Working Papers on University Reform
Working Paper 8:
Will market-based ventures substitute for
government funding?
- Theorising university financial management
By DR. PENNY CIANCANELLI
Danish University of Education,
University of År
Udgivelsesmåned
Århus
May 2008
Working Papers on University Reform
Penny Ciancanelli: Will market-based ventures substitute for government funding?
Working Papers on University Reform
Series Editor: Susan Wright
This working papers series is published by the research unit
”Transformations of universities and organizations” at the Danish School of
Education, Århus University. The series brings together work in progress in
Denmark and among an international network of scholars involved in
research on universities and higher education.
”Transformations of universities and organizations” aims to
establish the study of universities as a field of research in Denmark. The
field has three components: International and national policies to revise the
role of universities in the knowledge economy; the transformation of
universities as organizations; and changes in teaching and learning in higher
education. The research unit aims to understand each of these components
in the context of the others and explore the links between them. The central
questions are: How are different national and international visions of
learning societies, knowledge economies, and new world orders spurring
reforms to the role and purpose of universities and to the policies and
practices of higher education? How do university reforms introduce new
rationalities of governance, systems of management and priorities for
research and teaching? How do managers, researchers, and students
negotiate with new discourses, subject positions and forms of power arising
from university reforms? What kinds of changes are students, academics
and university managers themselves initiating, and how do these interact
with reforms coming from governments and international organizations? This
interaction is central to the work of the research unit.
The unit draws together ideas and approaches from a
range of academic fields and collaborates internationally with other higher
education research environments. Currently the unit’s main activity is a
research project, ‘New management, new identities? Danish university
reform in an international perspective’ funded by the Danish Research
Council (2004-2008). The unit holds seminars and there is a mailing list of
academics and students working in this field in Denmark and internationally.
Members of the unit include professor Susan Wright, Danish
School of Education, associate professor John Krejsler, Danish School of
Education, assistant professor Jakob Krause-Jensen, Danish School of
Education, Ph.D. student Gritt Bykærholm Nielsen, Danish School of
Education, and research assistant Jakob Williams Ørberg, Danish School of
Education.
Further information on the research unit and other working papers
in the series are at http://www.dpu.dk/site.asp?p=5899. To join the mailing
list, hold a seminar or have material included in the working paper series
please contact professor Susan Wright at suwr@dpu.dk or at the Danish
School of Education, Tuborgvej 164, 2400 Copenhagen NV, Denmark.
Working Papers on University Reform
Penny Ciancanelli: Will market-based ventures substitute for government funding?
Will market-based ventures substitute for government
funding?
- Theorising university financial management
DR. PENNY CIANCANELLI
Department of Accounting and Finance
Strathclyde University
100 Cathedral Street
Glasgow, UK
Email: p.ciancanelli@strath.ac.uk
Tel +44 141 548 3689
Fax: +44 141 552 3547
Copyright: Penny Ciancanelli
Working Papers on University Reform
Penny Ciancanelli: Will market-based ventures substitute for government funding?
Contents
Abstract.......................................................................................................................... 1
Introduction .................................................................................................................. 1
Controlling the Controllers .......................................................................................... 3
Performance measurement and control............................................................................. 3
Funding versus Finance............................................................................................... 6
What does a University Cost? ............................................................................................. 9
Do universities cost their operations? .............................................................................. 10
Impatient wealth ................................................................................................................ 11
Conclusion .................................................................................................................. 13
References ................................................................................................................... 14
Working Papers on University Reform
Penny Ciancanelli: Will market-based ventures substitute for government funding?
Abstract
The aim of this paper is to challenge taken-for-granted assumptions about the ease
with which universities can turn a profit in global education markets. Drawing on
Weber’s neglected insights into the financial management of non-business units, the
paper theorizes structural differences in financial management of non-profit and
business organizations, drawing attention to differences in the fungibility of the
financial resources at management’s disposal. It argues that cost identification is the
financial Achilles heel of such organizations because unlike business units, their aims
do not offer a normative basis (profit maximization) for distinguishing between
necessary and discretionary expenditures. Difficulty in identifying and calculating
costs amplifies the financial risks of commercial ventures, making it highly unlikely
that they offer public universities a sustainable alternative to government funding.
Key words: Higher Education Financial Management, Cost identification, Non-profit
organizations
Introduction
For most of the post World War II period, the core structures and processes of
university life in Europe were not much different to those that characterized 19th
century universities. Badly paid professors lectured badly behaved students and the
technology of Guttenberg ruled. Self-regarding governance in the context of public
support for enlightenment ideals appeared to conserve a way of life that had largely
accommodated rather than capitulated to capitalism (Reading 1996).
Today, however, the signs of institutional transformation are abundant.
