Financial Management in Higher Education Institutions
Ziegele, Frank
This video addresses some fundamental developments in higher education financial management. For example that diversification of universities' financial resources is increasing. Financing strategies of universities must take these developments into account and be prepared for new challenges in financial management. Traditional financing models are reaching their limits. To illustrate this, various problems of traditional financing models are highlighted and an alternative is proposed in form of the "performance-based management". Using the 3-pillar model as an example, it is shown how performance-based management can be incorporated into university financing strategies and what advantages this offers.
 Dear audience, welcome to my presentation on financial management in higher education institutions. I would like to present some experiences and four basic lessons learned, which are really important for universities and faculties and for their financial management. So let's start and have the basic lesson learned number one. Number one is funding sources for universities and faculties become more diverse. Therefore institutions need a financial strategy and of course also financial leadership to deal with it. So let me tell you a bit about the financial strategy that is necessary. First of all, the assumption is the diversity of funding sources is increasing. Traditionally, the two major sources to finance a university is in the case of a public university state funding and in the case of a private university also public, but for privates even more important the tuition fee revenue. So these are the two main sources. But we found during the last years the reliability of these two sources is limited. If you depend really on one of them, then your risk spreading is very low. Example tuition fees, the COVID-19 crisis showed how difficult it is for universities which really have to rely on their tuition fee revenue if suddenly the international students don't come anymore. So you depend on it and you don't have it. So you have a high risk out of being dependent on these two sources. On the state side, on the side of public funding, we have shifts from basic funding to program funding. So even the state itself doesn't produce one source of funding, it produces many different sources, competitive programs, excellence initiatives and all kinds of things. And of course what is also important, universities benefit from more autonomy. So they have new chances to get into contact with sponsors and people who give them money. So that means, all that means the variety of financial sources and new financial sources increases and it has to increase. So if the diversity of funding is increasing, so which are the new sources that are extremely relevant? Maybe not the complete list, but the most important are here. It's of course the external research income and you can get it from different donors from the state, from private institutions, from foundations, from international organizations like the European Union or the World Bank or whatever. So it's external research income. Then universities produce revenues out of technology and knowledge transfer. They generate patents which they can benefit from. They have own revenues for instance in form of rents for buildings, vocational training offers bookshops or printing companies or sometimes even television stations. So there are different ways how to generate own income. Universities are often owners of companies in Southeast Asia and many countries. This contributes largely to the income of universities to own your own company. For instance, a pharmaceutical company that comes out of a faculty which deals with that kind of topic. So entrepreneurial activities. And last but not least, there is fundraising and sponsoring. So many options and many chances. If you take a strategic approach, I think you have to plan as a university and a faculty your funding portfolio. And let me give you an example for that. Assume you're a university. On the one hand, you look at the financial market growth. So that means you look at a certain source of funding and you ask, how is this source developing? Is the source getting larger or is it shrinking? So money from private companies, are they in a crisis? So there is a low growth. Are they doing well? Then there is high growth of the market for potential funding. We are talking about funding sources. And there is also the market share, which means how successful are you so far as a university? How well can you exploit that financial source? And let's assume there is a public excellence program. There is public money for the most research excellent university. This program is new, so the market is growing. There is a large sum of money that you can get, but your market share might be low because you didn't do much so far in terms of research excellence. So what could be your strategy? Your strategy could be move that one to the right because the public excellence program, you might be successful and then you might increase your market share. So use the chance or you will find out we have no chance, then don't do anything. So get rid of this. You cannot invest if you know from the beginning that you will not succeed to get money out of this program. So either invest or leave it. That's the norm strategy for that part of the diagram. If you are more to the right, maybe you have transfer activities to a booming industry. What would you do here? You exploit this financial source. You do as much as possible. You just take the money. So you do a lot of projects to generate money. So this is your star. So you're really successful here. If you are more at the bottom of the diagram, for instance, you run training courses, you get money for training courses that you run for a declining industry. The question is, so your market share is high. You're good at this, but there is no market growth anymore because the industry will disappear. So what are you going to do? You give it up. You might decide this is not worthwhile anymore. The industry is dying. We stop the training program. So you say we do something similar for a different industry. So we use our knowledge to create a new market. So you will relaunch this activity and get new funding out of it. So my argument is you can use that kind of portfolio analysis to analyze your financial portfolio, your portfolio of income streams. And you could decide where are we going to do more in order to generate money. So a strategic approach. If you are here, well, you might have revenue from renting a lab space, but the market growth is low and the market share is low, then leave it. So this is the thing that you should not do. And this is not worthwhile doing it. So strategic approach. There are further issues. You need to link the source of funding with the university profile, lifelong learning university, entrepreneurial faculty. If this is your profile, of course, this determines which financial sources you can use. If you are a lifelong university, you generate money from lifelong learning. That's clear. The question of the limits. Are we maybe drifting too far away from core missions? I have visited universities in Indonesia, for instance, where we found there are really, really a lot of entrepreneurial activities. They run IT companies and everything. But at a certain point at a university, I think you have to ask, are we going too far away from our core missions in teaching and research? Are we doing too much just to generate money? Are we like companies in the end? Or should we at a certain point see a limit of entrepreneurial activities? I think that's an open question where this limit is. But I think you have to think about it. Risk management. Yeah, you have to assess if you have a certain financial source. You have to assess how probable is it that you will have it in the long run and what would be the potential loss if you lose it. And so if you have many sources, you can spread the risk. I think that's a good strategy to mitigate risks, to spread it. Sustainability. So sources of funding for infrastructure and buildings as an important aspect. Cash flow management and the management capacities that you need for financial