Question 8.OA.1: Strategy, ‘Pricing,’ and Costing in Universities Universitie...
Strategy, ‘Pricing,’ and Costing in Universities
Universities around the globe increasingly focus their strategic efforts on national and international recognition for their research and teaching. Research and teaching excellence are major factors in attracting highly qualified faculty, the best students, and external support. Successful implementation of strategic plans requires that universities understand and adapt to the dynamic context in which they operate. Universities must respond nimbly and effectively to their environment while maintaining high standards for excellence. Universities also require a firm understanding of the impact of their strategies on revenues, such as tuition fees, government support, alumni, and corporate funding. Universities must also control their costs. To do so, they need to comprehend the nature of their varied activities and the links between these activities. A better grasp of an activity’s direct and indirect costs enables universities to make strategic decisions that reflect the value of their programs and services. Better information should lead to informed decision making about which programs to offer, which to eliminate, and promote decisions that are consistent with the universities’ long-term goals. Queen’s University at Kingston, Canada was created by Royal Charter in 1841. It is recognized globally for its rich sense of tradition, community, research, and teaching excellence. The university’s mission emphasizes the balance between a research-intensive institution and a ‘transformative student centred experience.’ Queen’s developed a Strategic Framework from its Academic and Research Plans to provide planning mechanisms and guidelines, along with metrics to evaluate progress in achieving its strategic goals. A key element of the Strategic Framework is the alignment of the university’s budgeting to its strategic planning process. Financial planning is increasingly important as universities face a competitive market for higher education, reductions in public resources, and greater reliance on external funding (including from students). Within this Strategic Framework, a resource allocation model allocates central costs to academic activities, and outlines the basis (cost drivers) for their allocation. The Strategic Framework emphasizes transparency, accountability, awareness, and consistency to develop costing and pricing models that reflect sound business practices. For instance, while faculties and academic units will pay for central services, they will know ‘where the university’s money goes, how it is allocated among units, and who pays for what.’ Units will also retain the revenues generated from their various activities but pay for shared services, including university space. Does Queen’s University use cost allocation primarily for planning or control purposes? Why would cost allocation for the purpose of accurate ‘product costs’ have been less important in the higher education market? How does the cost allocation procedure at Queen’s University relate to its strategy?
Queen’s University uses cost allocation primarily for planning purposes. The university uses its system to better understand the relationship between its research and teaching activities and their costs. This knowledge enables the university to make informed decisions about which programs to offer, promote, or wind down. Cost allocation for the purpose of accurate ‘product costs’ might have been less important in the higher education market in the past, when students and their parents were less informed about programs, universities, and international study opportunities. With the Internet and other information sources, students are more demanding and universities must compete globally to attract the brightest and the best. Additionally, in some countries, universities previously received much more government funding than they do presently, reducing the attention paid to costs and their control. In today’s market, universities need information to determine the cost of their activities and to demonstrate their financial stewardship. Financial stability is important to external donors whose support is increasingly important. Queen’s strives to be a leading university, combining teaching and research excellence. Its cost allocation procedure links activity costs to achieve this strategy to outcomes. In addition, the allocation of central costs highlights to departments and units that these costs must be covered by providing programs and research activities that attract the best students, faculty, and external support. Allocated costs emphasize the need for the university to pursue its short-term objectives in a fiscally transparent and stable manner to ensure that it can achieve its long term goals. Programs must be both financially viable and support the university’s strategy for high-quality research and teaching in a dynamic educational environment.