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Where Universities Can Be Cut

September 16, 2011

What a group of management consultants found when they analyzed several research universities in 2008 and 2009 to identify potential savings probably didn’t come as a surprise to most people in higher education.

The key findings section of Bain & Company’s report on the University of North Carolina at Chapel Hill summarizes the issue: “UNC has a complex [organizational] structure,” the slide states. “Multiple layers of management can exacerbate complexity. Complexity and related operating issues lead to inefficiency.”

The report on the University of California at Berkeley sounds similar. “The organic growth of our operations over decades has led to many redundancies, complexities, and inefficiencies which will be challenging to unwind,” the report states. “Local optimization, although well-intentioned and efficient on an individual basis, has unintentionally undermined pan-university effectiveness and has increased overall institutional costs and risk.”

In other words, universities are complex, decentralized institutions. They waste a lot of money on redundant administrative activities and could probably save money in the long run if they made big changes to their structure. Many college and university employees have been making those points for years.

When consultants were first brought on to work with the universities, faculty members expressed skepticism that they would find anything useful or understand the differences between business and higher education. But in the past three years, as institutions grappled with diminished budgets as a result of decreased state funding, net tuition revenue, or investment returns, faculty members, staff, and students called for cuts that resembled recommendations found in the consultants' reports. These groups are asking budget administrators to "protect the academic core" by slicing from what they view as unnecessarily large administration instead of instruction, research, and student and academic services. And many university administrators claim they are doing just that.

What the consultant reports show, and what other universities learned through their own efforts, is that major budget savings could be obtained through cuts in administrative services. Many universities are now trying to execute these plans, merging and sharing services across divisions, eliminating supervisory positions, and using new software to lower the cost of purchasing.

But data such as a new report released this week from the Delta Project on Postsecondary Education Costs, Productivity, and Accountability, show that administrative cutting can only go so far, even at the most bureaucratic institutions. The majority of spending for all classifications of nonprofit colleges and universities is tied up in “core services” such as instruction, academic and student support, and research. And at smaller or teaching-oriented colleges -- private liberal arts institutions and public community colleges -- where large bureaucracies are almost nonexistent, administrative savings aren't so easy.

The fact that the discussions are taking place at all, however, is notable, says Jane Wellman, executive director of the Delta Project. Institutional efficiencies rarely dominated the conversation before the current economic crisis. “The major challenge these universities face is trying to figure out how to rethink the institutional support category,” she says. “There is a lot of interesting work that has been done and is being done, and institutions are engaged in conversations in a way that I haven’t seen before.”

Why Changes Are Necessary

The economic downturn has been the main driver behind most of the cost-cutting efforts taking place on college campuses today. Every sector of nonprofit higher education saw revenues decline during the recession.

But while investment returns stabilized for private institutions, public colleges and universities saw state and local funding per student continue to drop, and few are optimistic that funding will return to pre-recession levels any time soon. According to the Grapevine report, an annual evaluation of state funding for higher education, per-student state appropriations are at their lowest level in 25 years.

Even if administrative cuts won't balance the budget, they still matter, says Joe Templeton, a chemistry professor at UNC-Chapel Hill who is responsible for carrying out efficiency measures. When state and family budgets are tight, institutions need to do a better job of justifying their spending and making sure they’re using tuition and state revenues efficiently.

“This notion that higher education has an obligation to try to reduce administrative costs to preserve the academic core of institutions as a way of trying to pull down tuition increases is very important,” says Ronald G. Ehrenberg, a professor of industrial and labor relations and economics at Cornell University and director of the Cornell Higher Education Research Institute. “Tuition cannot go up forever.

"In the public sector, where we depend on state support and states are facing serious financial pressures, we have a very serious obligation to show that we are being a very responsible steward of the public’s investment.”

Between 1999 and 2008, community colleges were the only sector of not-for-profit higher education that actually decreased the per-student cost of a degree, according to the Delta Project's report. Much of that was out of necessity. During that period the sector saw almost no growth in revenues per student – particularly state and local appropriations – while the costs of educating increased.

At research universities – both public and private – efficiency has been considered an afterthought, Ehrenberg says. Before the current crisis, there was little incentive for institutions to work to lower the cost of producing a graduate. U.S. News & World Report does not give points for producing a degree at low cost. In fact, the methodology actually weighs higher expenditures per student as a positive.

Savings are ‘Nothing Magical’

When the recession began and revenues declined, administrators began adjusting the bottom line. UC-Berkeley, UNC-Chapel Hill, and Cornell University all worked with Bain & Company, and other colleges and universities launched their own explorations of efficiency, citing a need to be more responsible.