strategies, marketing, accounting, industry relations, and also proposal writing. By the way, proposal writing, many universities invest a lot to teach all the academics how to write a proposal. Some universities in my country are now investing in offices for proposal writing, which give a service to the academics and are extremely professional in writing proposals. So ask yourself, what is our strategy here? Should everyone learn how to write a proposal or should people collaborate with professional proposal writers? Just an idea. So that was my first point, financial strategy. Second important point, the traditional input-oriented line item funding is problematic. Universities need more performance-based funding. So the PBF, performance-based funding, as an important element of allocating money in universities. Let me explain. And let's start with the traditional funding. So what are the features of traditional funding and what are the problems related to these features? Traditional funding is line item budgeting. You have these line items for staff, for professors for traveling, for machines, for other office products. So what is controlled financially is the input. You say you have to spend so much for staff. This is what is being controlled. This is totally inflexible. You cannot link goals and money. You create a very inflexible allocation if you fix the line item budget. Budgets traditionally are yearly. So you plan and you decide on the budget for one year, which means, and many of you might know that, there is the famous December fever. What is a December fever? If the budgetary year is the calendar year, if you find out in December, oh, we have some money left, what are you going to do? You are going to spend it like hell because if the money is left over, if you are a public university, your government would say, hey, there is money left over, you have too much money. So please give it back to us. You cannot keep it. And what are you doing? You just spend it. No matter if it makes sense or not. You cannot plan with reserves. It might make a lot of sense to build up a reserve to be prepared for a future challenge, but you cannot do it because the budget is always yearly. So what you are not going to spend, you have to give it back to your government in case of a public university. So December fever, inefficient. The yearly budget also leads to instability. You don't have a reliable calculation base over several years. You are always going for one year and if the government decides, oh, I am sorry, we have 10% less, then next year you have 10% less. So you cannot calculate in the long run. More problems. Incremental budgeting. What does that mean? The budget of the year 2020 mainly depends on the year 2019. Because people look at last year's budget, they say, okay, this is what we had. Now we want it again. Or maybe we want a 5% increase or there is a 5% decrease. So there is no real reallocation. It's just perpetuated incrementally. What does it mean? There are no incentives. You always get the same. There is no performance orientation. If the allocation decisions are made centrally on the top level, assume the president of a university is making the allocations to staff, to traveling, to whatever, so the line item budget, then everything is determined ex ante before. And these central decisions suffer from low information and from inflexibility. If the president or the vice chancellor determines in the beginning how much you can spend, you are not flexible in the end over the year to adjust your funding. So all this is determined already by the line items. Inflexibility. And usually traditionally you aggregate bottom up financial plans. So you ask the department for a financial plan. The departmental plans are aggregated to the faculty and the faculties are aggregated to the university as a whole. If you do it that way, how can you build priorities? Because everyone wants to have the same again. So this is linked to the incremental budgeting. So no real strategic priority setting. So you see, we need change here. So this traditional funding has severe problems. It's inefficient. It creates December fear. It's inflexible. It's not performance oriented. So what would be an alternative? The alternative would be performance based funding. This offers an alternative. And let me give you briefly the storyline of this new funding approach and assume we're talking about internal allocation inside the university. The steering now focuses on objectives. University follows a strategy, explicit strategy. The strategy works if it is supported by performance based funding, PPF. And what is performance? Of course, this is determined by the strategic goal. Good performance means the realization of the strategic goals. So this is related. This means that funding has to be directly related to the objectives. Incentives to reach them have to be created. So performance is rewarded. The strategy gives orientation to the funding. And the funding makes the strategy work. And there's a preference for steering with incentives and competition and not with rules. This is not regulation. This is creating incentives. This is creating competition. So financial decisions are made autonomously by the faculty. There's a lump sum budget. They can build reserves and everything. And there are incentives to do the right thing, to follow the strategy. And the incentives define the consequences. So these central decisions are better informed and more flexible. So you should leave it to the faculty to decide on what the money is spent for. So that's the basic idea of PPF, which directly leads to my third out of four lesson learned. And this is how can we integrate this performance-based funding into an allocation model? And there is a famous concept, which is called the three pillar model. So this model creates a balance between different orientations of a funding model. So let me explain that briefly. The combination of basic funding and performance-based funding leads to three pillars of funding that you can find in a model. First is there is a basic task-oriented funding. Quite often this is 80 to 90% of the allocation. The idea is the purpose is here, we want something stable. We want a stable basic funding covering the costs, allowing you to fulfill your task. So this is coming as a lump sum. Or you calculate it on the number of staff members or study places. So this is a very stable component in your funding. So if you distribute money from the university level to the faculty level with a stable task-oriented basic funding, you get a certain sum every year. So this is incremental. This is still incremental. But in the three pillar model, there are two more pillars. There is the performance-based funding. This is to influence behavior with rewards and sanctions. And this is exposed incentives for performance. So you have a formula, you have formula funding. You measure with indicators last year's performance. And if you were good, high numbers of graduates, high publication output, whatever, you are rewarded by a financial algorithm. So that's the formula. And performance is rewarded. And the third is, and this is also part of the performance-based funding, it's the innovation-oriented funding. So this is the programmatic part. You finance innovation projects in advance. In the end, you control the result of the innovation. So you induce a competition. So for instance, you have a competitive fund. The president of a university says, here I put aside 1 million euros. This is our competitive fund. And now you faculties could make innovation proposals, what you want to change, what you want to do. And you can get pre-funding. You can get support from it. But still I want from you target agreements. I want you to tell me what are the performance indicators that we want to achieve in four or five years' time. And then you get a reward to follow your objective. But in the end, we will check if you really did. And a good funding model, that's my idea. A good funding model makes a combination of the three components. For instance, it puts 80% into basic funding. It puts 15% into performance-based fund. And it puts 5% into innovation or other percentages. But if you combine it, you have certain advantages. Because with the three-pillar