Financial Review Models for Interdisciplinary Programs Are they mutually compatible? Isabelle Cherney, Ph.D. 1

What is RCM? A budget and reporting framework. It enables schools and auxiliary units that generate revenues to share in the results of their net contribution margin after covering a portion of the costs associated with other functions that serve the overall good of the institution. RCM has also been referred to as: – RCB (Revenue Center Budgeting ) – Incentive Budgeting – ETOB (Every tub has its own bottom) The RCM concept has been adopted by several universities since A sample of Universities that have implemented a form of RCM: – Harvard, USC, Loyola- Chicago, University of Pennsylvania, Georgetown, Columbia, Cornell 2

Historical Perspective Centralized Model Revenues & Expenses (Central) Expenses School A Expenses School B Expenses School C Expenses School D Source: adapted from a USC presentation by Michael A. Diamond and Robert A. Cooper 3

Historical Perspective – Decentralized Model Administrative Revenues and Expenses (Central) Revenues & Expenses School A Revenues & Expenses School B Revenues & Expenses School C Revenues & Expenses School D Source: adapted from USC presentation by Michael A. Diamond and Robert A. Cooper 4

RCM Framework & Philosophy RCM Units are defined at a rollup level that are made up of sub units at the program (dept/major) level. The net contribution for each program will be defined and measured. Direct revenues such as tuition, fees and room & board are placed directly in the RCM units. Direct expenses such as instructional costs are placed directly in the RCM units. A share of the indirect revenues (gift income, interest) and indirect expenses (facilities, HR, finance) are allocated to the RCM unit. A portion of the net contribution earned by each RCM unit is returned based upon a predetermined formula. Negative net contribution RCM units are incented to reevaluate their individual programs. 5

Noteworthy Points RCM is a decentralized budget framework. Each University defines how to deploy RCM to work to meet their individual strategic goals. Once implemented, RCM processes will evolve over time to better align with the changing needs of the University. 6

The Opportunities of RCM Integrates strategic planning – Overall University priorities are defined and integrated into the budget process through the allocation of indirect activities. Facilitates responsible management of entrepreneurial activities. – Establishes incentives for organizations that perform above expectations and disincentives for areas that perform below expectations. Aids cost/benefit analyses and trade-off studies of programs. – RCM forces the University to determine their most valuable programs on both a qualitative and financial bottom line basis. If programs are low in quality and high in subsidy, the opportunity costs of protecting a weak academic unit are clear. Encourages efficient, competitive administrative services. – The resulting cost of administrative services can be compared to alternative providers. Allows for consistent net contribution measurement for programs (dept/majors) across schools. 7

The Risks of RCM Cross-unit investments lack incentive and collaboration between responsibility centers diminishes. Overlap of administrative functions increases. Responsibility centers may begin to compete with each other for revenues. Pursuit of responsibility center goals that are contrary to the University’s strategic goals may occur. The University may arrive at insufficient funds to promote institution-wide initiatives. Cost allocations for support functions are not widely understood causing a lack of support for the process. 8

Financial Review Model What strategies should Graduate Deans take? How do you create financial incentives for Interdisciplinary programs? What types of structures should be in place? 9