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Financial planning, resource allocation, systems and structures

Brendan FawcettHead of PlanningUniversity of Leicester

In this session you will:

• Gain an understanding of why and how devolved financial management works in universities

• Develop an understanding of the opportunities and risks associated with a devolved financial model

• Gain an appreciation of the strengths and weaknesses of particular resource allocation models

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Physics laboratory: female student in pink jumper uses large shiny apparatus equipment© University of Leicester

Photo published in Life Magazine, 195922 male students at Saint Mary's College in Moraga, California take part in telephone-booth stuffing

The constraint of money

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Hyperinflation in Zimbabwe, 2008. Source: http://greatblogabout.com/?p=1425

Planning Timetable 2010-11

Resource Allocation

“A methodology which provides the greatest overall satisfaction in meeting objectives while simultaneously constraining the use of resources exactly to those which are available.”

p49, Chapter 3, Allocating Resources in the HE SectorFinancial Management Control in Higher Education (2005)

Malcolm Prowle, Eric Morgan

“The distribution of power, authority and esteem.”

“Creation of relationships based on trust and accountability.”

Dave Hall

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What beyond the strategic aims of the institution might influence the nature of a resource allocation process?

Your institutional landscape

• Structure– Reporting lines– Dist of prof services staff– Size of depts– Academic range

(profile / structure)

• Systems

• Geography

• History

• Culture

• Leadership

• External environment

Why Allocate Resources (1)?

• Too complicated not too

• Better informed decisions; therefore better decisions

• Increase the speed of decision making

• Greater flexibility and responsiveness

• More efficient and effective deployment of resources

Why Allocate Resources (2)?

• Improved record keeping so costs monitored and controlled more effectively

• Demonstrable articulation of institutional priorities

• Increased understanding of workings of the institution

• Sense of identity and purpose

• Motivation and morale

• Mitigates risk of financial impropriety

There are of course problems….

What do you think are the key risks when allocating resources?

How would you mitigate against these?

Risks

• Ineffective and inefficient

• Increase costs / Diseconomies of scale

• Institutional fragmentation - departments pulling in different directions

• Increased internal tension - tension of paying for indirect costs

• Increased risk of financial failure or impropriety

• Focus on figures not service

Mitigations

• Expenditure based on an institution-approved plan

• Clarity as to what authority is being devolved and why

• Procedure for accountability

• Strong central finance function, institutional oversight and monitoring, provision of comprehensive financial and other management information

• Institution-wide processes and procedures

• Central IT system and support

• Unify the administration (devolve and centralise)

• Incentives and rewards with the model for allocation

• Devolve to units which have critical mass

• Don’t “over-allocate”

Resource Allocation Models (RAMs)

“A RAM is a model by means of which institutional funds are distributed according to pre-set criteria represented by a number of formulas and variables”

“A RAM is not neutral. It contains a number of basic assumptions regarding what is important and what is not … a RAM does not decide on budgets, decision-makers do … a Resource Allocation Model does not eliminate the politics of the budgetary process”

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Oxford’s JRAM and JRAAB• Joint Resource Allocation Advisory Board makes recommendation, to

Council through PRAC, and to the Conference of Colleges on:– The annual resource allocation exercise.– Identification and proposed treatment of funding streams within the

JRAM, including those from HEFCE.– Assessment of the alignment of the model with academic strategy.

Assessment of whether change in academic strategy and policy requires changes in the JRAM to support collegiate University objectives and if so the mechanisms which would enable these to be achieved.

– Proposals on how changes in external funding should be incorporated within the core mechanism transparently and on whether such changes then require an over-riding mechanism to align the JRAM with University academic strategy.

– Recommendations on related issues concerning the management of resources and the funding of activities across the collegiate University, as they arise in the course of the group’s work.

– The Board should be primarily an expert body, which will make recommendations for consideration by the wider membership of PRAC and the Conference of Colleges.

– Membership is for three years in the first instance, renewable for one further term. The Chair is nominated by Council and Conference in rotation, each time for a two-year period.

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Features of a RAM

• Strategic fit– In the service of the institution– Devolution not autonomy

• Transparency– How funds are earned and allocated must be clear

• Incentives & Rewards– For quality and rational behaviour, not egalitarian

• Reliability & Predictability– Ability to plan, evolution rather than revolution

What and How to Allocate

Income

• Sources for Dept– State funding– Student fees– Research – Commercial activities

• Other Inst. Income

Expenditure

• Direct costs– Pay and non-pay

• Indirect costs

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The Problem of Indirect Costs

• Space– Charge direct

• Utilities– Incorporate with space– Charge direct

• Capital– Top slice– Tax– Allocate– Charge direct

• Institutional costs– pensions, insurance,

maintenance

• Central administration– Finance, HR, Marketing,

IT, Student and Academic Services

– Top slice– Tax– Charge direct

Top Slice Model

• Top slice funds support units, capital investment and central institutional costs, e.g. pensions

• Each academic unit receives ashare of the balance of income

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• Protects the institution

• Simple to manage

• Reduced transparency– Weakens financial awareness?– Top down, reduces central accountability?– Increased internal tension?

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• Transparent

• Increased financial awareness

• Accountability of administration/support services

• Potentially simple to manage

• Inaccurate?

• Reduced collegiality?

• Strategic investment?

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• Similar to taxation model

• Drives perverse expectations?

• Complicated – inefficient?

• “Playing shops”

• Reduced collegiality?

The University of Bath RAM

• allocates central costs to all of its academic activities on the basis of a number of cost drivers:

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• UG FTEs

• PG FTEs

• Sited FTEs

• Non-pay expenditure

• R income

• Weighted employee numbers

• Overseas FTEs

• All FTEs

• Space utilisation

• T income

• OSR income

Accountability: The Budget Centresto the University• Defined roles and responsibilities

• Common processes, procedures, regulations

• Good management information

• System for oversight– Plans– Monitoring of financial performance / transactions

• Shared goals

• System of rewards and sanctions

Accountability: The Administrationto the Budget Centres• Transparent financial reporting

• Published service and financial plans

• Service level statements ?

• Balanced scorecard ?

• KPIs and performance targets ?

• Benchmarking ?

• Service reviews led by senior academics

• Central units bid for additional resources