Globalization and neo-liberalism — as ideologies and programmes of deregulation
and privatization—have succeeded in cracking open the defences that allowed some
aspects of life in universities to evade full on commoditization (Epstein et al. 2008;
Wright and Ørberg 2008; Marginson 2004; Scott 2002). One example is the
attribution of declining government support for public universities to the fiscal
consequences of globalization (Vincent-Lancrin 2004; Johnstone et al. 2000;
Varghese 2001, CIHE 2005). This has encouraged many public universities to
supplement their revenues through commercial ventures.i
The financial realism of this turn toward market sources of revenue is rarely
challenged. Indeed, most criticisms of such engagements by universities are moralpolitical, concerned with the threats they pose to valued modes of teaching, research
and self-governance (Nobel 2003; Aronowitz 2001; Reading 1996). The presumption
in much of the research seems to be that the difference between a business and a nonprofit university is largely ideological; if non-profit organisations change their mindset, they can change their financial fate. This may explain why some governments
have mandated business-style accounting for universities on the argument that this
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will promote more business-like resource management (Ciancanelli 2008a; HEFCE
2004; IFAC 2002).
Even financial management research tends to minimize the difference between
financial management in business and non-profit organization. Overall emphasis is
placed on the politics (and ideology) of budgeting and its similar effects on
individuals in organizations (Helmig et al. 2004; Olson et al. 1998; Covaleski and
Dirsmith 1988).
Studies contrasting the effects of budgeting in business units and non-profit
organizations are almost unknown. It is certainly true there are significant formal
similarities in the financial management of the two types. Both types allocate
resources according to some kind of plan (budget) and regularly assess the efficiency
and effectiveness of the plan (control). In addition, both types rely on monetary
accounting as the core valuation technology used in both constructing the plan
(budget) and defining the assessment measure (control). However, the legal and other
purposes of planning and control in non-profit organizations are fundamentally
different to those in business units. Arguably, these differences in purpose have
consequences that warrant investigation.
One possible reason for the influence of these purely formal approaches is the
paucity of theoretical research on financial management in non-profit organizations
(Ciancanelli 2008a, b; Helmig et al. 2004). In conventional research on planning and
control, theoretical interest lies in organization processes common to both types of
organizations, (e.g. labour control processes) and the reliance on politicalsociological theories of organization behaviour. The technical features of cost
measurement have attracted little interest in this body of research (Jones 1995). There
is very little theoretical research on financial management of non-profit organizations
(Helmig et al. 2004) and virtually no research into possible structural differences in
the financial management of profit and non-profit organizations.ii The large body of
research on public sector reforms conforms to this pattern. Thus, rather than theorizing
how the different aims of business and non-profit organisations affect the
implementation of formally similar planning and control technologies (Olson et al.
1998), researchers have tended to rely on non-financial theories of organizational life
when analyzing empirical materials on non-profit universities (Deem 2004; Ehrenberg
2002a; Covalesky and Dirsmith, 1988).
The aim of this paper is to challenge the assumption that organizational aims
exert little or no influence on financial management practices.iii Highlighting legal
differences in the uses of funds and structural features of performance measurement,
this paper proposes a theoretical explanation for observed differences in cost
management in the two types of economic units. Whereas the aim of profit
maximization forces business units to attend to cost identification and minimization,
there is no equivalent link between the organizational aim and costs in non-profit
organizations. This makes it difficult (if not impossible) for the latter to identify
necessary costs and distinguish them from discretionary expenditures.
The discussion of these issues is presented in three main sections. The first
offers a theoretical exploration of the differences between planning and control in
non-profit organizations and capitalist firms. It extends the ideas developed in
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Weber’s discussion of substantive and formal rationality in monetary accounting,
identifying theoretical reasons why capitalist firms must focus on costs and why nonprofit organizations find it difficult to do so. The second section is devoted to an
analysis of the type of funding relied upon by non-profit organizations, noting how
restrictions on fungibility amplify the problems of cost identification, on one hand,
and financial accountability, on the other. The discussion in the concluding section
offers illustrations that point to the empirical pertinence of the theoretical ideas
developed in the first two sections.
Controlling the Controllers
…the accounting calculations of a profit-making enterprise and a
consumption unit differ as fundamentally as do the ends of want
satisfaction and of profit-making which they serve” (Weber 1978:
92).
The starting point for theoretical clarification of at least some of the structural
differences in planning and control in these types of units can be found, curiously
enough, in Weber’s (1978: 86-89) discussion of the rationality of monetary
accounting, especially his ‘formulation of a precise concept of the rational budgetary
unit as distinguished from that of a rational profit-making enterprise…’ (Weber 1978:
89, Note 3). This discussion and the subsequent elaboration of the distinction between
formal and substantive rationality of accounting control in capitalist firms (Weber
1978: 92-118) offers a useful way to begin theorising structural differences in
planning and control. Because these particular insights are not integrated into
contemporary conceptualizations of planning and control, they are worth reviewing
them in some detail (Colignan and Covalesky 1991).
Performance measurement and control
Weber’s discussion of monetary accounting is situated between his definition
of formal versus substantive rationality in economic action and his discussion of the
concept and types of profit making units (Weber 1978: 85-90). As discussed more
fully elsewhere (Ciancanelli 2008a), Weber’s treatment of monetary accounting is, in
effect, a comparison of the value rationalities that underpin planning and control in the
two types of economic units — one oriented towards consumption (Haushalt) and the
other oriented towards profit (Erwerb).iv
In the course of the development of profit-oriented firms in Europe, a specific
type of monetary accounting was devised and subsequently used by capitalist
enterprises (Yamey 1978). Weber summarized the features of this specialist
accounting in the following way:
Capital accounting is the valuation and verification of opportunities
for profit and of the success of the profit-making activity by means
of a valuation of the total assets (goods and money) of the enterprise
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at the beginning…and at the end of the accounting period (Weber
1978: 91).