The consultants’ reports from the three institutions identify similar areas for potential savings. Simplify organizational structure by decreasing layers of management and increasing the number of direct reports for each supervisor. Eliminate redundancies in information technology, human resources, and finance by centralizing some of these services. Consolidate purchasing to ensure the best deals with suppliers. Observers say they can likely be applied to almost any institution to generate real savings. “There’s nothing magical about their message,” Ehrenberg says.

These types of redundancies are endemic to higher education -- particularly research universities -- observers and implementation administrators say, and are a function of how institutions develop and are organized. As mostly autonomous units, departments, schools, and colleges all develop institutional support infrastructure such as human resources, purchasing, and information technology, to support their employees. Central administration does the same thing, and over time redundancies develop. “When you get into institutional support, you really get into the straight-up bureaucracy of the university,” Wellman says.

Show Me the Money

While they’re not magical, the savings that can be realized through the consultants' recommendations are substantial. At UC-Berkeley, the total envisioned savings are about $75 million per year. At UNC-Chapel Hill, total savings could reach $66 million a year. Administrators from all three institutions say they had to modify the consultants’ original recommendations to fit within the parameters of how a university operates, but they have stayed within the identified areas.

All three institutions are about halfway through implementation, and each maintains a fairly detailed web site listing individual projects, the amount they will save, and timelines for their adoption (see UC-Berkeley's Operational Excellence project, Cornell's Administrative Streamlining Program, and UNC-Chapel Hill's Carolina Counts program). While the projects fall along similar lines, the amount saved through each project varies.

The major savings at Cornell are slated to come from changes to the university’s procurement process. Of a total of close to $85 million in potential savings, about $30 million is slated to come from procurement. Administrators are funneling purchasing orders through an online procurement system. They are working to broaden preferred supplier agreements to include more of the campus and then renegotiate contracts with certain suppliers for lower costs. For example, the university has already renegotiated deals on bulk paper, toner, and copy paper.

At UC-Berkeley, the major cost savings are slated to come from a reorganization of the university’s administrative structure, much of which has already been realized. When administrators and consultants looked at the university's structure, they found that 55 percent of supervisors oversaw three or fewer direct reports. Administrators in the implementation program gave each of the institution’s 28 administrative units new targets for how many layers of administration they should have and how many individuals should report to each supervisor. The university eliminated about 300 administrative positions, some through attrition and some by eliminating supervisory responsibilities for certain positions. In total, the effort will save the university $20 million a year.

At all three institutions, consultants found large numbers of supervisors who oversaw few direct reports, suggesting that this inefficiency is common across institutions. Implementation administrators suggest that a good ratio would be about six direct reports for each supervisor, though that ratio should vary depending on the type of work being done, they say.

In addition to the institutions that are working from consultants’ reports, numerous other institutions are developing their own plans for streamlining administrative efficiencies. The Association of Public and Land-grant Universities, which represents 221 public institutions, surveyed institutions in 2009 and 2010. A large number of public institutions said they were balancing budgets through cuts to administration and trying to minimize the effect on research funding, student services, and academic programs. But a lot of this involved freezes to hiring and raises and less investment in infrastructure and maintenance, rather than structural changes to administration.

But those institutions that tried to improve administrative structure implemented changes that look similar to those at Berkeley, Cornell, and UNC. Ivy Tech Community College in Indiana recently made headlines for centralizing its purchasing operations. As a single statewide institution with multiple campuses, it has been able to centralize procurement to save about $20 million over three years.

The State University of New York system recently grouped its 64 campuses – both four-year institutions and community colleges – into regional “Campus Alliance Networks” to develop regional shared services plans. The idea is for institutions to begin sharing administrative services, such as leadership, human resources, and information technology, to save money that can be redirected to education. The system has gone a step further at six institutions, placing three presidents in charge of two campuses each.

Andy Brantley, president and chief executive of the College & University Professional Association for Human Resources, said there has been a noticeable increase in the number of institutions exploring ways to save money by reorganizing their human resources structures. "Sometimes -- and this is with any organization -- crisis forces us to conduct assessments and make decisions that we would never make if we’re not in crisis mode," he says. "Hopefully this leads us to decisions that are in the best interest of the overall institution even when the crisis is over."

The University of Tennessee, which previously had human resources offices on each of its five campuses, implemented a three-tiered model of human resources, centralizing some functions, placing others in two regional service centers to handle routine questions, and leaving officers on each campus to provide a human presence. The 35-campus University of Georgia system consolidated administrative functions such as payroll and accounts receivable into a single service center.

