THE FINANCIAL MANAGEMENT SYSTEM PRIOR TO RCMS Prior to the implementation of RCMS decision-making power was centralized, with one senior administrative officer playing a key role in all major resource allocation decisions. Abdul Karim remembered that, "The old system was heavily based on personal negotiation. The resource allocation decisions were made behind the scenes in a 'smoke- filled room'." Also, in the old system financial accountability for the unit heads was weak. Each university unit had its own financial statement, but the statements were not complete, as some revenues were neither traced nor allocated to the units that generated them, and unit heads were not sanctioned for producing unfavorable variances as compared to their budget. Salam Munir, finance director for the School of Engineering, recalled: Certain players would consistently overrun their budgets, and some had substantial overruns. Most of the overruns were due to under generated revenues rather than cost overruns. No one had any explicit financial incentive to manage differently. But there were some real, significant informal incentives. RCMS DESIGN PRINCIPLES The RCMS was designed in 1991 by a Task Force on Budget Incentives appointed by Mahmud Akbar, the university president. The Task Force based much of the RCMS design on the system used at the University of Barakah that, in turn, was adapted from the system in use at Great Success Company. Ahmad Jones, the then chairman of GS was on the Board of Trustees at University of Barakah, and he insisted that this kind of system would provide a better alignment of authority and responsibility, and better university management. The Task Force developed the following nine management principles to guide their development of the RCMS: 1) Responsibility should be commensurate with authority, and vice versa. 2) Decentralization should be proportional to organizational size and complexity. 3) Locally optimal decisions are not always globally optimal: central leverage is required to implement corporate (global) priorities. 4) Outcome measures are preferable to process controls. 5) Accountability is only as good as the tools which measure it. 6) Quantitative measures of performance tend to drive out qualitative measures. 7) Outcomes should matter: plans that work should lead to rewards, plans which fail should lead to sanctions. 8) Resource-expanding incentives are preferable to resource-dividing ones. 9) People play better games when they own the rules. The new RCMS system had to include three basic elements that would permit a decentralized management system within the university. First, the university had to be divided into responsibility centers. Second, the performance reports, including methods for tracing or allocating shared revenues and costs to the primary operating units, had to be designed. And third, the extent of decision authority to be delegated to the operating units needed to be clarified. RESPONSIBILITY CENTERS The university was divided into two types of responsibility center: revenue centers and administrative centers. Revenue centers were units to which revenues could be uniquely attributed. Some of these, the colleges, schools, and research institutes, were called academic revenue centers. The other revenue centers, including athletics, residence halls, bookstores, parking operations, and food services, were called auxiliary revenue centers. The administrative centers were entities that did not generate revenues directly but performed activities which supported the revenue centers. Examples included Admissions and Financial Aid, Business Affairs. Financial Services, Legal Services. Library. Office of the President, and Registrar. Most of the responsibilities for raising revenues and expending resources were delegated to the revenue center managers. The central administration maintained some power to implement university-wide goals. As noted in the 1995 UMQ Financial Report: At UMQ, we believe that the primary planning takes place at the operating unit level the school or auxiliary enterprise, or the administrative unit. We believe that people closest to the action know their programs, their customers, and their markets best; they are the best informed and, therefore, most capable of strategic thinking. The role of central planners is primarily one of coordinating and monitoring. The central administration maintained the power to hold the responsibility center managers accountable for attaining their targets. The academic revenue center managers (i.c., school deans) were evaluated in terms of their units' academic excellence (research and teaching), generation of sponsored research grants, faculty development, fundraising, and bottom-line financial performance. Their performances were reviewed formally every five years. PERFORMANCE REPORTS UMQ produced an elaborate set of reports to facilitate control of each responsibility center's operations. A monthly financial report presented the current months and year-to-date performance as compared to budget. Other reports provided information on gifts, grants, enrollments, students, personnel, space usage, and the detailed items affecting the revenues and expenses of each responsibility center. The financial reports included four primary categories of accounts: revenues, direct expenses, indirect expenses, and participation/subvention. These are explained as follows. a) Revenues The university generated two types of revenues: restricted and unrestricted. More than 25% of the total funds available to support operations were restricted, meaning that they were given to the university for a specific purpose or project. These funds came from grants and contracts, from the federal government and other sponsors of specific research projects, gifts from private donors and foundations, and income from endowments to support specific individuals and/or activities. The restricted revenue funds had to be used only for the specific purpose for which they were given and were not allowed to be transferred to an unrestricted account without prior permission from the central administration. The other revenues were unrestricted in purpose. They came from tuition and fees, unrestricted gifts, and indirect cost recoveries from government contracts. Tuition revenue was credited 100% to the revenue center offering the courses taken. The indirect cost recoveries were determined by a formula negotiated with each funding source. For example, in fiscal year 2001, UMQ's indirect cost recovery rate on government projects was 60.5% of direct costs; that is, for every S1 reported as the approved direct costs of a research project, the university received an additional 60.5 cents to help cover indirect costs. But on projects funded by the Oil Foundation, the recovery rate was only 8%. b) Expenses The direct expenses of a revenue center included the costs of the people and equipment directly assigned to that center. Indirect expenses included the costs of shared resources, such as buildings, utilities, and various kinds of support provided by the administrative centers. The indirect expenses were allocated to the revenue centers on the basis of cause and effect, benefit derived, or common practice. Exhibit 3 shows the indirect cost pools generated by the various administrative centers and the rules that governed their allocation. Samad Ali, vice president of budget and planning, acknowledged that the allocations were based on: Imperfect rules, some of which are totally arbitrary. We used Federal government allocation guidelines as a guide, but we also put together a group of deans and administrators and hammered the rules out. Abdul Karim concurred: Allocation of indirect costs is done with thumbnail methods that are much less precise than precise. No study was done, but the allocations