As details of his discussion make clear, Weber (1978) used the term capital
accounting for those practices that are now referred to as financial accounting and
‘household’ accounting for practices that are now referred to as budgets or financial
plans. In Weber’s representation, the commercial virtues of capital accounting lie in
the way it offered the capitalist ‘control’ over operations through the provision of
information about the incremental effect of market exchanges (transactions) between
his firm and others. Weber writes:
Through a system of individual accounts, the fiction is here created
that different departments within an enterprise, or individual
accounts, conduct exchange operations with each other, thus
permitting a check, in the technically most perfect manner, on the
profitability of each individual step or measure (Weber 1978: 93).
This leads him to conclude that the use of this specialist monetary accounting
instantiates substantive rationality in the capital budgeting process (planning) because
the success (or failure) of the plan can be precisely calculated (its monetary value) in
exactly the same terms as the aim of the plan (acquisition of wealth). Thus, capitalist
accounting is said to impose substantively rational controls (performance measures) on
the controllers of these types of economic units (see Carruthers and Espeland 1991 for
a critique).
Weber’s observations anticipated subsequent theories of accounting
concerning the distinctive benefits claimed for capital accounting. His conceptual
distinction between the type of income and wealth held by business and non-profit
organizations anticipates the modern profession’s construction of specific technical
meanings for the terms income and capital (Parker et al. 1986). For example, in
Anglo-American accounting, the term income refers to profit, not revenue and its
measurement is regulated by concepts and rules known as generally agreed accounting
principles or GAAP. For non-profit units, accountants prepare a very different
summary financial statement; it is a ‘revenue’ statement as distinct from a profit and
loss account (UK) or income statement (US). In this sense, professional practice
reflects a judgement that the economic substance of business income is quite different
to that of non-profit revenue. Moreover, the revenue statement is often compiled on a
funds basis rather than a consolidated basis.v
The difference between income and revenue turns on the difference between
the ‘wealth’ of a unit oriented towards consumption and the capital of a unit oriented
towards acquisition or profit—a difference reflected in the terminology. Weber used
to distinguish wealth (vermogen) from Kapital (See Note 14 in Weber 1978: 206). In
contemporary financial management terminology, the reserves and endowment funds
controlled by non-profit organizations usually have the legal status of ‘wealth’ (his
concept of vermogen) rather than capital (his concept of Kapital). With respect to the
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measurement of the value of both types of wealth, Weber thought each ought to
include social advantages, now referred to as intangible assets. Thus, Weber wrote:
The category of ‘wealth’ includes…all economic advantages over
which the unit has assured control, whether that control is due to
custom, to the play of interests, to convention or to law (Weber
1978: 89: Note1)
The profit (or income) of a business unit is ‘capital maintained income’ which
means it is the surplus (measured in money) over and above the monetary value of the
firm’s capital at the beginning of the production period (Lee 1996). This means that
for a business, the expenses of the period will include not only those outflows of
money required to earn the inflows of revenue. They will also include imputed
charges (accruals) whose value is based on estimates of the monetary value of the
capital assets used up or consumed in the period (e.g. depreciation) (Parker et al.
1986).
In contrast, the revenue of non-profit organizations consists of the monetary
value of inflows received by the unit during the reporting period; it declares as net
revenue the ‘surplus’ left after expenses have been paid. This means expenses are
equivalent to payments and costs are not matched to the revenues they are thought to
generate. There was longstanding agreement that the wealth of non-profit units does
not constitute capital, per se, which gave rise to objections to the practice of imputing
charges for the so-called ‘cost’ of capital (Wynne 2003; Lapsley 1999; Sidebotham
1965). Indeed, there are often legal restrictions that limit the uses to which a resource
may be put. For example, non-profit organizations may have access only to the
income from a bequest; the capital itself is held in trust in perpetuity. In such cases, it
is accepted that this wealth does not conform to the statutory definition of capital used
by financial managers when measuring the value of income in a business unit (Mautz
1988; Barton 2000).
Following on his discussion of differences between business and non-profit
units, Weber proposes that the particular monetary accounting practices used by
business units impose substantively rational ‘controls’ on the controllers of those units
(Weber 1978: 92-95). These practices do so, according to Weber, because the
mechanism of control (quantitative measure of increase or decrease in monetary
income and wealth) is symmetric with the aims of the organization (quantitative
increase in monetary income/wealth).
According to Weber’s framework, monetary accounting does not provide
substantively rational control of the plans agreed by the controllers of non-profit
organizations. It cannot do so because there is no equivalence between monetary
measures of performance and the diverse qualitative purposes non-profit and
government organizations aim to serve (Ciancanelli 2008a). The crux of Weber’s
argument is that the substantive rationality of monetary accounting in capitalist firms
lies in the use of the same value base to measure means and ends. Since the
measurement of ‘ends’ (increase or decrease in capital maintained income or profit)
requires value equivalent measurement of means (operating costs), the capitalist’s
focus on profit is simultaneously (and necessarily) a focus on costs. Of particular
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importance to commercial competence is the premium this places on identifying the
minimum necessary costs, as doing so allows maximization of profit.