But Brantley notes that just because an institution has a distributed model of human resources does not necessarily mean that it is operating inefficiently. "A large campus that has some H.R. functions that are at the department level doesn’t necessarily mean it is inefficient use of staff," he says. "For some key issues, having some H.R. expertise at that department or division level could be really important in helping core H.R. staff."

But not all institutions have the kind of bureaucracy that shows up at research and master's institutions. According to Delta Project data, administrative spending at community colleges did not grow as quickly as it did in other sectors during the decade preceding the recession. Richard Ekman, president of the Council of Independent Colleges, which represents 600 independent institutions, says the same is true for most small bachelor's institutions.

"Except for a handful of wealthy institutions, most have never had deep staffing in administrative offices," he says. "Not much was done in the flush days of the 1990s to increase staffing, except in technology, and in order to comply with more regulation and to provide support services to increasingly diverse student bodies."

Administrators at these institutions say that because they don't have the same types of administrative structures, there's little to cut. At many of these institutions, cuts were conducted in a similar manner to previous economic crises, by replacing full-time faculty with part-time and adjunct faculty, increasing class sizes, and reducing student and academic support services. When they to try to save on administration, the cuts are typically not as great and require more creativity. At religious institutions, community colleges, and public historically black institutions, administrators have discussed savings that could be generated by merging campuses to create economies of scale.

But when push comes to shove, faculty members, administrators, and students at several universities have been unwilling to compromise the independence of their institutions for the sake of administrative cuts. In North Carolina, where state lawmakers proposed folding the administration of small community colleges into their larger neighbors, eliminating presidents, payroll, and other administrative offices, colleges fought back against the proposal.

The SUNY system has also seen some backlash to its proposal to place one president in charge of two campuses. Faculty members say eliminating the president will deprive a campus of strong leadership while only bringing minimal savings to the institutions.

Need for Better Metrics

Administrators in charge of implementing the changes say financial efficiency could be greatly improved with a more robust exchange of data on university costs.

While it's easy to compare metrics such as graduation rates, faculty salaries, overall budgets, and student aid across institutions, more specific metrics about the efficiency of certain administrative or spending practices are not widely available. Andrew Szeri, faculty head of Operational Excellence at UC-Berkeley, said the university's implementation of its efficiency program has been "intensely metric driven," but putting the metrics in context is difficult.

“Becoming more efficient would be easier with an understanding of what the benchmarks are and what the targets across the higher education industry should be,” he says. For example, he says, there is no common understanding of how much each institution spends for each dollar it raises, no statistics about staffing ratios, and no available information on what other universities spend in financial transactions. If universities can see comparisons across institutions, they can know if their numbers are out of line with the standard.

In a recent survey by Inside Higher Ed, less than 40 percent of business officers at public and private institutions said their college or university was very effective at using data to inform decision making.

Can’t Cut Administration Alone

Administrators at many institutions, even those that are working to make their administrations more efficient, still made cuts to academics. Colleges and universities eliminated low-enrollment departments such as foreign languages, which happened at the State University of New York at Albany. In addition to eliminating six vice president positions and making a host of administrative changes, administrators at Washington State University eliminated its theater, dance, and community and rural sociology departments. In total it has decided to phase out 16 degree programs and reduce or consolidate eight more.

In response to those cuts, some faculty organizations have pushed for even greater cuts to administration, particularly administrator's salaries, which many see as exorbitant.

While administrative costs rose faster than any other aspect of spending, they still only make up a small fraction of an institution’s total budget. Instruction, which includes faculty salaries and benefits, academic administration, and office supplies), is the largest expense category at all sectors of higher education, according to the Delta Project’s report.

The $66 million a year that UNC administrators predict their implementation will save, while a lot of money, is a drop in the bucket of the institution’s annual budget of more than $2 billion. While much of that total operating budget is earmarked for research purposes, the savings are still only about 12 percent of the $541.75 million the institution received in state funding for fiscal year 2009-10, which tends to go toward teaching.

Despite the savings already put in place, the university still had to eliminate 129 full-time positions and 175 part-time workers as a result of a 17 percent cut in state funding for the 2011 fiscal year.

Berkeley’s implementation is the same way. The savings the university identified would reduce expenditures by $75 million a year once the changes are implemented, but the institution spends about $1.8 billion annually on teaching, research, and public service. Szeri says the implementation would not have been as effective if the program was not allowed to invest in making improvements. The university authorized administrators to spend a total of $75 million to implement changes.

“Six percent is great,” Ehrenberg says. “But unless you make continuous improvement, it's still only 6 percent."

 

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