model, you could turn an objective into funding and into incentives. You could relate performance and funding. Example, think about a university that wants to promote internationalization. So that's the objective. You see my three pillars. So how can you use the three pillars technically to promote internationalization? In the basic funding, you could say, maybe if I calculate basic funding by student numbers, if a student comes from another country, he or she gets a higher weight in the formula. So basic funding would increase if you have more international students. In the performance part, you could say, we measure as a KPI performance indicator, we measure the incoming and outgoing students. So we reward universities, we reward faculties inside a university which are very successful in that. Or you have an international research fund, which you just spent for international orientation. Innovation-oriented. Yeah, you make target agreements about internationalization. You create a competitive fund for internationalization projects. So you induce competition to follow the objectives for the future. You haven't achieved it yet. But you say to your president, again, you say as a faculty, I want to be more international. I have a good idea. A president gives me money out of your competitive fund. And we promise you for the future, we will have 10% more foreigners in our study programs. In the performance-oriented part, you promise, no, you don't promise, but you already had 10% more. So you will be rewarded for the past performance. In the innovation part, it's about the future performance. But both is performance-based funding. So you have many design options. And you can, of course, start pragmatics. So the three-pillar model is applicable on all levels of internal funding. So between university and faculties, between faculties and departments, between departments and individuals, you can implement it with a big bang. Yeah, you can say, now, completely new funding model, here's the three pillars. But you could also follow a very careful step-by-step approach. For instance, if you want to implement a funding formula with performance indicators, then you can do it stepwise. You can say, I start with 2% of the budget distributed by a formula, but I go to five in one year time and to 10 in five years. So you can stepwise enlarge the performance-based part. And you could start with pragmatic and small components. You could just create a fund to kick off new research projects. You could top up external research revenue by a kind of premium. You're saying, if you get one euro research income from outside, we put 50 cents on top from our internal distribution to create an incentive. So that's my recommendation. If performance-based funding in your university doesn't exist so far, take small steps, start pragmatic. You don't need a revolution of the whole funding model, but I think every university can move to some extent into the performance-based orientation. The balance that is created is between stability and competition. It's between expository words for past performance and pre-funding for future performance. You saw these two pillars. The performance-based funding could be based on indicators and could be based on peer review. If you have a competitive fund, you could let peers decide who gets it. If you have a formula, you let the indicators decide. And the two things create a balance or a balance between different instruments like formula and target agreements. So that was my lesson learned number three. Number four is a very short one. It could be a long one, but I kept it short here. There are a lot of instruments of higher education management to be applied for the funding for the finance of universities and faculties. Professional knowledge is available and should be used. So there is a lot of instrumental knowledge out there how we can apply funding instruments to university. There are a lot of design options and principles for funding formula, for a target agreement, for a competitive fund. There are already established tools for risk management, how to analyze and deal with risks. There are financial reporting tools to support your decision making. There is cost accounting for universities. It has to be different from cost accounting in private industry. In private industry, it's about the profit. In higher education, it's about the performance in teaching and learning and research and third mission. So cost accounting means something different. There are concepts to assign financial competences between the levels of universities. And there is much more. I just wanted to mention that here. And I just wanted to bring that basic principle that you can use the knowledge from business management, but you could adapt the whole thing to the culture and the context of university. Cultural customization is an important catch word here. You really have to adapt to the academic culture. And all these things are a lot of material for another presentation, but that's not my task here today. So I just wanted to mention that. So bringing the four lessons learned together, they showed how the financial university management could be successful. Number one was developer funding strategy, strategic approach. Number two was apply performance based funding. Number three, create a balanced three pillar model of resource allocation. Number four, professionalize your financial management with specific tools for the higher education context and customize to the culture. That's an important aspect. Thank you very much for your patience and for your attention. I hope these four lessons have been helpful. Thank you.
 Dear audience, welcome to my presentation on financial management in higher education  institutions.  I would like to present some experiences and four basic lessons learned, which are really  important for universities and faculties and for their financial management.  So let's start and have the basic lesson learned number one.  Number one is funding sources for universities and faculties become more diverse.  Therefore institutions need a financial strategy and of course also financial leadership to  deal with it.  So let me tell you a bit about the financial strategy that is necessary.  First of all, the assumption is the diversity of funding sources is increasing.  Traditionally, the two major sources to finance a university is in the case of a public university  state funding and in the case of a private university also public, but for privates even  more important the tuition fee revenue.  So these are the two main sources.  But we found during the last years the reliability of these two sources is limited.  If you depend really on one of them, then your risk spreading is very low.  Example tuition fees, the COVID-19 crisis showed how difficult it is for universities  which really have to rely on their tuition fee revenue if suddenly the international  students don't come anymore.  So you depend on it and you don't have it.  So you have a high risk out of being dependent on these two sources.  On the state side, on the side of public funding, we have shifts from basic funding to program  funding.  So even the state itself doesn't produce one source of funding, it produces many different  sources, competitive programs, excellence initiatives and all kinds of things.  And of course what is also important, universities benefit from more autonomy.  So they have new chances to get into contact with sponsors and people who give them money.  So that means, all that means the variety of financial sources and new financial sources  increases and it has to increase.  So if the diversity of funding is increasing, so which are the new sources that are extremely  relevant?  Maybe not the complete list, but the most important are here.  It's of course the external research income and you can get it from different donors from  the state, from private institutions, from foundations, from international organizations  like the European Union or the World Bank or whatever.  So it's external research income.  Then universities produce revenues out of technology and knowledge transfer.  They generate patents which they can benefit from.  They have own revenues for instance in form of rents for buildings, vocational training  offers bookshops or printing companies or sometimes even television stations.  