In units oriented towards consumption, monetary accounting does not have
equivalent rationality and provides no basis for identifying minimum operating costs.
The rationality of monetary accounting is limited to providing a unit measure of value
that allows for a purely formal comparison of revenue and expense. In non-profit
organizations, the value of the items in the consumption bundle to members of the
organization cannot be measured in money. As a result, controllers of such units, who
attempt to characterize a subset of expenditures as necessary or a certain consumption
bundle as essential to the organization, are advancing a political claim about which
organizational actors’ needs should have priority.
By implication, the path of least organizational resistance in non-profit
organisations would be to treat all expenditures as operating costs and focus instead on
revenues, allocating resources to efforts to secure more revenue in order to ‘cover’
ever increasing costs. Such an orientation is obviously dysfunctional when
undertaking a commercial venture since a project may appear to generate enough
revenue to cover only the most obvious of its direct costs (wages and consumables)
while not generating enough to cover its full economic cost (e.g. including all indirect
costs and net of joint costs). Absent are both the capitalist’s motive to reduce costs (as
this increases profit—all things remaining the same) and accounting information that
supplies the required details. Therefore it is unlikely that revenue-focused controllers
would be able to rationally assess a venture’s performance or to determine its ‘true’
financial contribution to the overall costs of running the university.
Funding versus Finance
A key difference in the monetary resources managed by business and non-profit units
is their fungibility. In Weber’s discussion of the rationality of the planning control
nexus, markets supply price information that enhances the rationality of two types of
economic calculation—one is the marginal rate of substitution between utilities and
the other is the opportunity cost of investment capital. The more that the monetary
accounts integrate market prices, the greater the rationality of both planning and
control (Weber 1978: 109-113). vi
By implication, any normative or legal prohibitions that constrain the
flexibility of resource allocation, also constrain the rationality of monetary accounts.
Limited flexibility is a qualitative property of the resource that cannot be
communicated by a quantitative measure of value expressed in monetary accounts.
Contemporary financial management employs the concept of fungibility vii to describe
this feature of budgeted resources.
In both non-profit and capitalist organizations, financial management
hierarchies dictate the parameters of the budget holders’ authorization to spend the
organization’s money. If the budget holder is free to revise his authorized plan of
expenditures (e.g. reallocate resources within the total spend she controls) the overall
resource is fungible. If she does not have that freedom, the use of the resource is
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stipulated; it is a non-fungible resource. A central difference between capitalist firms
and non-profit organizations is that in the former internal actors (e.g. the
owners/controllers of capitalist firms) design the constraints on fungibility in light of
the agreed organization structure (management hierarchy) up to and including
constraints on the powers of the chief operating officer.
For government and non-profit units, however, decisions on fungibility are
made by external actors including legal terms of reference or specific terms of a grant
or bequest or the vote of legislative funding bodies. With respect to the latter, in
parliamentary democracies, for example, departments of government are authorized
(on vote) to spend specific amounts for specific purposes (Jones and Pendlebury
1996). In order to take money voted for purpose A and use it for purpose B, civil
servants require approval from someone higher up in the department (or from
parliament itself). In such a context, it would hardly make sense to ‘control’ the
controllers with a performance measure that assumes complete freedom in resource
allocation. This is why prior to neo-liberal reforms, control in government
organizations consisted of budget outturn reports, as these highlight any variance
between how a department allocated its resources and how it was supposed to (as set
out by government, parliament or other relevant authority) (Wynne 2003).
Differences in fungibility have two main financial management implications.
Firstly, the more reliant the unit is on non-fungible resources and the more diverse the
sources of revenue, the more difficult it will be to define an organization’s own
operating costs, and by extension, the more difficult to ascertain the revenue benefits
of a venture to the organization, per se. Secondly, the more reliant the organization is
on non-fungible resources, the more limited will be its ability to fund (or finance)
commercial ventures without diverting resources from its previous portfolio of
activities. Given the internal dissent such diversion might provoke, commercial
ventures may be afflicted with unrealistically short limits on the amount of time they
are given to demonstrate their merit. Thus, we expect commercial undertakings by
public universities to pose more of a hazard to their public benefit obligations (via
diversion of resource) and to be subject to commercially inappropriate time horizons.
As elaborated in Ciancanelli (2008a), the global higher education sector is
composed of three main types of universities. The most common type is a public
university, one that is funded by government from its overall tax take. From a
governance perspective, a public university is a department of government and its
controllers are civil servants who are expected to implement plans that reflect the
diverse, qualitative aims set by government. The next most common type is a nonprofit private university. This type is organizationally and financially independent of
government. It funds its operations from grants received from various stakeholders—
such as wealthy benefactors, students viii and government departments that pay for
research undertaken by universities. The third type, a corporate university, is one that
has increased in importance over the past decade. Like any business, its purpose is to
profit from the sale of services and it finances operations from the capital markets or
the personal wealth of its owners.
The budgets or plans of each of these types allocate resources in light of their
founding requirements and related statutory terms of reference. Thus, civil servants
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are expected to allocate resources in public universities in line with public benefit
priorities imposed by party political institutions. Those in charge of a private
university are expected to govern in line with the largely public benefit rationales
imputed by its benefactors and imposed by their statutory terms of reference.
