Excerpts from the Cost Project

About the Cost Project

This paper is the third in a series of reports and initiatives in AGB’s Cost Project. Supported by a grant from the Robert W. Woodruff Foundation and a planning grant from the Lumina Foundation, the project is designed to build governing board capacity to monitor institutional costs effectively and strategically.

Costs and productivity are not new issues in higher education. AGB and its member governing boards have long recognized the importance of responsible stewardship of institutional resources as central to the work of effective boards. But the rapidly changing environment in higher education has brought a new urgency to the topic. Many institutions have been at the forefront of change, having reengineered core functions and decentralized responsibilities for resource management. The Cost Project intends to identify such successes and promote them broadly within the higher education community.

AGB is mindful that containing costs and sustaining quality require active partnerships among institutional leaders and others in the higher education and public-policy communities. A comprehensive effort needs to be built—to forge partnerships, to make the conversation more data-driven, to connect better with public audiences, and to find strategies to reach out to accreditation agencies and others concerned about ways to sustain quality and improve institutional effectiveness. While institutional chief executives must lead such efforts, boards should be actively engaged in these issues. Encouraging and enriching this process are goals of The Cost Project. As it continues this work, AGB will collaborate with other groups interested in contributing to the agenda.

Get details about the project, additional readings, and updates on current research.

About the survey

The survey was sponsored and conducted by AGB in collaboration with the National Association of College and University Business Officers (NACUBO). The survey population included 2,131 CFOs, drawn from member institutions of AGB and NACUBO, stratified into groups of public four-year, public two-year, private two-year and private four-year institutions. The survey was administered online over four weeks from December 15, 2006, to January 15, 2007. The survey was preceded by a letter to AGB-member presidents, informing them of the survey and inviting questions about it.

Responses were received from 733 institutions—about 26 percent of the survey recipients (after correcting for duplicate responses and undeliverable e-mail). Response rates were highest (50 percent) among the “administrative units” (system offices), followed by 32 percent for private four-year institutions, 22 percent for public four-year institutions, and 18 percent for two-year institutions, both public and private. Responses from private two-year institutions were excluded from the subsequent analysis because of the small number in this category. The remaining groups are statistically valid for the sectors as a whole.

Comments from CFOs about impediments to better board understanding of costs

• As new members come on the board, they’ll need to better understand the distinction between higher education budgeting and corporate budgeting.
• Cost data that we collect are not relevant to most policy issues. These are accounting data, not decision-making data.
• Inconsistent accounting presentation and reporting standards prevent a “clean” comparative data point for peer comparisons
• Members of the board who have taken an interest in costs have preconceived notions about the data, perhaps because of their business backgrounds. As a result, their minds are not open to the data, and their approach to cost containment is simplistic.
• The issue of cost has become a political one.
• The most significant impediments are (1) that it is counterintuitive to board members that cost exceeds price, (2) faculty cannot easily be terminated, and (3) it is not unusual that staff employees outnumber faculty.
• We need to upgrade our administrative data system and hire an institutional effectiveness professional to provide consistent, accurate, and timely information to our board.

Comments from CFOs on best practices leading to cost control

There were nearly 400 comments from CFOs regarding the best board and administration actions for controlling costs. In order of greatest frequency, these involved budget planning and management; salary, benefits, health care, and medical insurance; tuition, fees, and discounts; energy and utilities; and benchmarks, measures, and peers. Not surprisingly, these categories reveal some of the biggest cost drivers and best tools for addressing them. Here is a sample of the actions taken:

• Joined a consortium for health care.
• Ad Hoc Committee on Purchasing and Cost Containment combined purchasing power of universities in system. Saved over $2.5 million in energy and utilities and $2.2 million in IT over two years.
• Stopped building automatic cost inflation into every area of the budget.
• Reviewed vendor contracts—saved over $200,000 annually.
• Started projecting budgets forward three years—helped to see patterns and trouble spots.
• Set outward limits on tuition; reframed expectations about future funding initiatives.
• Restructured debt portfolio—reducing annual interest by $10 million per year.
• Committed to an energy conservation plan—reduced fuel consumption by 30 percent.
• Internal reporting mechanism presented fully burdened bottom-line financial information for each major academic division and program. Financially stressed programs are especially scrutinized relative to the mission of the institution.
• Updated strategic plan and linked it to rolling five-year financial budgeting model.
• Decided to manage down the tuition discount rate. We’re higher than peers and the national average.

Advice from CFOs about board engagement in costs

• Transparency is always best.
• Setting up the context is critical, with senior colleagues and the board.
• Identifying the key trade-offs and being open about the information are crucial to gaining confidence, respect, and support from colleagues in particular.
• Be patient and take the time to explain costs and how they relate to performance.
• Identify and measure cost drivers.
• Develop benchmark data using a close set of peers.
• Educate board on “business model”—student/faculty ratio, full-time/adjunct faculty, cost per discipline, tuition discounting, cost per recruitment.
• Spend time with key board members to enlist their assistance in explaining the complexity of the university cost structure to fellow board members. Don’t make excuses for rising costs, but do take time to explain cost drivers that are unique to higher education.
• Link year-to-year budgets with factors and goals of the strategic plan. Make sure all strategic plan objectives have action plans that detail costs.
• Find ways to look out five years—look at relation of price/discounting/revenue/quality/market.
• The CFO plays a key role in working with the president and board chair on cost issues, determining what the board needs to know, and helping board members understand the work to be done.
• Involve board members prior to decision-making time to get their input, feedback, and support before making proposals requiring their action.
• If management is effective and can demonstrate that costs are being controlled, the board is less likely to get involved in details.

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