So there are different ways how to generate own income.  Universities are often owners of companies in Southeast Asia and many countries.  This contributes largely to the income of universities to own your own company.  For instance, a pharmaceutical company that comes out of a faculty which deals with that  kind of topic.  So entrepreneurial activities.  And last but not least, there is fundraising and sponsoring.  So many options and many chances.  If you take a strategic approach, I think you have to plan as a university and a faculty  your funding portfolio.  And let me give you an example for that.  Assume you're a university.  On the one hand, you look at the financial market growth.  So that means you look at a certain source of funding and you ask, how is this source  developing?  Is the source getting larger or is it shrinking?  So money from private companies, are they in a crisis?  So there is a low growth.  Are they doing well?  Then there is high growth of the market for potential funding.  We are talking about funding sources.  And there is also the market share, which means how successful are you so far as a university?  How well can you exploit that financial source?  And let's assume there is a public excellence program.  There is public money for the most research excellent university.  This program is new, so the market is growing.  There is a large sum of money that you can get, but your market share might be low because  you didn't do much so far in terms of research excellence.  So what could be your strategy?  Your strategy could be move that one to the right because the public excellence program,  you might be successful and then you might increase your market share.  So use the chance or you will find out we have no chance, then don't do anything.  So get rid of this.  You cannot invest if you know from the beginning that you will not succeed to get money out  of this program.  So either invest or leave it.  That's the norm strategy for that part of the diagram.  If you are more to the right, maybe you have transfer activities to a booming industry.  What would you do here?  You exploit this financial source.  You do as much as possible.  You just take the money.  So you do a lot of projects to generate money.  So this is your star.  So you're really successful here.  If you are more at the bottom of the diagram, for instance, you run training courses, you  get money for training courses that you run for a declining industry.  The question is, so your market share is high.  You're good at this, but there is no market growth anymore because the industry will disappear.  So what are you going to do?  You give it up.  You might decide this is not worthwhile anymore.  The industry is dying.  We stop the training program.  So you say we do something similar for a different industry.  So we use our knowledge to create a new market.  So you will relaunch this activity and get new funding out of it.  So my argument is you can use that kind of portfolio analysis to analyze your financial  portfolio, your portfolio of income streams.  And you could decide where are we going to do more in order to generate money.  So a strategic approach.  If you are here, well, you might have revenue from renting a lab space, but the market growth  is low and the market share is low, then leave it.  So this is the thing that you should not do.  And this is not worthwhile doing it.  So strategic approach.  There are further issues.  You need to link the source of funding with the university profile, lifelong learning  university, entrepreneurial faculty.  If this is your profile, of course, this determines which financial sources you can use.  If you are a lifelong university, you generate money from lifelong learning.  That's clear.  The question of the limits.  Are we maybe drifting too far away from core missions?  I have visited universities in Indonesia, for instance, where we found there are really,  really a lot of entrepreneurial activities.  They run IT companies and everything.  But at a certain point at a university, I think you have to ask, are we going too far  away from our core missions in teaching and research?  Are we doing too much just to generate money?  Are we like companies in the end?  Or should we at a certain point see a limit of entrepreneurial activities?  I think that's an open question where this limit is.  But I think you have to think about it.  Risk management.  Yeah, you have to assess if you have a certain financial source.  You have to assess how probable is it that you will have it in the long run and what would  be the potential loss if you lose it.  And so if you have many sources, you can spread the risk.  I think that's a good strategy to mitigate risks, to spread it.  Sustainability.  So sources of funding for infrastructure and buildings as an important aspect.  Cash flow management and the management capacities that you need for financial strategies, marketing,  accounting, industry relations, and also proposal writing.  By the way, proposal writing, many universities invest a lot to teach all the academics how  to write a proposal.  Some universities in my country are now investing in offices for proposal writing, which give  a service to the academics and are extremely professional in writing proposals.  So ask yourself, what is our strategy here?  Should everyone learn how to write a proposal or should people collaborate with professional  proposal writers?  Just an idea.  So that was my first point, financial strategy.  Second important point, the traditional input-oriented line item funding is problematic.  Universities need more performance-based funding.  So the PBF, performance-based funding, as an important element of allocating money in  universities.  Let me explain.  And let's start with the traditional funding.  So what are the features of traditional funding and what are the problems related to these  features?  Traditional funding is line item budgeting.  You have these line items for staff, for professors for traveling, for machines, for  other office products.  So what is controlled financially is the input.  You say you have to spend so much for staff.  This is what is being controlled.  This is totally inflexible.  You cannot link goals and money.  You create a very inflexible allocation if you fix the line item budget.  Budgets traditionally are yearly.  So you plan and you decide on the budget for one year, which means, and many of you might  know that, there is the famous December fever.  What is a December fever?  If the budgetary year is the calendar year, if you find out in December, oh, we have some  money left, what are you going to do?  You are going to spend it like hell because if the money is left over, if you are a public  university, your government would say, hey, there is money left over, you have too much  money.  So please give it back to us.  You cannot keep it.  And what are you doing?  You just spend it.  No matter if it makes sense or not.  You cannot plan with reserves.  It might make a lot of sense to build up a reserve to be prepared for a future challenge,  but you cannot do it because the budget is always yearly.  So what you are not going to spend, you have to give it back to your government in case  of a public university.  So December fever, inefficient.  The yearly budget also leads to instability.  You don't have a reliable calculation base over several years.  You are always going for one year and if the government decides, oh, I am sorry, we have  10% less, then next year you have 10% less.  So you cannot calculate in the long run.  More problems.  Incremental budgeting.  What does that mean?  The budget of the year 2020 mainly depends on the year 2019.  Because people look at last year's budget, they say, okay, this is what we had.  Now we want it again.  Or maybe we want a 5% increase or there is a 5% decrease.  So there is no real reallocation.  It's just perpetuated incrementally.  What does it mean?  There are no incentives.  You always get the same.  There is no performance orientation.  If the allocation decisions are made centrally on the top level, assume the president of  a university is making the allocations to staff, to traveling, to whatever, so the line  item budget, then everything is determined ex ante before.  