Businessmen are expected to govern for-profit universities in the interests of owners’
income and wealth accumulation.
Differences in the structure of financial management emanate from, inter alia,
differences in flexibility to allocate resources along a continuum from full flexibility
to quite limited freedom to revise the plan. Controllers of corporate universities have
the most financial freedom, while the capital assets of the unit may be temporarily
fixed in the form of machines, real estate, etc., they are in principle a fully fungible
resource. This means the owners are free to sell all or any part of the business and
pocket the proceeds.
Slaughter and Leslie (1997) draw attention to the importance of ‘nonstipulated’ resources for academic entrepreneurs. Their work does not make clear
whether non-stipulated resource refers to ‘free cash flows’ (e.g. internal surpluses) or
to revenues that are fully fungible. Their discussion does not consider the fungibility
of the stock of wealth at the disposal of the university’s controllers, a subject of
increasing importance in recent charges that wealthy US universities prefer to raise
student tuition rather than spend a reasonable portion of their endowment income (e.g.
over 5%) (Lederman 2008).
In contrast, in typical private universities, a substantial share of the income and
(normally) all its assets have limited fungibility. The controllers of non-profit
organizations often have little or no authority to liquidate the unit’s assets; if such
authority is supplied, the problem arises as to whom to distribute the proceeds to,
since these organizations do not have owners in a conventional sense (Sidebotham
1965). The constraints on fungibility derive from reliance on grants and bequests that
stipulate how the funds are to be used and, in some jurisdictions, from strict fiduciary
obligations that limit the uses to which any internal surpluses may be put (Jackson and
Cowley 2002; Dukes 2002).ix
In the case of public universities, the lack of fungibility is even greater and
reflects the organization’s subordination to legislative or parliamentary appropriations
processes. By limiting fungibility, legislatures aim to prevent unelected civil servants
from diverting public finances to private uses. It is argued that unlimited fungibility
of resources allocated to public bodies is undesirable in as much as it creates both
fiscal and moral hazards. The fiscal hazard is that public bodies will spend more than
allowed; the moral hazard is that spend will be for personal rather than democratically
determined purposes (Sidebotham 1965; Wynne 2003; Jones and Pendlebury 1996).
The fungibility constraints on the controllers of non-profit universities (both
public and private) have two main consequences for the management of commercial
ventures. First, reliance on grants creates complexity in the identification of operating
costs (or even the definition of cost categories) which limits control to purely formal
control of the organization’s resources (e.g. keeping records of inflows and outflows
of cash). Complexity is created because receipt of grants requires honouring the cost
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categories defined by the funding body; the more diverse the funding bodies relied on,
the more cost categories (and details of cost measurement) can be expected to vary.
Even if there is a sophisticated accounting information system in place, this
heterogeneity in sources of funding implies heterogeneity in uses. This will make it
difficult to identify all the costs incurred by the organization and to ascertain whether
these costs were actually covered by the level of expenditure the grant authorizes. In
other words, cost recovery is more technically demanding, the more diverse the
funding base.
This suggests that efforts to diversify sources of revenue through commercial
ventures generate at least two types of hazards. The first is an untracked but continual
increase in uncovered administration costs whose payment will perforce come out of
the organization’s general revenue. This is because without detailed and reliable data,
it will be impossible to assign all the costs generated by the commercial venture to its
project accounts. Leslie and Rhoades (1995) were among the first to associate rising
administration costs with efforts to diversify the funding base of US universities.
The second hazard concerns how ventures are financed. Commercial ventures
require the advance of money ‘today’ in expectation of more money (capital
maintained income) tomorrow. This means investment in commercial ventures
requires deciding which elements of the negotiated consumption bundle must be
sacrificed today to fund the investment that it is hoped will bring a cash benefit
tomorrow. If the uses of revenues received by public universities are largely
stipulated, funding commercial ventures requires controllers to reduce costs or to
increase sources of revenue to which no strings are attached. Even private universities
will be hemmed in by constraints on such possibilities if only because of their
obligations to maintain expensive campuses or other heritage assets.
It seems unlikely that commercialization can increase revenue quickly enough
to withstand the internal tensions that are created by (at least initially) taking resources
away from existing operations. Even if such ventures were debt financed, the project
itself would require management, a requirement that would mean diverting existing
staff to that purpose or the hiring of additional staff. Either choice implies some
degree of reallocation of resources away from current uses; how much depends on the
extent to which the controllers have access to resources whose use is unstipulated
(such as increasing student fees).
What does a University Cost?
There is a deep tradition and understanding in higher education that
resources equates to quality—that more money results in better
institution and that you cannot cut money without reducing quality
(Wellman 2007 in Lederman 2007:2).
The habit of equating more money with higher quality (cited above) suggests
that universities are managed in line with an orientation towards consumption rather
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than acquisition. If so, the main theoretical implication of such an orientation is the
management of finance with an eye to ‘covering the cost’ of the non-profit
organization’s traditional consumption bundle. This supplies a structural explanation
for universities’ focusing on expanding revenue to meet costs. The remainder of the
discussion in this section offers two sets of events that illustrate the revenue bias of
financial management in non-profit universities. The first concerns cost identification
and measurement in EU and US universities. The second concerns the relationship
between fungibility and commercial ventures.
