Having sat through literally hundreds of board meetings as a college trustee, hospital trustee and college president, I’ve lost track of the times I’ve heard that “this place needs to be run more like a business”. But in my private business experience, I’ve also seen business organizations that were the height of disorganization and inefficiency. I would cringe at the thought of these businesses being the model for good business practices. In the spirit of full disclosure, I must admit in one or two situations when I was leading the business, I was one of the contributing parties to the disarray! As I’ve pondered this question, I’ve come to this non-controversial conclusion: Tax-exempt entities (I hate the term non-profit, as I believe it becomes a guiding principle and self-fulfilling prophecy for many organizations) are on one hand guided by a mission that rises above the issue of simply making a profit, yet they would benefit from some business practices often adopted by profit making firms.

One of those business practices that really must be effectively adapted to mission-centered colleges and universities is a review of revenue sources and revenue uses. For so many institutions that struggle for long term survival, a balanced budget (where revenue meets expenses and there is no surplus or deficit) is often viewed as the “gold standard.” Yet, the balanced operating budget fails to answer a number of questions, not the least of which is: What programs generate financial resources for the whole institution and which draw on them?

Some institutions try to answer this challenge with the installation of a detailed cost-accounting system, an expensive and time consuming pursuit.

One solution I’ve utilized and Stevens Strategy has provided to its clients is a periodic Responsibility Center Review of their programs. This review allows a college or university to gauge the surpluses and deficits of its programs through the conduct of a thorough review of the most recent yearend audited financial statements. The review allocates tuition and fee revenue and assigns direct expenses to all revenue generating academic programs, creates a “transfer price” estimate to allocate some of that revenue to academic service departments and assigns overhead estimates to all programs. In a short period of time and without extensive accounting upgrades, an institution can gauge its “profits” and “losses” by program with this method.

But in mission-based organizations, finances only tell part of the story. And a college or university can’t determine the effectiveness of its program offerings simply through a financial analysis. A thoughtful Responsibility Center Review must carefully consider two other program attributes: A program’s contribution to the mission of the institution and its quality. We might find through such a review programs that not only lose money, but that lose money and really don’t support the college’s mission or are of questionable quality or both. If we can reduce the losses from non-missionessential or low quality areas over time, our balanced budget might become a budget with a surplus, a budget that can provide additional funds to pay down deferred maintenance, expand mission essential programs or build reserves for “rainy days.”

Mission-centeredness, while seemingly an abstraction, can be effectively measured through carefully crafted surveys of the institution’s primary constituencies: its students, faculty, staff, alumni and trustees. These groups understand the true mission of the institution and inherently recognize what programs are vital to achieving both the stated and implied mission of the college. Quality indicators may vary by institution to a certain degree, but acceptance rates, retention rates, graduation rates and placement rates are often among the major quality indicators everywhere. And there are others that can often be tailored to the institution: The percentage of faculty holding terminal degrees in their field, the number of courses taught by professionally qualified faculty, student pre- and post-test results and accreditation requirements might be among additional quality factors to consider. Some of these indicators are easy to determine, but others will require more thought and analysis.

This review can’t be conducted in a locked room in the basement of the administrative office building. To be conducted effectively and to engender broad institutional support, it requires involvement by a broad crosssection of the institution in developing the analysis and considering the ramifications of the results of that analysis: The programs that require more support, those that require less, and yes, those that should be closed. An effective Responsibility Center Review will help institutions to make these tough decisions and achieve broad ownership of the results. I and Stevens Strategy know it’s not impossible to achieve these goals. We’ve achieved them. What are your thoughts?

Originally posted December 12, 2007