Report on Piedmont University

Case Study analysis on Piedmont University

Submitted to: Dr. Monica Singhania

Submitted by:

Group LGagandeep Singh Dhingra N-22

Mayank Jain N-41

Sarita Tirumala N-65

Zia Al Nasir Khan N-86

Paramjeet Singh S-48

Faculty of Management Studies

PT-II Year (4th semester)

North Campus, University of Delhi

Acknowledgement1 | P a g e

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We would like to show my greatest appreciation to Dr. Monica Singhania who rendered her assistance and cooperation during the course of study. Without her encouragement and guidance this study would not have materialized.

We would also like to show our sincere gratitude to Faculty of Management Studies, and its resources for providing us a platform to understand, analyse and conclude the study on Piedmont University. The case study focuses on analysis of various departments of Piedmont University as cost centers, revenue centers etc. and their importance to convert Piedmont University into a profitable venture.

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Table of Contents

1. Acknowledgement ...........................................................................................................................2

2. Table of Contents ............................................................................................................................3

3. Objective..........................................................................................................................................4

4. Background of the Case....................................................................................................................5

5. The Proposal of Neil Malcolm...........................................................................................................6

6. Critical analysis of the Proposal .......................................................................................................8

7. Recommendations............................................................................................................................9

8. Questions answered ......................................................................................................................10

I. How should each of the issues described above be resolved?

II. Do you see other problems with the introduction of profit centres? If so, how would you deal with them?

III. What are the alternatives to a profit centre approach?

IV. Assuming that most of the issues could be resolved to your satisfaction, would you recommend that the profit centre idea be adopted, or is there an alternative that you would prefer?

9. References ....................................................................................................................................12

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Objective

To provide insights into management control systems for service organization

To propose a solution to Piedmont University to convert it into a profit making venture

To analyse and understand the importance of forming profit centers, expense centers etc and its relevance to Piedmont University.

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Background of the Case

Professor Scott became the president in 1984. At that time the university was facing declining enrollment and increasing cost. The deficit resulted from using the principal of quasi-endowment funds. Professor Scott instituted measures to turn the financial situation around by applying the following:

Raised tuition.

Froze faculty and staff hiring.

Reduced operating cost.

The above did not seem to improve the situation of declining enrolment.

In the present situation of financial control, annual expenditure budgets were allocated from Deans and Administrators of support departments. Budgets were usually approved with minor changes with emphasis on monitoring major items and less focus on adhering to ‘other items’. Overall it can be said that there was a lack of budget discipline.

In 1986, Mr. Malcom who was a Piedmont alumni and partner in local consulting firm, volunteered to examine the situation and offered the following recommendations:

1. Increased recruiting and fund raising activities.

2. Recognized the university into a set of profit centers.

At the time the principal means of financial control was an annual expenditures budget submitted by the dean of each school and other support departments’ heads. Malcom proposed that the deans and other department administrators would be responsible for both revenues and expenditures of their activities.

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The Proposal of Neil Malcolm

In 1986 Hugh Scott appointed a Management consultant to control the situation. The consultant Neil

Malcolm was alumnus of the same university and volunteered to analyze Piedmont University finances

His most prominent recommendations were as follows:

Increase student recruiting and fundraising activities

Re-organize Piedmont University as ‘set of profit centers’

He proposed the reorganization of Piedmont University into profit centers. Besides this major proposal

he also offered that deans and administrators should submit budgets for both revenues and expenses.

Majorly he hinted at general shift in responsibilities. He stressed new procedures for:

Crediting revenues to profit centers which earned them

Charging expenditures to profit centers responsible for them

Rough estimates of 1986 Impact of Proposals is given in the tabular form in the following page.

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E stimates of 1986 Impact of Proposals

Rough estimates of 1986 Impact of Proposals ( $ Million) Revenues Expenses Difference

Profit Center:

Undergraduate liberal arts school

Graduate liberal arts school

Business school

Engineering school

Law school

Theological school

Unallocated revenue

30.0

5.6

15.3

17.0

6.7

1.2

5.0

29.2

11.5

12.3

17.3

6.5

3.4

--

3.8

(5.9)

3.0

(0.3)

0.2

(2.2)

5.0

Total, academic 80.8 80.2 0.6

Other:

Central Administration

Athletics

Computers

Central maintenance

Library

10.1

2.6

3.4

5.7

3.4

10.1

2.6

3.4

5.7

3.4

0.0

0.0

0.0

0.0

0.0

Total, other 25.2 25.2

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Critical analysis of the Proposal

Reorganization of university as ‘Profit Centers’ was most important and controversial recommendation