Do universities cost their operations?
In a remarkable coincidence, higher education policy research in both the US and
Europe has turned its attention to the cost of universities and discovered that
systematic identification and measurement of costs does not feature much in their
planning and control routines.
In the US, the Delta Project on post secondary costs, productivity and
accountability, headed by Wellmanx is the higher education establishment’s response
to widespread discontent with the inexorable rise in the costs of attending university
(Ehrenberg 2002a) and with the lack of transparency in university financial
management (Ehrenberg 2002b; Ehrenberg and Rizzo 2004). Initiated in late 2006,
the results of its research will not be fully known until late in 2008 (Lederman 2007).
However, the results made public thus far point to a revenue bias in university
financial management.
A survey of the chief financial officers of over 2000 universities revealed that
the majority report expenses only in the aggregate and decoupled from performance;
fewer than twenty-five percent report the use of what are referred to as standard
methodologies for reporting costs. Implied is Wellman’s belief that ‘standard
methodologies’ are business methodologies even though there is considerable research
that suggests such methodologies are problematic when used by non-profit
organizations in the public sector (Wynne 2003; Lapsley 1999; Olson et al. 1998).
Interestingly enough, her results indicated that the trustees and other
controllers are not concerned with the issue of costs per se. Instead, they are
preoccupied with comparing the salaries paid to faculty (and the tuition charged to
students) in those universities (and only those universities) they regard as having a
similar status (Lederman 2007). This seeming lack of interest in costs is emphasised
in Wellman’s testimony before the US Congress. In it Wellman argued ‘Despite
repeated calls…(to document costs)…governing boards focus on growing revenues
and meeting the market (sic) for tuition. The focus remains on tuition and financial
aid, not on how the money is spent’ (Wellman 2007:6).
The second illustration is the European University Association’s (EUA)
project on funding and accounting at EU universities. Recently, spokesmen for the
project made public (via interviews and press releases) the association’s concerns
about the low awareness of costs evidenced in the financial management of most
European universities. According to the director of finance at Liverpool University,
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initial findings from research on accounting controls ‘revealed that, as yet, there is no
common understanding of the financial terminology used, let alone a coherent way to
define the full costs of university activities’ (Haworth 2008a). Indeed, at a EUA
conference on the subject, the corporate controller of Amsterdam University reported
that the basic conditions for identifying costs do not yet exist. He also expressed
scepticism that what was required could be achieved, even though ‘…only institutions
that knew the full costs of their activities could judge if they were operating on a
financially sustainable basis’ (Haworth 2008b).xi
Nothing in either initiative points to a theoretical understanding of the question
raised by the reported results. Indeed there is a remarkable absence of curiosity about
finding the same defect in the financial management of organizations across Europe, a
set of institutions whose only common feature is their claim to being universities.
Otherwise, what characterizes the population surveyed is enormous diversity in
historical origin, institutional characteristics and funding base. That such a diverse
group should manifest the same financial management shortcoming deserves more
theoretical attention than has been given thus far.
In addition to the empiricism that seems to drive the policy research agenda in
both the US and the EU, there is little acknowledgement of the known difficulties of
cost measurement in non-profit organizations (Salerno 2003). Accounting research on
the latter has long suggested that the technical basis for constructing measures of costs
of such organizations is very weak. Thus, one scholar commented that initiatives that
focus on cost ‘…fail to acknowledge the frailties of performance measures in the
public sector, the absence of robust measures and the potential for displacement of
important elements of service which are not measurable’ (Lapsley 1999: 203).
Impatient wealth
It was argued above that the more reliant on non-fungible monetary resources, the
more resources would have to be diverted from existing operations to finance (or
fund) commercial ventures. This implies, among other things, that public universities
would have more difficulty sticking with a venture than might be the case if it were
capitalist firm. Any such short-termism would amplify problems in ascertaining what
the venture was costing the university if for no other reason than the expectation that it
would be possible to recover costs in what any businessman might regard as an
unrealistically short time frame. This type of financial hazard is evidenced in two
recent, high profile commercial failures. One involves a consortium of private
universities in the US, the other involving a public university in Australia.
The first example is Fathom—an online, distance-learning venture launched
by a consortium of wealthy private universities in the US in 2000. The venture itself
appears to have been the equivalent of an on-line culture-mall that would allow
individuals (and businesses) to shop for high-end, cultural goods (museum products)
and services (training classes, cruises, etc) produced by members of the consortium.
Columbia University was the lead institution and a majority shareholder,
having initially invested $14.9 million. When the venture was shut down in 2003, its
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commercial viability was cast in doubt by the meagre level of sales (circa $700,000).
This was much less than its attributed three-year operating costs. Columbia
University declared it had lost $25 million—its initial investment in the consortium
and the cash injected into the business between 2000 and 2003 (Hane 2003). The
discussion in the faculty senate of Columbia University makes clear that many were
disposed to close the project because of its repeated calls for additional finance. Such
calls, however, were not necessarily proof that the venture was a bad idea. They could
be taken to reflect the university senate’s perception that it should not require more
money. The basis of this perception is undocumented and it remains an open question
whether it reflects a rational assessment or one emerging from internal political
disputes.
