The president and the academic vice president had announced their intention to eliminate some…

MANAGERIAL DECISION CASE: CENTRALIZE VERSUS DECENTRALIZE

Central University, a Midwestern university with approximately 17,400 students, was in the middle of a budget crisis. For the third consecutive year, state appropriations for higher education remained essentially unchanged. (The university is currently in its 2006–2007 academic year.) Yet, utilities, Social Security benefits, insurance, and other operating expenses have increased. Moreover, the faculty were becoming restless, and some members had begun to leave for other, higher-paying opportunities.

The president and the academic vice president had announced their intention to eliminate some academic programs and to reduce others. The savings that result would be used to cover the increase in operating expenses and to allow raises for the remaining faculty. Needless to say, the possible dismissal of tenured faculty aroused a great deal of concern throughout the university.

With this background, the president and academic vice president called a meeting of all department heads and deans to discuss the budget for the coming year. As the budget was presented, the academic vice president noted that continuing education, a separate, centralized unit, had accumulated a deficit of $504,000 over the past several years, which must be eliminated during the coming fiscal year. The vice president noted that allocating the deficit equally among the seven colleges would create a hardship on some of the colleges, wiping out all of their operating budgets except for salaries.

After some discussion of alternative ways to allocate the deficit, the head of the accounting department suggested an alternative solution: decentralize continuing education, allowing each college to assume responsibility for its own continuing education programs. In this way, the overhead of a centralized continuing education could be avoided.

The academic vice president responded that the suggestion would be considered, but it was received with little enthusiasm. The vice president observed that continuing education was now generating more revenues than costs—and that the trend was favorable.

A week later, at a meeting of the Deans’ Council, the vice president reviewed the role of continuing education. He pointed out that only the dean of continuing education held tenure. If continuing education were decentralized, her salary ($50,000) would continue. However, she would return to her academic department, and the university would save $20,000 of instructional wages, since fewer adjunct faculty would be needed in her department. All other employees in the unit were classified as staff. Continuing education had responsibility for all noncredit offerings. Additionally, it had nominal responsibility for credit courses offered in the evening on campus and for credit courses offered off campus. However, all scheduling and staffing of these evening and off-campus courses were done by the heads of the academic departments. The head of each department had to approve the courses offered and the staffing. According to the vice president, advertising is one of the main contributions of the continuing education department to the evening and off-campus programs. He estimated that $30,000 per year is being spent.

After reviewing this information, the vice president made available the following information pertaining to the department’s performance for the past several years (the 2006–2007 data were projections). He once again defended keeping a centralized department, emphasizing the favorable trend revealed by the accounting data. (All numbers are expressed in thousands.)

 

2003–2004

2004–2005

2005–2006

2006–2007

Tuition revenues:

 

 

 

 

Off-campus

$ 300

$ 400

$ 400

$ 410

Evening

525

907

1,000

Noncredit

135

305

338

375

Total

$ 435

$1,230

$1,645

$1,785

Operating costs:

 

 

 

 

Administration

$ 132

$ 160

$ 112

$ 112

Off-campus:

 

 

 

 

Direct

230

270

270

260

Indirect

350

410

525

440

Evening

220

420

525

Noncredit

135

305

338

375

Total

$ 847

$1,365

$1,665

$1,712

Income (loss)

$(412)

$ (135)

$ (20)

$ 73

The dean of the College of Business was unimpressed by the favorable trend identified by the academic vice president. The dean maintained that decentralization still would be in the best interests of the university. He argued that although decentralization would not fully solve the deficit, it would provide a sizable contribution each year to the operating budgets for each of the seven colleges.

The academic vice president disagreed vehemently. He was convinced that continuing education was now earning its own way and would continue to produce additional resources for the university.

Required:

You have been asked by the president of Central University to assess which alternative, centralization or decentralization, is in the best interest of the school. The president is willing to decentralize provided that significant savings can be produced and the mission of the continuing education department will still be carried out. Prepare a memo to the president that details your analysis and reasoning and recommends one of the two alternatives. Provide both qualitative and quantitative reasoning in the memo.