And these central decisions suffer from low information and from inflexibility.  If the president or the vice chancellor determines in the beginning how much you can spend, you  are not flexible in the end over the year to adjust your funding.  So all this is determined already by the line items.  Inflexibility.  And usually traditionally you aggregate bottom up financial plans.  So you ask the department for a financial plan.  The departmental plans are aggregated to the faculty and the faculties are aggregated to  the university as a whole.  If you do it that way, how can you build priorities?  Because everyone wants to have the same again.  So this is linked to the incremental budgeting.  So no real strategic priority setting.  So you see, we need change here.  So this traditional funding has severe problems.  It's inefficient.  It creates December fear.  It's inflexible.  It's not performance oriented.  So what would be an alternative?  The alternative would be performance based funding.  This offers an alternative.  And let me give you briefly the storyline of this new funding approach and assume we're  talking about internal allocation inside the university.  The steering now focuses on objectives.  University follows a strategy, explicit strategy.  The strategy works if it is supported by performance based funding, PPF.  And what is performance?  Of course, this is determined by the strategic goal.  Good performance means the realization of the strategic goals.  So this is related.  This means that funding has to be directly related to the objectives.  Incentives to reach them have to be created.  So performance is rewarded.  The strategy gives orientation to the funding.  And the funding makes the strategy work.  And there's a preference for steering with incentives and competition and not with rules.  This is not regulation.  This is creating incentives.  This is creating competition.  So financial decisions are made autonomously by the faculty.  There's a lump sum budget.  They can build reserves and everything.  And there are incentives to do the right thing, to follow the strategy.  And the incentives define the consequences.  So these central decisions are better informed and more flexible.  So you should leave it to the faculty to decide on what the money is spent for.  So that's the basic idea of PPF, which directly leads to my third out of four lesson learned.  And this is how can we integrate this performance-based funding into an allocation model?  And there is a famous concept, which is called the three pillar model.  So this model creates a balance between different orientations of a funding model.  So let me explain that briefly.  The combination of basic funding and performance-based funding leads to three pillars of funding  that you can find in a model.  First is there is a basic task-oriented funding.  Quite often this is 80 to 90% of the allocation.  The idea is the purpose is here, we want something stable.  We want a stable basic funding covering the costs, allowing you to fulfill your task.  So this is coming as a lump sum.  Or you calculate it on the number of staff members or study places.  So this is a very stable component in your funding.  So if you distribute money from the university level to the faculty level with a stable task-oriented  basic funding, you get a certain sum every year.  So this is incremental.  This is still incremental.  But in the three pillar model, there are two more pillars.  There is the performance-based funding.  This is to influence behavior with rewards and sanctions.  And this is exposed incentives for performance.  So you have a formula, you have formula funding.  You measure with indicators last year's performance.  And if you were good, high numbers of graduates, high publication output, whatever, you are  rewarded by a financial algorithm.  So that's the formula.  And performance is rewarded.  And the third is, and this is also part of the performance-based funding, it's the innovation-oriented  funding.  So this is the programmatic part.  You finance innovation projects in advance.  In the end, you control the result of the innovation.  So you induce a competition.  So for instance, you have a competitive fund.  The president of a university says, here I put aside 1 million euros.  This is our competitive fund.  And now you faculties could make innovation proposals, what you want to change, what you  want to do.  And you can get pre-funding.  You can get support from it.  But still I want from you target agreements.  I want you to tell me what are the performance indicators that we want to achieve in four  or five years' time.  And then you get a reward to follow your objective.  But in the end, we will check if you really did.  And a good funding model, that's my idea.  A good funding model makes a combination of the three components.  For instance, it puts 80% into basic funding.  It puts 15% into performance-based fund.  And it puts 5% into innovation or other percentages.  But if you combine it, you have certain advantages.  Because with the three-pillar model, you could turn an objective into funding and into incentives.  You could relate performance and funding.  Example, think about a university that wants to promote internationalization.  So that's the objective.  You see my three pillars.  So how can you use the three pillars technically to promote internationalization?  In the basic funding, you could say, maybe if I calculate basic funding by student numbers,  if a student comes from another country, he or she gets a higher weight in the formula.  So basic funding would increase if you have more international students.  In the performance part, you could say, we measure as a KPI performance indicator,  we measure the incoming and outgoing students.  So we reward universities, we reward faculties inside a university which are very successful in that.  Or you have an international research fund, which you just spent for international orientation.  Innovation-oriented.  Yeah, you make target agreements about internationalization.  You create a competitive fund for internationalization projects.  So you induce competition to follow the objectives for the future.  You haven't achieved it yet.  But you say to your president, again, you say as a faculty, I want to be more international.  I have a good idea.  A president gives me money out of your competitive fund.  And we promise you for the future, we will have 10% more foreigners in our study programs.  In the performance-oriented part, you promise, no, you don't promise, but you already had 10% more.  So you will be rewarded for the past performance.  In the innovation part, it's about the future performance.  But both is performance-based funding.  So you have many design options.  And you can, of course, start pragmatics.  So the three-pillar model is applicable on all levels of internal funding.  So between university and faculties, between faculties and departments, between departments and individuals,  you can implement it with a big bang.  Yeah, you can say, now, completely new funding model, here's the three pillars.  But you could also follow a very careful step-by-step approach.  For instance, if you want to implement a funding formula with performance indicators,  then you can do it stepwise.  You can say, I start with 2% of the budget distributed by a formula,  but I go to five in one year time and to 10 in five years.  So you can stepwise enlarge the performance-based part.  And you could start with pragmatic and small components.  You could just create a fund to kick off new research projects.  You could top up external research revenue by a kind of premium.  You're saying, if you get one euro research income from outside,  we put 50 cents on top from our internal distribution to create an incentive.  So that's my recommendation.  If performance-based funding in your university doesn't exist so far,  take small steps, start pragmatic.  You don't need a revolution of the whole funding model,  but I think every university can move to some extent  into the performance-based orientation.  The balance that is created is between stability and competition.  