One could argue that $25 million (or even twice that) is not a lot of money for
a very rich university (Columbia’s wealth in 2003 was reported as circa $6 billion and
its annual revenues as $2bn) (Columbia University 2003). On the other hand, one
could just as easily point to the opportunity cost of the venture from the perspective of
the university’s highly indebted undergraduates. An expenditure of $25 million would
have been sufficient to waive the tuition fees (estimated at $15,000 per annum) for all
undergraduate students (circa 7,000) for 2.5 years or so (Columbia University 2003).
Another illustration of dubious investment time horizons concerns the efforts
of the University of New South Wales of Australia to set up a university in Singapore
(Cohen 2007). The bespoke campus (whose costs of production are not clear but
which one source estimates at $145 million) was built to accommodate 15,000
students, drawn from all parts of the globe (Forss 2007). The project reflected the
Singapore government’s desire to establish the island as a regional hub of higher
education (Epstein et al. 2008). The University claimed that a minimum of 800
students would enrol in the first year and the number would increase to about 3,000
per year within ten years. In the event, fewer than 150 signed up in 2007, two thirds
of them from Singapore. This provoked a rapid (some might say overly hasty)
response from the University. It announced closure of the operations only two months
into the academic year and ceased operations altogether only 5 months after opening
its doors (Forss 2007).
When setting up the new university, the University of New South Wales
received $15 million in loans and grants from the Singapore government. Its decision
to close the new university after only two months meant it had to repay the entire $15
million (Cohen, 2007). Undoubtedly the University lost some of its own money; how
much is unclear. There is a considerable lack of transparency in the financial details
of the affair, including the extent of financial losses incurred by the Singapore
government (Forss 2007).
The auditor’s report and other sources suggest the closure was prompted not
only by the disappointing enrolment but also by the auditor’s lack of confidence in the
commercial ability of those in charge of the university. According to the report, ‘The
degree of control exercised by the University over all its controlled entities has not
always been consistent with that required’, an observation which suggests the
University collected financial information in ways that did not allow it to distinguish
differences in costs across the group (Auditor General 2007). This criticism points to
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the disturbing possibility that the university’s controllers thought it was possible to
manage the dozen or so units under its control without such basic information. In
light of these events, it is possible the university controllers believed the $15 million
paid by the Singaporean government and the tuition fees charged the 800 or so
students would not only cover costs but also generate a surplus (else why do it).
Given their hasty withdrawal, it seems likely that the true scale of the costs they would
have had to bear were much greater than they calculated. It is rather astonishing that
the financial projections of the University were either so crude or so mistaken they did
not allow for the possibility that enrolments might be quite low, at least in the first few
years.
Further evidence of revenue bias is found in research by Ehrenberg. Citing
evidence from his 1999 survey of financial management of both private and public
universities in the US, he emphasises that centralized control of budgets and the
shared system of governance combine to minimize internal pressures to reduce costs
(Ehrenberg 2002a). Moreover, Ehrenberg (2002a) argues that administration costs
have risen more rapidly at selective private universities because in addition to the
ineffectual control of costs there is a dysfunctional competition for prestige—
including costly efforts to manage how they are ranked by external sources such as
Business Week. While US studies, such as Ehrenberg’s, rely on what Wellman
(2007) regards as unsystematic and incomparable cost data, she expects that when
good data become available, they ‘…will show that most of the growth in
spending…(has been for) administration, fund-raising and costs of regulation’
(Wellman 2007 cited in Lederman 2007:3), a possibility first noted by Leslie and
Rhoades (1995). Thus, it seems fair to conclude that many university controllers are
remarkably unwilling to ‘look under the hood of higher education expenditures’
(Callan 2007; Lederman 2008: 3).
Conclusion
Arguably, these various illustrations point to the empirical pertinence of the proposal
that financial management in non-profit organizations is structurally different to that
in capitalist firms. In favour is the (admittedly limited) body of research which points
to weaknesses in cost identification and a bias towards revenue growth to resolve
financial problems. Unfortunately, in most current research on the subject, revenue
bias is treated as an empirical rather than structural feature of non-profit financial
management. This treatment underpins the unwarranted assumption in the work of
Wellman (2007) and others that cost identification by universities is technically
possible and just overlooked, rather than structurally difficult and so avoided. Thus,
the EU proposes the importation of business accountants to install ‘proper’ cost
accounting systems. The danger with such proposals is they may provoke efforts to
change university management to fit the accounting that is imported rather than
innovate a kind of accounting that is compatible with non-pecuniary value rationalities
that ought to govern resource allocation in non-profit universities (Rhoades et al.
2004; Peters 2004).
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We have argued that the ‘revenue bias’ of non-profit organizations derives
from the inability of capital accounting to impose substantively rational controls on
resource allocation. The central implication is that such controls cannot be sought in
accounting per se. Instead, universities and non-profit organizations must look to
their governance arrangements and reform them along lines that encourage greater
transparency in resource allocation. (Lauter 2002; Scott 2002). Transparency and
dialogue are essential because cost identification (as opposed to merely recording
expenditures) requires agreement on the (minimum) necessary consumption bundle
required to constitute a university (or other public benefit non-profit organization).
The only politically sustainable basis for reaching such agreement will be a
commitment to social relations within the organization that make it possible to forge
substantively value-rational links between the organization’s resource allocation
processes and the aims agreed by stakeholders.
