As higher education institutions continue to try to do more with less, college business officers have become all too familiar with the process of cutting budgets. “Community colleges, in particular, are feeling the squeeze,” notes The ABCs of Activity-Based Costing in Community Colleges (2014, American Institutes for Research and Johnson County Community College). “Even those institutions that have seen some restoration in state funding (although still well below prerecession levels) understand that higher education is still competing for limited state resources.”
But it’s never easy to make budget decisions about what should be cut. Some colleges choose certain programs to keep, at the expense of others. Some simply make across-the-board reductions, chopping every budget by a certain percentage.
But when colleges decide to use activity-based costing (ABC), a methodology common in the corporate world, decisions about budget cuts become much easier to make. With ABC, costs become connected to necessary activities, such as grading papers, counseling a student, powering a classroom, and maintaining a parking lot. By managing and analyzing this data over time, business officers can see how increases or decreases in various activities affect outcomes, such as graduation rates or retention.
For instance, with activity-based costing, a community college leader may see that cutting funds to the academic success center will directly decrease graduation rates in the welding program, but cutting funds in another area will have no impact at all on that area’s graduation rates.
For community colleges, which face particular pressure to improve outcomes without increasing spending, data gleaned from ABC can make an extraordinary difference when the time comes to adjust the budget. Activity-based costing provides greater transparency and an analytical framework for deciphering the relationship between spending and results, which can result in better financial decisions.
Implementing a full-scale version of activity-based costing can be difficult, time-consuming, and expensive. So last year, with a grant from the Bill and Melinda Gates Foundation, the National Higher Education Benchmarking Institute (NHEBI) at Johnson County Community College, Overland Park, Kan., designed an activity-based costing and benchmarking program for community colleges called Maximizing Resources for Student Success.
This costing framework, developed in partnership with the American Institutes for Research and the National Center for Higher Education Management Systems, offers a simplified version of ABC and equips community colleges with the necessary tools to realize cost savings and align resources with initiatives that lead to student success.
When Time Is Money
In fall 2013, NHEBI launched a pilot program with 26 community colleges across the country. Maximizing Resources is the first national fiscal benchmarking project to examine community college costs and student outcomes in concert, and aims to allow colleges to align spending on instructional and student services activities with their priorities, while considering their impact on student success.
Because this costing method is a relatively new idea in the higher education space, colleges joined the project for various reasons.
- Increased need to analyze cost drivers. “I have a background in accounting and the idea of looking at activity-based costing in education is certainly intriguing,” says Jonathan Gueverra, president of Florida Keys Community College in Key West, Fla. “More important than that, though, given increased accountability directives, performance-funding formula pressures, and the continued need to do more with less—or with no additional resources—it has become increasingly critical to determine the correlation between cost drivers.”
For Florida Keys, as for other community colleges across the country, it has become imperative to “understand the value added when we make marginal increases or decreases in the resources we add or remove from the various units or divisions,” Gueverra says. “Often, we view divisions as homogenous in the work they perform. For example, in the instructional area, we tend to think of faculty time as primarily instructional. While this is true, there may be nuances that release faculty for advising or other noninstructional activities. Without getting to the level of detail that gives a sense of both the actual activity and then the cost, it is difficult to determine how time and effort connect to dollars being spent in specific areas. ABC will help us better track specifics and ultimately assess real value.”
- Desire to deliver on mission while containing costs. MiraCosta College in Oceanside, Calif., joined the project this year for both altruistic and pragmatic reasons. “On the altruistic side, our college has made a commitment, as part of its comprehensive master plan, to innovate, create, and find research-based practices that improve student learning and success,” says Robert Pacheco, dean of institutional effectiveness at MiraCosta.“Our goal has been to become a learning organization. There is a core movement at the institution to create a learner-centered college, open to new possibilities where experimentation is encouraged, fostered, and rewarded.”
On the practical side, MiraCosta officials recognize that the model of continued, automatic economic growth in the nation and in the college’s Southern California region is no longer sustainable. “We are now living in a new reality, a reality where colleges must hold down costs and also improve student completion,” Pacheco continues. “Colleges must now look inward and creatively repurpose existing funds to improve student learning and success. Moreover, to continually improve, we must look to aspirational and true peers.”
Easier Done Than Said
While participating in the Maximizing Resources project involves examining detailed cost information from across a college campus, the workload for institutional representatives is relatively simple. When a college signs up to participate, staff members must complete six forms, and all information is submitted online.
The first set of information points revolves around instructional costs; business officers go to each academic unit and ask the deans or directors to fill out a straightforward form that covers the number of full-time and part-time faculty; the amounts paid in salary and benefits; and the deans’ estimates of the amount of time faculty members spend in tutoring, advising, grading, professional development, and other activities.
Because salaries and benefits represent the lion’s share of most colleges’ costs, getting that first portion of data collection out of the way is significant. Next, institutions look at the executive staff associated with instructional activities and the nonlabor operating costs associated with instruction. For the Maximizing Resources for Student Success project, they do not include facilities costs, but do include equipment, software, travel, and other expenses.
Once all the costs for instructional activities are documented, the next step is to divide all costs by the amount of time spent on the specific activities assigned to the instructional category. In that way, the data can show, for instance, how much the activity of grading costs across the entire college.
The project can also provide a report that shows the specific costs for individual programs, such as the welding program or the allied health program. Participating colleges can then compare costs internally for various units or divisions.
In addition to instructional activities, the project also looks at costs for student services and academic support activities. In each area, the necessary information is relatively easy to gather from various departments on campus.