It's between expository words for past performance  and pre-funding for future performance.  You saw these two pillars.  The performance-based funding could be based on indicators  and could be based on peer review.  If you have a competitive fund, you could let peers decide who gets it.  If you have a formula, you let the indicators decide.  And the two things create a balance  or a balance between different instruments like formula and target agreements.  So that was my lesson learned number three.  Number four is a very short one.  It could be a long one, but I kept it short here.  There are a lot of instruments of higher education management  to be applied for the funding for the finance of universities and faculties.  Professional knowledge is available and should be used.  So there is a lot of instrumental knowledge out there  how we can apply funding instruments to university.  There are a lot of design options and principles for funding formula,  for a target agreement, for a competitive fund.  There are already established tools for risk management,  how to analyze and deal with risks.  There are financial reporting tools to support your decision making.  There is cost accounting for universities.  It has to be different from cost accounting in private industry.  In private industry, it's about the profit.  In higher education, it's about the performance in teaching and learning  and research and third mission.  So cost accounting means something different.  There are concepts to assign financial competences between the levels of universities.  And there is much more.  I just wanted to mention that here.  And I just wanted to bring that basic principle  that you can use the knowledge from business management,  but you could adapt the whole thing to the culture and the context of university.  Cultural customization is an important catch word here.  You really have to adapt to the academic culture.  And all these things are a lot of material for another presentation,  but that's not my task here today.  So I just wanted to mention that.  So bringing the four lessons learned together,  they showed how the financial university management could be successful.  Number one was developer funding strategy, strategic approach.  Number two was apply performance based funding.  Number three, create a balanced three pillar model of resource allocation.  Number four, professionalize your financial management  with specific tools for the higher education context  and customize to the culture.  That's an important aspect.  Thank you very much for your patience and for your attention.  I hope these four lessons have been helpful.  Thank you.
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Dear audience, welcome to my presentation on financial management in higher education institutions. I would like to present some experiences and four basic lessons learned, which are really important for universities and faculties and for their financial management. So let's start and have the basic lesson learned number one. Number one is funding sources for universities and faculties become more diverse. Therefore institutions need a financial strategy and of course also financial leadership to deal with it. So let me tell you a bit about the financial strategy that is necessary. First of all, the assumption is the diversity of funding sources is increasing. Traditionally, the two major sources to finance a university is in the case of a public university state funding and in the case of a private university also public, but for privates even more important the tuition fee revenue. So these are the two main sources. But we found during the last years the reliability of these two sources is limited. If you depend really on one of them, then your risk spreading is very low. Example tuition fees, the COVID-19 crisis showed how difficult it is for universities which really have to rely on their tuition fee revenue if suddenly the international students don't come anymore. So you depend on it and you don't have it. So you have a high risk out of being dependent on these two sources. On the state side, on the side of public funding, we have shifts from basic funding to program funding. So even the state itself doesn't produce one source of funding, it produces many different sources, competitive programs, excellence initiatives and all kinds of things. And of course what is also important, universities benefit from more autonomy. So they have new chances to get into contact with sponsors and people who give them money. So that means, all that means the variety of financial sources and new financial sources increases and it has to increase. So if the diversity of funding is increasing, so which are the new sources that are extremely relevant? Maybe not the complete list, but the most important are here. It's of course the external research income and you can get it from different donors from the state, from private institutions, from foundations, from international organizations like the European Union or the World Bank or whatever. So it's external research income. Then universities produce revenues out of technology and knowledge transfer. They generate patents which they can benefit from. They have own revenues for instance in form of rents for buildings, vocational training offers bookshops or printing companies or sometimes even television stations. So there are different ways how to generate own income. Universities are often owners of companies in Southeast Asia and many countries. This contributes largely to the income of universities to own your own company. For instance, a pharmaceutical company that comes out of a faculty which deals with that kind of topic. So entrepreneurial activities. And last but not least, there is fundraising and sponsoring. So many options and many chances. If you take a strategic approach, I think you have to plan as a university and a faculty your funding portfolio. And let me give you an example for that. Assume you're a university. On the one hand, you look at the financial market growth. So that means you look at a certain source of funding and you ask, how is this source developing? Is the source getting larger or is it shrinking? So money from private companies, are they in a crisis? So there is a low growth. Are they doing well? Then there is high growth of the market for potential funding. We are talking about funding sources. And there is also the market share, which means how successful are you so far as a university? How well can you exploit that financial source? And let's assume there is a public excellence program. There is public money for the most research excellent university. This program is new, so the market is growing. There is a large sum of money that you can get, but your market share might be low because you didn't do much so far in terms of research excellence. So what could be your strategy? Your strategy could be move that one to the right because the public excellence program, you might be successful and then you might increase your market share. So use the chance or you will find out we have no chance, then don't do anything. So get rid of this. You cannot invest if you know from the beginning that you will not succeed to get money out of this program. So either invest or leave it. That's the norm strategy for that part of the diagram. If you are more to the right, maybe you have transfer activities to a booming industry. What would you do here? You exploit this financial source. You do as much as possible. You just take the money. So you do a lot of projects to generate money. So this is your star. So you're really successful here. If you are more at the bottom of the diagram, for instance, you run training courses, you get money for training courses that you run for a declining industry. The question is, so your market share is high. You're good at this, but there is no market growth anymore because the industry will disappear. So what are you going to do? You give it up. You might decide this is not worthwhile anymore. The industry is dying. We stop the training program. So you say we do something similar for a different industry. So we use our knowledge to create a new market. So you will relaunch this activity and get new funding out of it. So my argument is you can use that kind of