While we have theorized reasons to be sceptical of the financial realism of
commercialization by universities, much more work is required to understand the
drivers of resource allocation in non-profit organizations. Some of that work is
theoretical with further clarification required of the different roles played by class and
status in setting the expenditure agendas of universities. Other necessary work is
empirical, including for example, detailed case studies that make use of the financial
information disclosed in the annual accounts of universities to shed light on the murky
relationship between rising administration costs, rising student fees and efforts to
diversify income through commercial ventures.
At stake is the much broader issue of financial management in nongovernmental organizations, the proliferation of a new type of non-profit organization
as the faux frais of the neo-liberal reforms of the public sector. Largely funded by the
public purse (either directly or indirectly through favourable tax treatments), such
organizations now provide a range of essential public services at arms length to
government and its accountability mechanisms. More research is needed to
understand how this new organizational form is managing public money and whether
it is to be trusted to deliver services in the public’s interest.
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Endnotes
i
Aggregate data on university funded commercial ventures are not compiled. Public
bodies, such as the International Finance Corporation (Perkinson 2006) and others
cited in text, offer data on the sector as a potential site of private investment but not on
the sector as a source of private investment into other sectors. Some information on
commercialization can be gleaned from tertiary sources including Inside Higher
Education (http://www.insidehighered.com) for mainly US news and University World
News for mainly European and Developing Countries
(http://www.universityworldnews.com).
ii
Examples of research of this type can be found in Critical Perspectives on
Accounting, Accounting, Auditing and Accountability Journal and Accounting,
Organizations and Society. For a discussion of its debts to Sociology, see Jones
(1995).
iii
This paper elaborates themes initially developed by Ciancanelli (2008a) on the
rationality of using monetary accounting to assess the performance of the controllers of
non-profit organizations.
iv
The dictionary translation of Erwerb (a noun) is given as acquisitive (an adjective);
in the text, Erwerb is translated as ‘business’ (a noun) an English language word for a
unit focusing on acquisition wealth (profit accumulation).
v
The difference turns on how the financial position in summarized. A fund’s basis
would reveal the net revenue/net worth of each specific (or specific type of)
endowment whereas consolidation would aggregate the ‘net revenues’ of each into the
net revenue of the unit. If the uses of a bequest are highly stipulated, there is good
reason not to include the income on the amount into consolidated revenue since its
proceeds cannot be used for general purposes. A fuller discussion of the lack of
fungibility of bequests is given in the next section.
vi
In Ciancanelli (2008a) attention was drawn to the relation between resource
fungibility and the difference between the substantive (as opposed to purely formal)
rationality of monetary accounting. The discussion here draws attention to the
implications of resource fungiblity for cost management.
vii
A contrast can be drawn between liquidity and fungibility; liquidity concerns how
readily the asset may be exchanged for other types of goods and services. Monetary
resources are highly liquid. Fungibility refers to its use. In commerce, monetary
resources are not only assumed to be liquid but to be available for any purpose.
viii
It may seem odd to refer to tuition fees as a ‘grant’ rather than a ‘user charge.’ The
difficulty with ‘user charge’ is that it implies any individual, for a fee, can use the
service, something that may be true of public transport but is obviously not true of
university education. The individual must first be granted admission to study at the
university before he/she is given the opportunity to pay a fee for the privilege.
ix
Lederman (2008) reports that a US government survey revealed a wide range of
differences in the fungibility of endowments. Texas A&M University reported that
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restrictions were placed on 90% of its endowment in contrast to Rice University,
which claimed that restrictions were placed on 53% of its endowment.
x
Wellman is the executive director of the Delta Project on Postsecondary Costs,
Productivity and Accountability http://deltacostproject.org/page4.html. Funding for
the project comes from Lumina Foundation.
xi
An illustration of the structural insensitivity to costs is given by the so-called serials
crisis faced by most university libraries in the last few decades. Monopoly pricing of
academic journal subscription, particularly science, technology and medical journals,
was ignored by the financial officers of most universities. Indeed, there is little
evidence to suggest any of them took the trouble to understand the drivers of the event,
its implications for the autonomy of their organization or the alternatives (including
new modes of publishing that were innovated by members of their own organizations).
It took the efforts of scientists and librarians at two public universities in the US
(University of California and University of Wisconsin) to initiate efforts to understand,
to identify the cause and to come up with a solution—all aspects of which were
resolutely ignored or opposed by the financial managers of universities. The
alternative pioneered by these scholars (Open Access) is now embraced by agencies
that fund much of the research conducted at public universities, such as the National
Institute of Health in the US and the research councils in the UK. For an overview of
these developments, including a theoretical perspective on their origins, see
Ciancanelli 2008b.
Previous Working Papers in this series:
1. Setting Universities Free? The background to the self-ownership of Danish
Universities, Jakob Williams Ørberg, July 2006.
2. Trust in Universities - Parliamentary debates on the 2003 university law,
Jakob Williams Ørberg, October 2006.
3. Histories of RUC - Roskilde University Centre, Else Hansen, November
2006.
4. An Insight into the Ideas Surrounding the 2003 University Law –
development contracts and management reforms, Peter Brink
21