Bill & Melinda Gates Foundation

How Do We Address Higher Education Operating Costs? Start With a Shared Vocabulary

April 05, 2013

Last week, the National Association of State Budget Officers (NASBO) released its “Improving Post-Secondary Education Through the Budget Process – Challenges and Opportunities” report which stated, among other things, that a common terminology around cost metrics could go a long way in advancing the dialogue between higher education institutions and their constituencies.

Unlike the private sector, where metrics like 'gross margin' and 'operating margin' serve as a universal language to judge the success of an enterprise, we have no such common language in higher education. This results in a lack of trust, whether justifiable or not, by our state officials and the public as to whether universities are spending public funds and tuition in an operationally-efficient manner. Given that higher education operating costs have greatly outpaced the growth of inflation in recent years, can we blame them? Political outcries for accountability at public universities will continue until we have developed an accounting language that can clearly communicate the operational costs associated with delivering our services in terms the public can understand.

As administrators, we have not been able to reach consensus on what constitutes an operationally efficient public college or university in a data driven way that holds up to public scrutiny.  I believe it’s time we confront this challenge by devising new financial metrics that will help us better identify and communicate where the true opportunities for operational cost reduction lie.

One cause for this financial communication issue, is the lack of good measurement.  While we have universal financial accounting standards, the only activity-based or cost accounting standards we have were developed over 20 years ago by the Department of Education. The Integrated Postsecondary Education Data system, or IPEDs for short, has not kept pace with the increasing complexity of services being offered by today’s universities. While IPEDs has certainly provided incredible value to the higher education community in a variety of different ways, I believe it has fallen short in helping to provide true insight into the toughest operational finance questions we need answered today.

We at the University of California are undergoing an exhaustive revamp of our Chart of Accounts to combat this problem head on.  The Chart of Accounts project, which spans all of our 10 campuses and 5 medical centers, will begin by creating true uniformity in cost classification at each UC campus.  We hope this project will increase the transparency of how the University is funded and how the funds are used to support the University’s mission

We are also exploring new ways to capture functional data in order to help us better communicate the cost of providing our services. This will require untangling variable costs from fixed costs, creating more meaningful accounting categories than the current broad brush strokes of IPEDs, and understanding that there is more nuance to delivering a quality education than the current classifications would lead us to believe – that functions like instruction and research, for example, are not always separate and distinct. 

While this is currently a University of California initiative – one that will certainly serve our 10 large campuses, 5 medical centers, and 220,000 students well – at its heart, it is a much broader undertaking and one that requires collaboration across all of higher education to be truly successful. The key to defining operational excellence is the ability to reliably compare any given institution to any other institution. Without this type of benchmarking, I don’t believe it will be possible for higher education to fully achieve its operational improvement goals. 

This is a call to arms and an invitation. The higher education industry and its observers have wrung hands over rising costs long enough.  It’s time to create the common financial language that can explain it.  We’re getting started at UC, and we are looking for partners to help us in this endeavor.

 
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