The Crimson Press Curriculum Center

First Page and the Assignment Questions:
        When Hugh Scott was inaugurated as the 12th president of Piedmont University in 2004, the university was experiencing a financial crisis. For several years enrollments had been declining and costs had been increasing. The resulting deficit had been made up by using the principal of quasi-endowment funds. (For true endowment funds, only the income could be used for operating purposes; the principal legally could not be used. Quasi-endowment funds had been accumulated out of earlier years' surpluses with the intention that only the income on these funds would be used for operating purposes; however, there was no legal prohibition on the use of the principal.) The quasi-endowment funds were nearly exhausted.
        Scott immediately instituted measures to turn the financial situation around. He raised tuition, froze faculty and staff hirings, and curtailed operating costs. Although he had come from another university and was therefore viewed with some skepticism by the Piedmont faculty, Scott was a persuasive person, and the faculty and trustees generally agreed with his actions. In the year ended June 30, 2006, there was a small operating surplus.
        In 2006, Scott was approached by Neil Malcolm, a Piedmont alumnus and partner of a local management consulting firm, who volunteered to examine the situation and make recommendations for permanent measures to maintain the university's financial health. Scott accepted this offer.
        Malcolm spent about half time at Piedmont for the next several months and had many conversations with Scott, other administrative officers, and trustees. In late 2006 he submitted his report. It recommended increased recruiting and fund-raising activities, but its most important and controversial recommendation was that the university be reorganized into a set of profit centers.
        At that time the principal means of financial control was an annual expenditure budget submitted by the deans of each of the schools and the administrative heads of support departments.
        After discussion with the president and financial vice president, and usually with minor modifications, these budgets were approved. There was a general understanding that each school would live within the faculty size and salary numbers in its approved budget, but not much stress was placed on adhering to the other items.
        Malcolm proposed that in the future the deans and other administrators would submit budgets covering both the revenues and the expenditures for their activities. The proposal also involved some shift in responsibilities and new procedures for crediting revenues to the profit centers that earned them and charging expenditures to the profit centers responsible for them. He made rough estimates of the resulting revenues and expenditures of each profit center using 2006 numbers; these are given in Exhibit 1.
        A series of discussions about the proposal were held in the University Council, which consisted of the president, academic deans, provost, and financial vice president. Although there was support for the general idea, there was disagreement on some of the specifics, as described below.

Central Administrative Costs

Currently, no university-wide administrative costs were charged to individual schools. The proposal was that these costs would be allocated to profit centers in proportion to the relative costs of each. The graduate school deans regarded this as unfair. Many costs incurred by the administration were in fact closely related to the undergraduate school. Furthermore, they did not like the idea of being held responsible for an allocated cost that they could not control.Assignment

1.     How should each of the issues described above be resolved?
2.     Do you see other problems with the introduction of profit centers? If so, how         would you deal with them?
3.     What are the alternatives to a profit center approach?
4.     Assuming that most of the issues could be resolved to your satisfaction, would         you recommend that the profit center idea be adopted, rather than an alternative?