portfolio analysis to analyze your financial portfolio, your portfolio of income streams. And you could decide where are we going to do more in order to generate money. So a strategic approach. If you are here, well, you might have revenue from renting a lab space, but the market growth is low and the market share is low, then leave it. So this is the thing that you should not do. And this is not worthwhile doing it. So strategic approach. There are further issues. You need to link the source of funding with the university profile, lifelong learning university, entrepreneurial faculty. If this is your profile, of course, this determines which financial sources you can use. If you are a lifelong university, you generate money from lifelong learning. That's clear. The question of the limits. Are we maybe drifting too far away from core missions? I have visited universities in Indonesia, for instance, where we found there are really, really a lot of entrepreneurial activities. They run IT companies and everything. But at a certain point at a university, I think you have to ask, are we going too far away from our core missions in teaching and research? Are we doing too much just to generate money? Are we like companies in the end? Or should we at a certain point see a limit of entrepreneurial activities? I think that's an open question where this limit is. But I think you have to think about it. Risk management. Yeah, you have to assess if you have a certain financial source. You have to assess how probable is it that you will have it in the long run and what would be the potential loss if you lose it. And so if you have many sources, you can spread the risk. I think that's a good strategy to mitigate risks, to spread it. Sustainability. So sources of funding for infrastructure and buildings as an important aspect. Cash flow management and the management capacities that you need for financial strategies, marketing, accounting, industry relations, and also proposal writing. By the way, proposal writing, many universities invest a lot to teach all the academics how to write a proposal. Some universities in my country are now investing in offices for proposal writing, which give a service to the academics and are extremely professional in writing proposals. So ask yourself, what is our strategy here? Should everyone learn how to write a proposal or should people collaborate with professional proposal writers? Just an idea. So that was my first point, financial strategy. Second important point, the traditional input-oriented line item funding is problematic. Universities need more performance-based funding. So the PBF, performance-based funding, as an important element of allocating money in universities. Let me explain. And let's start with the traditional funding. So what are the features of traditional funding and what are the problems related to these features? Traditional funding is line item budgeting. You have these line items for staff, for professors for traveling, for machines, for other office products. So what is controlled financially is the input. You say you have to spend so much for staff. This is what is being controlled. This is totally inflexible. You cannot link goals and money. You create a very inflexible allocation if you fix the line item budget. Budgets traditionally are yearly. So you plan and you decide on the budget for one year, which means, and many of you might know that, there is the famous December fever. What is a December fever? If the budgetary year is the calendar year, if you find out in December, oh, we have some money left, what are you going to do? You are going to spend it like hell because if the money is left over, if you are a public university, your government would say, hey, there is money left over, you have too much money. So please give it back to us. You cannot keep it. And what are you doing? You just spend it. No matter if it makes sense or not. You cannot plan with reserves. It might make a lot of sense to build up a reserve to be prepared for a future challenge, but you cannot do it because the budget is always yearly. So what you are not going to spend, you have to give it back to your government in case of a public university. So December fever, inefficient. The yearly budget also leads to instability. You don't have a reliable calculation base over several years. You are always going for one year and if the government decides, oh, I am sorry, we have 10% less, then next year you have 10% less. So you cannot calculate in the long run. More problems. Incremental budgeting. What does that mean? The budget of the year 2020 mainly depends on the year 2019. Because people look at last year's budget, they say, okay, this is what we had. Now we want it again. Or maybe we want a 5% increase or there is a 5% decrease. So there is no real reallocation. It's just perpetuated incrementally. What does it mean? There are no incentives. You always get the same. There is no performance orientation. If the allocation decisions are made centrally on the top level, assume the president of a university is making the allocations to staff, to traveling, to whatever, so the line item budget, then everything is determined ex ante before. And these central decisions suffer from low information and from inflexibility. If the president or the vice chancellor determines in the beginning how much you can spend, you are not flexible in the end over the year to adjust your funding. So all this is determined already by the line items. Inflexibility. And usually traditionally you aggregate bottom up financial plans. So you ask the department for a financial plan. The departmental plans are aggregated to the faculty and the faculties are aggregated to the university as a whole. If you do it that way, how can you build priorities? Because everyone wants to have the same again. So this is linked to the incremental budgeting. So no real strategic priority setting. So you see, we need change here. So this traditional funding has severe problems. It's inefficient. It creates December fear. It's inflexible. It's not performance oriented. So what would be an alternative? The alternative would be performance based funding. This offers an alternative. And let me give you briefly the storyline of this new funding approach and assume we're talking about internal allocation inside the university. The steering now focuses on objectives. University follows a strategy, explicit strategy. The strategy works if it is supported by performance based funding, PPF. And what is performance? Of course, this is determined by the strategic goal. Good performance means the realization of the strategic goals. So this is related. This means that funding has to be directly related to the objectives. Incentives to reach them have to be created. So performance is rewarded. The strategy gives orientation to the funding. And the funding makes the strategy work. And there's a preference for steering with incentives and competition and not with rules. This is not regulation. This is creating incentives. This is creating competition. So financial decisions are made autonomously by the faculty. There's a lump sum budget. They can build reserves and everything. And there are incentives to do the right thing, to follow the strategy. And the incentives define the consequences. So these central decisions are better informed and more flexible. So you should leave it to the faculty to decide on what the money is spent for. So that's the basic idea of PPF, which directly leads to my third out of four lesson learned. And this is how can we integrate this performance-based funding into an allocation model? And there is a famous concept, which is called the three pillar model. So this model creates a balance between different orientations of a funding model. So let me explain that briefly. The combination of basic funding and performance-based funding leads to three pillars of funding that you can find in a model. First is there is a basic task-oriented funding. Quite often this is 80 to 90% of the allocation. The idea is the purpose is here, we want something stable. We want a stable basic funding covering the costs, allowing you to fulfill your task. So this is coming as a lump sum. Or you calculate it on the number of staff members