Is Responsibility Centered Management (RCM) the Right Budgeting Model for Your Institution?
Part 1 of 4: Basic Structure and Money Flow
Responsibility Centered Management (RCM) is a budgeting model that has been in existence for decades but more recently has become the preferred budgeting approach for an increasing number of universities. Whether it is because RCM represents a change of significant consequence or because those who use it become vocal advocates, the move to the RCM model often results in deans and other administrators immediately seeking advice and information on its strengths and weaknesses, how it works, how their school might be treated when it is implemented, etc. Addressing these and related questions represents the impetus for this four-part series.
Part 1 covers the basic structural and fiscal features of RCM, along with the way that money flows into and out of Responsibility Centers. Part 2 will discuss the various ways that subventions, taxes (assessments) and administrative activities are funded, and it will address some suppositions about RCM that have proven to be largely unsubstantiated. Institutional practices that will render RCM ineffective will be covered in Part 3, while Part 4 considers weaknesses of RCM and will make some recommendations and observations that may prove helpful to those institutions considering switching to the RCM budgeting system.
RCM, in several versions, has been in place on the seven campuses of the Indiana University system for almost 30 years. IUPUI, my campus, is second to the Bloomington campus in terms of enrollment. After a few years of experimentation and trial runs, RCM was implemented in the School of Science in the early 1990s, about the time I became chair of one of the largest departments (Biology) on campus. I continued as chair until 2010 when I moved to my current position as Associate Dean for Planning & Finance. I mention this history to let the reader know that I have worked in an RCM environment at two levels for about 25 years, have experienced several changes to the model, and have noted the experiences of other campus units under the model.
RCM: What is it and how does it work?
The basic philosophy of RCM. RCM is a decentralized, transparent budgeting system that rewards institutionally valued outcomes such as increased enrollment, productivity, and entrepreneurship. It shifts the locale of fiscal decisions from central administration to where the real work of the university is done by giving deans and chairs greater authority for making these decisions while at the same time holding them accountable for the outcomes. RCM also fosters cost savings because the resources recaptured can be reallocated to other purposes including those associated with long-term planning.
The basic structure of RCM. Under RCM, universities are divided into two types of responsibility centers (RCs): revenue producing (academic) centers and service centers (administration, campus security, research office, library, bursar, admissions, etc.). For the sake of simplicity, I will not discus auxiliary units that also earn income but may require some additional support. The academic RCs are the campus schools or colleges, thus making the deans critical cogs in the RCM system. The mechanism of distribution of dollars from the RCs to the departments is at the discretion of the deans although they are often expected/encouraged to establish one that include the incentive features of RCM. The heads of each RC play crucial roles in setting budgets, planning expenses, and making certain that income meets expectations.
How money flows in. Each academic year, the academic RC is credited with the annual tuition and fee income its faculty have earned through teaching, 100 percent of its grant overhead, and a portion of the state appropriation (replaced by endowment income at private universities). What the reader must know here is that there are many versions or “flavors” of RCM that have evolved to accommodate local culture and values, unit sizes, capacities, activities, the make-up of the student body, and a host of other variables. As examples, referring to the funding distribution just listed, there are institutions that distribute tuition and fee income with a large fraction going to the unit that provides the instruction and smaller fraction going to the student’s home unit, institutions where the income from and costs of research are handled separately, and institutions where state appropriations are allocated in non-proportional ways.
How the dollars flow out. The dollars from tuition and fees, grant overhead, and state appropriation add up to a substantial sum compared to what the actual budget has been for the school in a prior, more traditional budget model. The dean receives this information along with the charge (assessment or tax) for campus level services, which when subtracted from the income total, will leave the amount remaining to the school for its expenses. The campus tax is substantial—as much as 50 percent or more of total income at some institutions. Deans also learn the degree of dependence on student tuition that exists as a result of decreased state support for higher education. If not already provided, deans should request an explanation of how assessment charges are determined, what the school pays for individual services/offices, and what other campus schools pay for the same services. Making this information available helps deans plan their future initiatives and assures them that the playing field is level in terms of everyone being held to the same taxation model.
Beyond campus costs, RC heads must be prepared to shoulder the entire cost of their operation. This includes faculty and staff salaries and benefits, salary increments, new lines, department operational budgets, school scholarship costs, graduate stipends and fees, equipment purchases and maintenance, renovations, new space, etc. Some of this may be delegated to the chairs but, in the end, the dollars come from the remaining earnings of the School. Thus, deans must be able to accurately predict income to the school and carefully plan expenses to avoid shortfalls and deficits.
Improving income streams. Entrepreneurial deans and chairs can improve their financial positions by enhancing their income streams. The obvious one is enrollment. Increasing credit-hour income can be accomplished through greater success in student recruitment, effective retention efforts, new and/or improved courses and academic programs that resonate with students, and scheduling classes according to student needs versus faculty preference. Cost savings through the consolidation of small sections, the creative utilization of instructional technology, and changing the mix of instructional personnel can also help the bottom line.
Another way to enhance credit-hour income is through the development of new, innovative academic programs. Today this typically translates into interdisciplinary programs. Although the word on the street is that RCM discourages collaborations across units, this is not true. The deans of the units can sit down and hammer out a memorandum of understanding that includes the contribution of each unit and an appropriate income sharing mechanism. Likewise, individual faculty from different units can submit a collaborative grant proposal by completing a campus form that spells out the split of the overhead or by establishing subaccounts with appropriate overhead when the award comes in.
Finally, grant overhead can be enhanced by the increased emphasis on faculty grants. This could mean revamping or adjusting the faculty hiring criteria at some institutions. Grant writing and success can be incentivized by the overhead and salary savings that return to the school being shared by the school, the department and the principal investigator, through merit pay and bonuses, and by increased consideration in promotion and tenure cases.
Fiscal flexibility. One of the most potent attributes of RCM is that surplus dollars can be carried over to the next fiscal year. This not only impacts morale (“The dollars earned are actually ours!”) but it also allows for long-term planning for large purchases and projects by chairs and deans. Following the principle that you keep what you earn, debt is handled in the same way. Department deficits do not usually attract campus-level attention if there are surpluses to cover them in the other department or school accounts. They should, however, result in a discussion between the chair and the dean that will result in a plan to remedy the situation. School-level deficits are more problematic, and deans and chairs are advised to set aside some surplus dollars from the “good years” to temporarily cover future deficits without disrupting unit operation.
Deans are also empowered to decide on when and where to make investments in new faculty and staff lines. Faculty in some disciplines are provided with start-up funds that also become part of the responsibility of the RC. Thus, deans must accurately project these costs in budget planning in order to avoid overspending. Expanded authority is balanced by increased responsibility for those who head RCs.
As an example of what can be done when one can carryover end-of-year cash, several years ago, in partnership with the School of Engineering & Technology (E&T), the IUPUI School of Science built a new $27M building that was sparked by a cash down payment (from carryover) with the debt service, operating costs and depreciation now being paid primarily by general fund money freed up by our expanded base of grant overhead. In the spring of 2019, the two schools along with the IUPUI campus, will break ground on second building (a $44M project) with all of Science’s $12M down payment coming from carryover cash. We have been fortunate to have been able to do this; neither project would have materialized without the carryover privilege afforded by RCM.
Part 2 in this series will run next month.
N. Douglas Lees is Professor and Chair Emeritus of Biology and former Associate Dean for Planning & Finance in the School of Science at IUPUI.