summarizes

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By the end of this lesson, students should be able to:

Explain why costs are rising in higher education and the specific challenges that drive these expenditures.

Explain how financial administrators can manage increasing costs.

List the reasons administrative and support costs are increasing.

Develop a plan to contain administrative and support costs.

Evaluate the major challenges universities face regarding expenditures on technology.

Propose various strategies for the acquisition of hardware and software while meeting the demands of employees.

Describe the pressures of maintaining adequate technology resources.

Discuss the various challenges of an aging physical plant.

List the challenges of hiring and paying employees.

Explain the considerations of faculty when facing retirement.

Administrators in higher education are so busy managing the day-to-day activities of the organization they rarely have time to think about the policies and procedures of budgeting. Universities enroll a class, make sure the revenue is adequate to cover expenses, and they focus on the next year. The ever increasing push to enlarge enrollments brings much needed revenue and also creates new challenges. With increases comes new pressure from outside sources for accountability. The university must have staffing to meet these needs. New programs have to be funded and existing programs must be enhanced. These are a few of the unmet needs that arise from growth. When you have employees you also have changes in the laws that affect compensation. Variable costs such as utilities, insurance, technology and other consumable products all affect mandated cost increases. Campuses are not immune from natural disasters and tragedies such as student deaths, tornados or fires for example. All of these concerns affect how we plan for and manage the increasing costs in higher education. Administrative costs increase to meet the new demands of managing larger numbers of employees. Universities strive to employ better qualified personnel but the demands of these employees increase administrative costs. The cost of faculty can be significant depending on their qualifications. Annual increases in salary and benefits rise quickly if the majority holds a terminal degree. Inflation should be monitored carefully because of escalating costs. As the faculty base ages retirement benefits are ever increasing. Some faculties are qualified and command a higher salary than others. Too many faculties who command a higher salary can be problematic to the budget. Teaching loads can increase costs as professors’ posture for release from classroom responsibilities. The fringe benefits you offer faculty can also have a negative impact on budget planning. Instructional costs will increase such as computer technology, media, libraries, and gymnasiums. If the university implements web-based learning the cost of software, software support, and hardware will increase. Libraries have become more

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dependent on technology which has brought about budget demands. Swings in enrollment can cause budgets to increase to either meet the new demands or increase recruitment. Research expenses are necessary when improving the quality of education. Additional equipment and support are needed to fulfill the research grant requirements. Most research grants require overhead investment and should be considered when planning and budgeting. If the university intends to increase enrollment then prestige cost studies are necessary. Cost studies enable universities to better plan and implement the changes but they have a price tag as well. All of these budget considerations are similar to unexpected expenses in a home budget. A wise administrator will anticipate these additional expenses at the point of planning so that the full cost can be considered before making a commitment. The best way to evaluate cost increases is to evaluate a multi-year comparison of growth in costs for administration and support. Another important factor to budgeting is to analyze the changes to the cost of instruction and research. Productivity is one way to evaluate how well costs are contained in higher education. Higher education has historically been weak in this area. Organizational slack refers to the lack of efficiency. The use of part time employees and implementation of technology can help reduce costs. The financial officer should not overemphasize efficiency to avoid reducing employee morale which can lead to poor motivation on the part of the workforce. It is possible to have employees’ busy working on unnecessary tasks. “Function lust” may occur when supervisors pay too much attention to other functions and their budgets. Every department sees their function as the most important at the college. To get a handle on costs the financial officer should focus on communication, the management process, good planning, incentives and measurements to see how well the tasks are being performed. It is imperative that universities evaluate the sources of income and develop a diversified portfolio of offerings. Studies should be conducted to ensure that the university is introducing new degrees and targeting new markets. This way, if the college experiences a downturn in one area, the other revenue sources can compensate for the losses. Another reason costs increase is the expansion of holding higher education more accountable. To meet the ever increasing demands universities have to spend more money on personnel and technology to measure their success. As universities diversify their offerings the administrative overhead and complexity also increases. Since the public is demanding more accountability universities would be wise to focus on knowing the actual costs of administrative overhead. Better data will enable college presidents to contain increasing costs. Faculty are demanding more sharing of decision-making with administration. The wise administrator would involve faculty in the process but within carefully constructed parameters. It is not possible to accurately predict the future of technology increases. The technology industry undergoes too many changes to make it easy to budget for increases. The best strategy for technology is to match the goals of the institution with the expansion of capabilities. The university should know the limits of the money available for technology, match purchases with the aptitude of the user, and build-in flexibility so it can adapt to the changes that will occur.