University Council discussed this is detail and in general there was support for of Profit Center. It should be highlighted that administrators of non-core departments (e.g. Library, Maintenance Dept.) not included in discussion. There were large areas of disagreement, some of which are highlighted below:

Central Admin Costs

Proposed formula unfair to Grad School. Deans did not want responsibility for allocated costs over which they had no control

Gifts and Endowments

Too much authority for president; some way of reducing president’s discretionary powers sought

AthleticsGoal of self-sufficiency risks student dissatisfaction, as well as causing much new

paperwork

Maintenance Schools seeking authority to outsource maintenance to reduce costs

Computers Fear that usage fees and computer regulation would discourage computer usage

Library Proposed fees (annual and/or usage fees) would increase paperwork

Cross Registration Complex formula for transferring revenues & expenses between schools

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Recommendations

Based on the proposal of Malcom and analyzing the present situation of Piedmont University, it can be said that profit centre may not always be a correct approach in finding the solutions of problems in corporate world. Some of the recommendations are listed below:

1. Based on the situation and the type of organization, there should be a mix responsibility centers.

2. The stress should be on improving quality and speed of decisions.

3. There should be appropriate cost allocation.

4. In some situations there should be motivation to increase motivation and creative ideas.

5. In Piedmont University the schools managers to have better control as profit centers.

6. Besides formation of proper responsibility centers other management techniques like balanced score card, reporting structure & system, transfer pricing and goal congruence to meet strategic objectives should be used.

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Questions of the Case Answered

1. How should each of the issues described above be resolved?

The views on various departments or sub-organisations are given below:

1. Central administration should function as a revenue centre. Administration should be accountable for University costs and no allocation to schools

2. Gifts and endowments should be part of Central Admin. The donations should go to students University may absorb cost as part of administration and schools should have input into allocation

3. Athletics should be a profit centre. There should be annual fee for users should be charged. This should be analysed on break-even goal and cost-recovery.

4. Maintenance should function as an expense centre. Schools to have cost based billing and may seek outside bids.

5. Computer department should function as expense centre. The intent should be to improve records & assign responsibility to schools. For computer department should have no monitoring and control.

6. Library should function as expense centre. A fixed annual fees in context of library should be charged which should be included within tuition fee

7. Regarding cross registration status quo; no charges (maintain spirit of collegiality)

2. Do you see other problems with the introduction of profit centres? If so, how would you deal with them?

There are some complexities involved with introduction of profit centres. The issues and resolution is listed below:

1. Profit Center approach doesn’t recognize non-monetary factors (e.g. quality of education and scholarship) The solution is to focus on core values (MBO (Management by Objectives) & Balanced Scorecard)

2. There might be competing activities between multiple profit centres (Campus Placements, Cultural events Alumni etc). Solution here is requirement of better coordination needed under president’s leadership.

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3. Situation when schools are unprofitable? Some schools may never be profitable yet may still be essential to goals and objectives of university. Profit centre approach not meaningful in this case, Discretionary expense centre approach would be more appropriate

4. Unanticipated risks (school’s competing for students, staff strikes, student dissatisfaction, faculty disenchantment, reputation of university). The solution therefore is to have responsibility centres approach.

3. What are the alternatives to a profit centre approach?

Profit should be defined in non-monetary terms with stress on performance measures. For instance individual schools should be gauged on following:

a. Performance Grades & their acceptability by reputed universities

b. Graduates’ employment rates

c. National & international scholarships, awards & accreditations

d. Survey students and employers for satisfaction

e. Trends in enrollment

The support functions should be analysed based on historical costs and costs compared to market costs. In present environment the intent should be to minimize focus on ‘profit’ and focusing on the vision and goals of Piedmont University. Some of the prime issues are that students already paying more and are not allowed increasing faculty. Piedmont University should focus on academics and rebuild quasi-endowment

4. Assuming that most of the issues could be resolved to your satisfaction, would you recommend that the profit centre idea be adopted, or is there an alternative that you would prefer?

The prime issues involved with introduction of Profit centre approach is loss of control for top management, drop in quality of management, issue of friction over the transfer price and common costs and organizations units’ competition. Therefore Profit centre approach may be called appropriate but not necessarily ‘profit focus’ approach. “Profit” should be gauged as the achievement of school’s objectives. However financial management must still be the priority. At the same time common sense and organizational culture play a vital role. The exact solution therefore is to apply management techniques like MBO or Balanced Scorecard and enhancement of management capabilities to ensure achievement of goals.

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References

1. Management control systems: text, cases and readings By Robert Newton Anthony, John Dearden, Richard F. Vancil

2. Effective management control: theory and practice by Eric Flamholtz

3. Otley, D., 1994. Management coontrol in contemporary organizations: towards a wider framework, Management Accounting Research, 5, 289-299.

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