidized if it contributes to the college’s mission.

Such transparency also allows deans to understand where their college stands in the system. “This creates a collegial and cross-disciplinary environment, where we are encouraged to work with other deans” for mutual benefit, says Kesner. The Kelley School recently created its 4+1 program, in which students can earn four-year undergraduate degrees in nonbusiness disciplines followed by a one-year master’s in a business discipline. Kelley has partnered with Rose-Hulman Institute of Technology in Terre Haute, Indiana, which enrolls its engineering students in the program, and with IU’s College of Arts and Sciences. Kelley offers scholarships to 4+1 students using money from the Provost’s Fund.

Faculty also are involved in the process in three primary ways, Kesner explains. First, professors participate on IU’s Budgetary Affairs Committee, which makes recommendations on Provost Fund allocations. Second, some RCM process once every five years and recommends tweaks to its implementation. Finally, faculty work with the deans of their individual schools to help determine budgetary allocations.

Kesner recognizes that, at schools still using a centralized financial system, administrators could fear losing the ability to control resources or determine the direction of the university under RCM. “But, in fact, I think the opposite is true,” says Kesner, “As deans, it’s important for us to share the success stories, and how we were able to achieve very good outcomes under the RCM model."

> To read more about how RCM has been implemented at several U.S. universities, including Indiana University, visit www.indiana.edu/~obap/rcm-iub.php.

THE RCM SWITCH

What does it take to convert a university's financial system to an RCM model? Len Jessup offers this advice from his time at the University of Arizona:

1. UNDERSTAND THE FINANCIAL SITUATION. Work with campus financial offices to compile accurate and comprehensive data on the university’s cash flow and expenses. Without hard numbers, it will be difficult to persuade university leadership of the need for change.

2. CALL FOR TRANSPARENCY. When colleges know exactly how much revenue they generate, and when tuition revenue clearly follows student enrollments, deans have more incentive to manage and grow their profit centers.

3. UNDERSTAND THE POLITICAL SITUATION. University leaders may be reluctant to overhaul the current system, so deans must manage the politics of their situations. Find the right allies and the right data, and tailor the pitch to each decision maker.

4. GET INFORMED. Jessup advises every dean to read Responsibility Center Management, a Guide to Balancing Academic Entrepreneurship with Fiscal Responsibility. Available from the National Association of College and University Business Officers (www.nacubo.org), the 110-page book discusses different RCM formulas and best practices at several U.S.-based schools.

BETTER MEASURE: MAJORS OR CREDIT HOURS?

Responsibility-centered management (RCM) is defined as a decentralized financial management system that allows academic units to control their own revenues, but schools can deploy RCM in a variety of ways. For instance, schools can emphasize a unit’s credit hours, student majors, or a combination of both as they allocate funds and assess fees. Opinions differ on which measure is better.

When the University of Arizona implements RCM in July, it will determine the assessment each college pays back to the university according to a formula that gives 70 percent weight to the credit hours a college teaches and 30 percent to the number of student majors it has. However, UA’s Len Jessup is concerned that if student credit hours are weighted so heavily, departments will be encouraged to create more courses to generate more credit hours. They might not be motivated to increase the number of student majors, which he believes is the bigger driver of revenue.

Indiana University also uses credit hours in its RCM system to determine each college’s “market share” of the campus’s state funding and expenses. IU’s Idie Kesner believes schools would see their income fluctuate more year to year under a majors-based system. “Students change their majors so frequently or do not declare a major until late in their programs,” she says. “You can never be sure where students will settle.”

But both Jessup and Kesner agree that the nature of RCM can be fluid, allowing universities to adjust the model over time. Says Kesner, “I know compromise can have a negative connotation, but under RCM, we all can come together under friendly terms to discuss the pros and cons of any change to the formula and the effects it might have on everyone. We all understand the model we’re operating under—there’s no mystery.”