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Staffing is the most costly and most important aspect of technology investment. Any good plan should include annual increases for personnel dedicated to technology. Professional development is necessary to keep pace with the changes to technology. One effective strategy is to outsource projects that would otherwise take too much time and money to implement with existing staff. Financial managers would be wise to spread the cost of technology support staff funding over all departments. The university should set limits to the amount of technology support departments receive to ensure that a balance is reached. Aging hardware is a challenge that every business faces. Donations of equipment is not a good strategy because the loss of productivity will outweigh the gift. Old equipment is outdated and is frustrating to maintain. One way to evaluate hardware is to calculate the unit cost per desktop. The institution should know this figure and place limits on what they purchase. The university should adopt a “life-cycle” on equipment and stick with the plan. Turning over a percentage of the equipment every year spreads out the costs to a manageable level. Another sub-strategy is to limit the number of machines that are replaced and reallocate the ones that are kept. Students should be required to purchase their own computers and this can help colleges reduce the number of computers accessed by the general student population. Leasing is an effective strategy if the university does not have the funds to have a life-cycle replacement program. Do not overemphasize the savings that technology will bring because it has been found that it will not ultimately save the institution money. Proprietary software can only be supported by a vendor and is therefore considered a “closed system”. The best strategy is to standardize on software that is an “open system” or software that will interact with other packages. The warranty of equipment is usually no longer than three years. The university should consider this window as the length of time they turn over equipment. This way they can reinvest in new equipment rather than pay for repairs on old equipment. Software prices have been declining but universities are using more packages so the cost savings has been negated. The university should evaluate the percentage of the budget allocated to technology and set the priorities accordingly. One way to defray technology costs is to distribute it over students as a part of their fees. Some universities have adopted a pay-as- you-use philosophy. This places the burden of cost on those who use technology the most. One significant danger most universities face is spending a large amount on technology all at once such as equipment grants. The problem arises when it is time to replace the equipment. It is better to build the annual cost into the budget. In recent years various departments have been merged by technology such as telephones, libraries, and presentation hardware. This requires a shift in the way the organization budgets and manages these departments. Universities are challenged to re-think how they budget for new technology and the physical infrastructure to support their campuses. As new buildings are brought online and staffing increases we are forced to look at new ways to manage the ever-increasing complexities in operations. The use of technology is increasing in importance and employees are asking for more capabilities. Each unit of computing power is decreasing while the total cost of maintaining technology is rising. Computer desktops become obsolete long before they are replaced. This presents a challenge to review the lifecycle of equipment.

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Whatever equipment we purchase today it is likely that the replacement of the same capabilities in the future will be much less. Over time the demand to do more will still ensure that the cost of technology will increase. The university must match the amount spent with the functional capabilities required by the individuals using the equipment. We have seen situations where the purchase of technology can significantly increase the output of departments which drives other costs upward. Institutions would do well to anticipate a high rate of change in technology and seek to manage it relative to cost and function. We need to accept that the changes in technology need to be balanced with optimizing the investments over time. The pressures to increase technology are not about technical issues; rather, the financial, political, and social use of information. Great care should be taken to ensure that the university not oversell the use of technology. The use of more technology will not automatically reduce personnel costs. Over time many universities have learned that traditional thinking about technology expenditures do not hold true. As prices for hardware decrease we usually want a greater volume which will increase the budget. Distributing computing over networks does not make central computing less expensive. The more complex software packages make supporting the investment more expensive. Technology investment should be annual and not one-time budgeting. New technologies do not ensure reductions in costs. Higher education is not the leader in the technology industry. There should be a balance between what departments require with the overall needs of the institution. The purchase of hardware and software is a one-time event but the life-cycle replacement strategy is perpetual. In general, universities should expect to pay more for technology if they expect to realize the benefits. Investment in technology is long-term to remain competitive and productive. Decision-making on technology investment must include a way to bring all parties to the table in an effort to coordinate purchases to maximize the investment. A common mistake made by universities is to add to the physical plant without sufficient planning for maintenance. Our buildings become obsolete and require re-tooling. Facilities become less efficient over time. The advancement of technology requires additional investment to remain effective. We need to determine how to replace and/or repair facilities that are aging in higher education. We need to be selective when considering which facilities to upgrade and those that should not. The university should defer maintenance on facilities that are not critical to the survival or well- being of the enterprise. Some facilities should be converted for other uses and others should be downsized. The mission of the university usually drives the use of space and careful planning can create much needed surplus of space. Many times it is more economical to build new space than to renovate old spaces. Properties that are not owned by the university should be examined on the basis of what it costs to operate the facility. Sometimes it is better to lease such space and/or sell it. The largest expenditure in the budget is salaries. Much attention has been given to pay and performance as a result. There are important considerations for evaluating pay and performance. Universities should examine whether salaries are gaining or losing regarding inflation. The best way to determine this is to compare salaries to the Consumer Price Index (CPI). The base salary of faculty is the predominant amount of what they earn. Other sources

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of income such as teaching overloads, research, and consulting are a smaller part of the equation. Salaries in selected fields command a higher rate of pay than others. Earnings by faculty rank are higher in private institutions and the salaries have risen more rapidly in private institutions. For many years it has become evident that there are substantial differences in pay for some faculty in particular fields over others and the inequality has been steadily growing. Women still earn less than men in most fields. Federal mandates regarding minority faculty have pushed their salaries higher. Salary compression is another challenge facing universities. It is not uncommon to see a junior faculty member hired and compensated at or above a senior professor. However, the larger the number of senior faculty the larger the payroll will be. Younger faculty site salary concerns at a higher rate than do senior professors. Salary levels are determined by rank, being in a private institution, being male, and being in a high-paying field. In 1986 amendments to the Age Discrimination in Employment Act (ADEA) abolished mandatory retirement age. Universities have sought to manage an aging faculty base with retirement questions. Some of the same considerations are true for non-faculty positions. Fringe benefits are a significant part of the compensation package of employees. Universities should analyze benefits based on a per-full-time-employee basis and as a percentage of salary on an annual basis. When planning for retirements it is important to consider advances in medicine and the resulting increase in life expectancy. Recent studies indicate that faculty is working longer than their administrative counterparts. The decision to retire is generally personal and/or professional. The faculty member will consider their retirement income, their personal health, and level of satisfaction with their accomplishments and their place of work. Retirement pensions often times dictates whether faculty retire early or stay later in their career. The amount of investment in pensions by universities has increased and will likely continue to do so. Continuing medical coverage is a major consideration for retiring employees. They are looking at protection and cost. As we add more part-time faculty we can expect that they will also demand retirement benefits.