or study places. So this is a very stable component in your funding. So if you distribute money from the university level to the faculty level with a stable task-oriented basic funding, you get a certain sum every year. So this is incremental. This is still incremental. But in the three pillar model, there are two more pillars. There is the performance-based funding. This is to influence behavior with rewards and sanctions. And this is exposed incentives for performance. So you have a formula, you have formula funding. You measure with indicators last year's performance. And if you were good, high numbers of graduates, high publication output, whatever, you are rewarded by a financial algorithm. So that's the formula. And performance is rewarded. And the third is, and this is also part of the performance-based funding, it's the innovation-oriented funding. So this is the programmatic part. You finance innovation projects in advance. In the end, you control the result of the innovation. So you induce a competition. So for instance, you have a competitive fund. The president of a university says, here I put aside 1 million euros. This is our competitive fund. And now you faculties could make innovation proposals, what you want to change, what you want to do. And you can get pre-funding. You can get support from it. But still I want from you target agreements. I want you to tell me what are the performance indicators that we want to achieve in four or five years' time. And then you get a reward to follow your objective. But in the end, we will check if you really did. And a good funding model, that's my idea. A good funding model makes a combination of the three components. For instance, it puts 80% into basic funding. It puts 15% into performance-based fund. And it puts 5% into innovation or other percentages. But if you combine it, you have certain advantages. Because with the three-pillar model, you could turn an objective into funding and into incentives. You could relate performance and funding. Example, think about a university that wants to promote internationalization. So that's the objective. You see my three pillars. So how can you use the three pillars technically to promote internationalization? In the basic funding, you could say, maybe if I calculate basic funding by student numbers, if a student comes from another country, he or she gets a higher weight in the formula. So basic funding would increase if you have more international students. In the performance part, you could say, we measure as a KPI performance indicator, we measure the incoming and outgoing students. So we reward universities, we reward faculties inside a university which are very successful in that. Or you have an international research fund, which you just spent for international orientation. Innovation-oriented. Yeah, you make target agreements about internationalization. You create a competitive fund for internationalization projects. So you induce competition to follow the objectives for the future. You haven't achieved it yet. But you say to your president, again, you say as a faculty, I want to be more international. I have a good idea. A president gives me money out of your competitive fund. And we promise you for the future, we will have 10% more foreigners in our study programs. In the performance-oriented part, you promise, no, you don't promise, but you already had 10% more. So you will be rewarded for the past performance. In the innovation part, it's about the future performance. But both is performance-based funding. So you have many design options. And you can, of course, start pragmatics. So the three-pillar model is applicable on all levels of internal funding. So between university and faculties, between faculties and departments, between departments and individuals, you can implement it with a big bang. Yeah, you can say, now, completely new funding model, here's the three pillars. But you could also follow a very careful step-by-step approach. For instance, if you want to implement a funding formula with performance indicators, then you can do it stepwise. You can say, I start with 2% of the budget distributed by a formula, but I go to five in one year time and to 10 in five years. So you can stepwise enlarge the performance-based part. And you could start with pragmatic and small components. You could just create a fund to kick off new research projects. You could top up external research revenue by a kind of premium. You're saying, if you get one euro research income from outside, we put 50 cents on top from our internal distribution to create an incentive. So that's my recommendation. If performance-based funding in your university doesn't exist so far, take small steps, start pragmatic. You don't need a revolution of the whole funding model, but I think every university can move to some extent into the performance-based orientation. The balance that is created is between stability and competition. It's between expository words for past performance and pre-funding for future performance. You saw these two pillars. The performance-based funding could be based on indicators and could be based on peer review. If you have a competitive fund, you could let peers decide who gets it. If you have a formula, you let the indicators decide. And the two things create a balance or a balance between different instruments like formula and target agreements. So that was my lesson learned number three. Number four is a very short one. It could be a long one, but I kept it short here. There are a lot of instruments of higher education management to be applied for the funding for the finance of universities and faculties. Professional knowledge is available and should be used. So there is a lot of instrumental knowledge out there how we can apply funding instruments to university. There are a lot of design options and principles for funding formula, for a target agreement, for a competitive fund. There are already established tools for risk management, how to analyze and deal with risks. There are financial reporting tools to support your decision making. There is cost accounting for universities. It has to be different from cost accounting in private industry. In private industry, it's about the profit. In higher education, it's about the performance in teaching and learning and research and third mission. So cost accounting means something different. There are concepts to assign financial competences between the levels of universities. And there is much more. I just wanted to mention that here. And I just wanted to bring that basic principle that you can use the knowledge from business management, but you could adapt the whole thing to the culture and the context of university. Cultural customization is an important catch word here. You really have to adapt to the academic culture. And all these things are a lot of material for another presentation, but that's not my task here today. So I just wanted to mention that. So bringing the four lessons learned together, they showed how the financial university management could be successful. Number one was developer funding strategy, strategic approach. Number two was apply performance based funding. Number three, create a balanced three pillar model of resource allocation. Number four, professionalize your financial management with specific tools for the higher education context and customize to the culture. That's an important aspect. Thank you very much for your patience and for your attention. I hope these four lessons have been helpful. Thank you.
financial management in higher education faculties and for their financial management. So crisis showed how difficult it is for increasing, so which are the new sources that are in form of rents for buildings, vocational contributes largely to the income of universities performance-based funding, as an important funding. So what are the features of traditional funding and what are the problems related to these features? Traditional funding is line item build up a reserve to be prepared for a future based funding. This offers an alternative. And this performance-based funding into an allocation is the performance-based funding. This is to a combination of the three components. For think every university can move to some extent