If your institution is looking into responsibility center management (RCM), consider this primer on the pros and cons, and the steps necessary for effective implementation.

1. By Larry Ladd, Director, National Higher Education Practice
Dec. 3, 2014
Innovations of any kind often are greeted with
greater initial excitement and higher expectation
than may be justified. One such innovation in
higher education business practices is responsibility
center management (RCM). For all its strengths in
budget control and resource allocation, RCM has
not always been the boon to larger universities that
early advocates had anticipated. For many
institutions, RCM has brought greater responsibility
and accountability to the budgeting process. For
others, the benefits have not offset the complexity
and costs, and RCM’s inherent approach has been modified accordingly. Most commonly, the
modification has been to strengthen the center, in terms of decision-making and resources, by
limiting the authority of the deans, or to increase the funding that stays in the center and isn’t
allocated to the schools.
Over the past few decades, and particularly in the most recent one, large and complex
institutions have increasingly moved to RCM to place budget decision-making in the hands of
those nearest to the transactions. RCM represents a radical decentralization of budgetary
authority, usually to the level of deans of academic units. It gives deans substantial responsibility
for their own unit and its revenue and direct expenses, as well as for knowing about, if not
managing, its indirect expenses.
In the ideal, RCM allows each unit to create its own profit-and-loss statement, holding the dean
accountable for a specific bottom-line result.
If your institution is looking into RCM, consider this primer on the pros and cons, and the
steps necessary for effective implementation.
On the plus side, decision­making can be precise
RCM places responsibility and accountability at the source of revenue generation, with
decisions made closest to the actual market served. Deans are strongly incented to generate new
revenue, find ways to reduce costs and make priority judgments among competing claims on
resources. Because deans are in the best position to know their particular field and market, they
are counted on to respond quickly to changes in both, and they are empowered — actually
required — to take fiscal responsibility for those actions.
Budget procedures and decisions are simplified by reducing layers of institutional involvement.
Presidents and provosts can focus on strategy and priorities rather than on detailed budget
issues.
RCM aims to improve budgeting for large
universities

2. On the negative side, decision­making can be narrow
RCM carries the risk that individual units will work to maximize their own benefits to the
detriment of the institution as a whole. A classic scenario is the engineering school deciding to
offer its own “physics for engineers” course, because it is cheaper, rather than the equivalent —
usually better — physics course offered in the liberal arts college.
Also, RCM requires a fairly sophisticated level of revenue and cost allocation to individual units.
Identifying and obtaining agreement on the drivers behind those allocations is challenging. It is
also a challenge to revise or enhance the systems needed to implement those allocations.
As a result, unless the president and provost insist otherwise, discussions at the university level
will tend to focus more on cost accounting than on fundamental issues of strategy and academic
quality.
And one more thing: Because decentralized units need more business support and staff time to
develop and manage data, there are likely to be additional administrative costs.
Embracing strengths and benefits while minimizing risks and downsides
Each college or university that implements responsibility center budgeting must design a system
based on its own objectives, values and circumstances.
The basic system is usually described in a rules-of-engagement document that outlines all the
key assumptions and allocations. The rules must be developed before implementation,
recognizing the need to change rules as circumstances warrant.
At minimum, rules must include a set of basic requirements:
Establishment of RCM principles as they apply specifically to the institution, with
special attention to particular areas
- The roles and expectations of the central administration and the budgetary units,
including who makes what decisions
Only a clear delineation will avoid confusion and conflict.
The president and provost must be able to exert strong strategic leadership within the
institution; thus, policies need to be in place to make certain that their leadership isn’t
inhibited or undermined by RCM.
Another key decision is how the central administration/central services will be paid.
One method is an allocation of a share of the income assigned to the unit. If that route
is followed, then what incomes are to be counted, and on what basis? The other
method is an allocation of costs. Again, the questions will be which costs, and on what
basis?
- Maintenance of institution-wide standards, programs and core services (often activities
that require consistency, or that can achieve economies of scale) to avoid units adopting
policies, practices or programs that increase risk or costs for the university as a whole
- Too much decentralization that can allow a reduction in quality standards or duplication
of programs or services
The institution needs to establish incentives for collaboration among units, and to
avoid duplications.
- The nomenclature to be used to describe key concepts
Success depends on all participants using the same language.
Definition of the units to serve as responsibility centers, including the central
administration (because various administrative or service units may also be
included)
The criteria for being a center usually require that bottom-line performance is critical
to its success and that it has sufficient revenue.
Allocation of revenue and expense (key revenue streams include tuition and fees,
room and board, sponsored research and indirect costs, gifts and endowment

3. room and board, sponsored research and indirect costs, gifts and endowment
income)
- Sample allocation questions:
Which revenues should be allocated in the units, and which to the central
administration?
Which revenues should be under the control of the deans, and which are allocations
only?
What actual formulas (allocation rules) will be used to allocate the various revenue
streams?
Allocation of direct expense
Allocation of indirect expense (or core services)
Which activities fall into the indirect expense category (facilities, IT, accounting,
development, administrative service centers, HR, etc.)?
On what basis will the various indirect expenses be allocated?
Redistribution of income/subsidies
Not every unit can be expected to break even. Some will run deficits, or, in more
acceptable phraseology, will need to be subsidized. Some will run surpluses. A key decision
is the level of subsidy or surplus that is acceptable. Generally these are called “net
contributions.”
- Before RCM begins, the expected net contribution, and how it will be enforced, must be
established.
- Also ahead of time, a policy must be established for how unexpected positive and
negative results will be handled.
These questions must have answers:
Will a unit get to keep some or all of a surplus beyond its expected net contribution?
Will a unit need to pay back a deficit under its expected net contribution?
Policies for operations
- Generally, RCM is seen as a practice relating to operating revenues and expenses. But
policies for capital funding and expenditures also need to be in place.
- RCM requires a “central bank” to oversee the accumulation, investment and
disbursement of financial assets. Structuring the bank before implementation is essential.
- Occasionally, schools will fall into serious, perhaps chronic, financial difficulty. A general
framework that describes how the institution will respond needs to be devised before such
an event.
Design of the budget reporting structure
- Each unit needs a chief financial or budget officer with appropriate qualifications. The
accountabilities of that position must be carefully spelled out, including the reporting
relationship.
- In addition, the frequency and level of detail of financial reporting and analysis from the
units to the center need to be delineated.
RCM holds promise for informed decision-making and wise budgeting. Establishing rules
that produce the right incentives, and providing education and training for deans and
others, are first steps toward success.
See more at: http://www.grantthornton.com/issues/library/articles/nfp/2014/12­RCM­OnCourse
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