Research on Financial Management in Higher Education Reveals Budget Flexibility Is Key to Security

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The decades-long decline in U.S. college enrollments this spring saw its biggest two-year decline in more than 50 years. Universities increasingly face tougher competition with less money coming from state budgets, which does not bode well for their financial security. A new study from the Strategic Management Journal (SMJ) reveals that universities thriving in this environment are doing more with less simply by embracing more flexible budgeting. The problem is that many universities face internal and external pressures that impede financial flexibility.

“Universities that reallocate resources more regularly are more likely to run larger budget surpluses,” says Sohvi Heaton, visiting assistant professor at Santa Clara University. “However, this is much more likely to be true in universities where external governance arrangements allow for greater discretion on the part of the executive.”

Heaton teamed up with renowned economist and UC Berkley professor David Teece and data scientist and economist Eugene Agronin to study more than two decades of longitudinal data on the financial performance of US public universities. The study delves into the concept of dynamic capabilities and uses the “expenditure ratio deviation” (DER), or the change in the expenditure ratio across all budget segments from year to year, to measure how easily universities can reallocate funds. They compare the DER to the university’s annual surplus or deficit to determine its effect on financial performance.

“In absolute terms over the period we studied, a typical annual change in DER could have added $10.02 million to the average income of a university,” says Agronin. “The effect is not negligible given that a public university typically spends around $5 million on scholarships.”

The authors then segmented universities into low, medium, or high regulatory levels based on their state board structures, finding 239, 328, and 1,136, respectively. Using a complicated linear regression model of performance of universities in light of DER and governance – while controlling for variables such as funding structure, endowments and university size – they found that weak governance more than doubles the effect flexibility in resource allocation, while high governance weakens it.

“In many of these cases, a budget deficit would turn into a surplus if a university increased the DER by a single standard deviation,” Teece says. “In this context, overly prescriptive governance arrangements have a significant effect on the financial performance of universities by making it difficult to achieve the necessary financial flexibility and associated resource reallocations.”

Several corporate studies have established that flexible resource allocation can improve performance under good leadership, but this study is the first to apply these dynamics to higher education. Academic budgets often sublimate financial performance and market considerations to internal politics – or external politics if subject to heavy government oversight. The authors warn that their results clearly indicate that a change in the traditional budget model of universities is necessary to survive in the current higher education climate.

“A university must be able not only to do research and teaching, but also to learn how to manage itself well,” says Heaton. “In an era of international competition for resources and talent, ‘organized anarchies’ are no longer an acceptable model for the management of colleges and universities. »

The Strategic Management Journal (SMJ), founded in 1980, is the world’s leading mass-impact journal for strategic management research. The SMJ seeks to publish articles that pose and help answer important and interesting questions in strategic management, develop and/or test theory, replicate previous studies, explore phenomena of interest, examine and synthesize existing research and to assess the many methodologies used in the policy area. management field.

SMJ is published by the Strategic Management Society (SMS), an association of 3,000 scholars, professionals and consultants from 80 countries that focuses on developing and disseminating ideas about the strategic management process, as well as promoting contacts and exchanges. around the world. To learn more about SMS’s scientific and educational programs in strategic management, please visit www.strategicmanagement.net.

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