As the pilot study unfolded, participating colleges became accustomed to eye-opening data. “This was the first time we’ve seen these types of statistics,” says John Bourgeois, director of institutional research at Spartanburg Community College in Spartanburg, S.C. “And I appreciated the very precise definitions. Some costs may not be figured the way we would traditionally calculate them here, but everyone throughout the project is doing it the same way, so it gives you a better comparison.”
The ability to make such comparisons led to some unexpected insights, including:
- Identifying opportunities. One of the most interesting results discovered through the pilot project concerned student services. The project revealed that, of all the student services activities examined, admissions was the one that had the highest correlation with graduation and transfer rates. Maybe that’s because admissions is where students first encounter the college, and if they have a good first experience, that positive experience continues with them throughout their college years. Whatever the reason, the correlation between admissions services and graduation rates was an important finding for participating community colleges: It may mean that making cuts to admissions programs is not a good idea, and that adding funds or new programs in admissions could pay off.
- Unintended failure to deliver. In addition to such overarching findings that applied across the board, some institutions also learned specific information about their own institutions’ spending and outcomes. For instance, one college had a stated goal to increase the number of students who secured jobs in their chosen fields. However, through participating in the Maximizing Resources pilot program, that college’s leaders learned that they were not backing up that goal financially. They learned that they were spending less on career services than on anything else, and in fact were spending less on career services than every other college in the pilot.
- Overspending on less-effective activities. Another participating college found that it was spending almost four times as much as others on student counseling. Business leaders on that campus decided to dig deeper into those counseling costs and study them in light of associated outcomes. They have since decided that they need to reduce the counseling program, because their graduation and transfer rates didn’t show that they were reaping the benefits from spending that much more. As a result of this process, officials at that college are working on reducing the costs in that program.
- Additional benefits. Such findings were among the most important results of the program: Activity-based costing became a tool to help participating colleges align their spending to their priorities. When business officers haven’t looked at their budgets through the lens of activity-based costing, they often have no idea what they’re spending to support each stated goal.
In addition to uncovering exact spend for individual activities across campus, most participants said they found the process of implementing ABC to be educational. Many said that gathering and submitting the necessary data led them to think about what they were spending on various items and how those expenses translated into outcomes.
At Florida Keys Community College, staff members are still collecting data from the pilot project but have committed to participating in the project’s second year, Gueverra says. “The real value that I see is in looking at how and if the resources we spend aid in accomplishing our strategic goals,” he says. “I am curious to see the relationships between spending increases or decreases in respective areas and the impact on positive change. We also intend to look at regulatory mandated spending versus discretionary spending and to get to the real cost of some of the burdensome regulations that hit us from time to time.”
Building on a Solid Beginning
As NHEBI wrapped up the pilot project and prepared for a new year of data collection, the institution gathered and reflected on feedback from the pilot participants about how to improve the process going forward. For the second year, NHEBI made several changes, anticipating that one of the biggest improvements will derive from including other measures of student success in addition to retention and graduation. Other refinements include clarifications to definitions and improvements in the ways institutions collect data relating to instructional activities.
After the success of the one-year pilot project, Maximizing Resources is focused on recruiting additional community college members to participate. As the number of participants grows, the data becomes even more useful. Members receive national cost benchmarks on instructional, student service, and academic support activities; an internal report that compares a college’s various divisions or academic units; an ABC guide; and the use of NHEBI’s powerful peer comparison tool.
Many of the schools that participated in the pilot project last year have opted to continue with the project for another year. “I try to encourage my school to participate in projects like this for at least five years, so that we have a good basis for a trend,” Spartanburg’s Bourgeois says. While Spartanburg doesn’t plan to implement changes to its budget based on only one year of data, Bourgeois foresees making potential changes based on a few years’ worth of ABC data—enough to reveal trends and directions.
MiraCosta College did not participate in the pilot but began in fall 2014 for the project’s second year. “We are just beginning in the project, but an early positive outcome has been the surprisingly robust conversations taking place about how to improve academic quality and meet our pledge to our community,” Pacheco says. “There is sincere dialogue taking place about how we look at costs by what we do and not by college function or department. There are also honest discussions recognizing that organizational and cultural barriers need to be cleared if we are to change.”
In joining the Maximizing Resources project, MiraCosta has three stated goals, Pacheco says. They are to:
1. Analyze the cost and time data for meaning, and discover the story that the data tell about the college and its students.
2. Convert the data to simple, meaningful, and consumable messages that all the college constituencies can connect with, reflect on, and act upon.
3. Present the message to the entire college community in a way that embraces a model of improvement, growth, and renewal.
For other colleges considering dipping a toe into activity-based costing by joining Maximizing Resources, Spartanburg’s Bourgeois says the workload is minimal and worth the effort. As the only employee in a one-man institutional research department, Bourgeois participates in three other NHEBI reporting projects in addition to Maximizing Resources. “If one person can do it, it’s not as hard as some people may think,” Bourgeois says. “There’s an easy online system for keying in information, and I have a spreadsheet that tells me what information I need to gather at each time of year, where to go in the college to get that information, and what reports to run.”
Maximizing Resources offers a worthwhile opportunity to move your resource allocation practices from look-at-last-year budgeting to strategic analysis. Through this program, you can learn how spending on each activity relates to outcomes. NHEBI believes this project will give community colleges the ability to redirect funds to activities that have the greatest impact on student success.
NANCY MANN JACKSON, Madison, Ala., covers higher education business issues for Business Officer. LOU GUTHRIE, director, National Higher Education Benchmarking Institute, Johnson County Community College, Overland Park, Kan., contributed to this article.