are somewhat thoughtful. We developed rules of thumb and tried to remove blatant inaccuracies. c) Participations and subventions University administrators used a system of participations and subventions to maintain a degree of control over university-wide resource allocation decisions and to even out the distribution of monies between revenue centers. The participations were contributions required from all revenue centers in equal proportion to further the objectives and well-being of the total university. Each revenue center contributed 20% of the sum of its tuition and fees, sales and service income, and indirect cost recoveries. These contributions were redistributed to revenue centers as block grants called subventions. In the revenue center financial reports, the participations were shown as negative indirect income, while the subventions were shown as positive indirect income. The participation/subvention feature of RCMS provided university administrators with a means to implement university priorities and goals. When they made their allocations of subventions the administrators, particularly the provost and president, tended to focus on two key factors: (1) differentials in the costs of educating students in different fields; and (2) the revenue centers' cost/quality ratios. The cost of educating students varied widely between schools. Some schools could educate their students effectively by teaching them in large sections, while others had to provide instruction in small classes or in expensive laboratories. Samad Ali explained: The cost of educating music major is large, especially in a conservatory- like program like ours. The dominant mode of instruction is one to one: a master pianist and pupil on the same bench. Business education is much less expensive; as accounting and finance can be taught well to classes of 25 or 50, or even more. But we as a university have decided to charge both music and business students the same tuition. Common price, but most uncommon unit costs! Part of the subvention allocations was aimed at evening out this cost disparity. This pattern can be seen in Table I which shows the 2001 summary income statement numbers for the schools of Business and Music. The other major factor underlying the subvention allocation was a subjectively determined cost/academic excellence ratio that represented what the university administrators perceived they were receiving for their investment. This is illustrated in Figure 1. A school located near point number 3, such as UMQ's School of Music, with both high cost of instruction and high academic excellence, is most likely to get a disproportionately high subvention. It offers high quality programs and research productivity but is unable to cover costs through tuitions. A school located near point number 4 is valuable to the university because it offers high quality and financial independence. It can probably provide funds that can be used in other parts of the university, but administrators will be careful to allow it to keep enough funds to maintain its excellence. A school located near point number 2 is in trouble. It is a candidate for new leadership or program discontinuance. INTERCENTER BANK The RCMS included one other significant element, an Intercenter Bank. This bank provided the revenue centers the opportunity to carry unrestricted funds across fiscal year boundaries. It thus provided revenue center managers with incentives to produce year end surpluses rather than just to meet a break-even bottom line. And it reduced the 'use it' or 'lose itinentality, present in some not-for-profit organizations, which causes managers to spend all the money that had been approved in their budget before yearend. The Intercenter Bank was used both by revenue centers reporting surpluses and by those reporting losses. If a revenue center had a surplus (i.e. a positive unrestricted fund balance at the end of the year), it was given an account in the bank and provided interest on the account balance at the annual treasury-bill rate as of July 1 of the year just started. These revenue center managers were allowed to spend their account's principal balance in future years, but only up to a maximum of 20% of the balance each year. Conversely, revenue centers with a deficit were assigned a loan from the bank and charged interest at the treasury-bill rate. They had to budget for repayment of the loan at a rate of at least 20% of the beginning balance per year. CRITICISMS OF THE RCMS SYSTEM The five basic criticisms of the RCMS system voiced in 2001 by one or both of the faculty groups or other critics were that the system discouraged innovation, multidisciplinary research, and the seeking of some outside grants and that it encouraged both proliferation of redundant and inappropriate courses and end-of- period financial game playing. 1. Discouragement of innovation The discouragement of innovation criticism, which the Research Committee considered the most important problem, stemmed from three concerns. First, some critics believed that the RCMS system forced deans to think of their mission more in financial terms and not in terms of their academic mission. The open letter to President stated: The system in place makes few allowances for the various missions and contributions of the academic units of the university. Those units unable to show a profit under current budgetary formulas are condemned to live in a deficit situation, to depend upon subventions given after demeaning negotiations, and to face inferior status among other units in the university. Many believed that the financial pressure discouraged innovation and even teaching quality. The committee report noted that, "Innovators whose ideas do not imply immediate income feel that no one in the system will give those ideas a sympathetic hearing and so are discouraged from innovating." And one critic added that, "Faculty under pressure to produce income are not focused on students." Some critics even believed that the emphasis on financial performance would lead university administrators to hire deans with, perhaps, more financial management abilities than leadership vision for their school. Second, another group of critics believed that innovation and initiative were stifled because RCMS institutionalized decentralization only to the level of the deans and, thus, did not go far enough. Deans were unlikely to carry the delegation any further and, as a consequence, the university was stripped of the entrepreneurial energies of many faculty leaders. And third, some critics observed that much of the power and discretionary funds had been taken from the top-level administrators and their roles essentially became those of administrators, not leaders. One critic noted that, "Neither President Mahmud nor Provost Saad has become identified with any public position. All the leadership that is being exerted is coming from the (good) deans." As a partial solution, the Research Committee report suggested that UMQ should create a Research Leadership Fund of at least $1 million per year to be used time-limited support of innovative projects. These projects should involve large expenditures, of at least 550,000/year, because another program was already in place to provide smaller grants to support individual faculty research projects. In the new program administrators or researchers would apply for funds, and the approval process would be administered by the Vice Provost for Research. 2. Discouragement of multidisciplinary research The Research Committee report expressed concern about the discouragement of multidisciplinary research because the committee members thought that the best research, particularly that of an applied nature, should involve researchers with different skills and perspectives. Some faculty members believed that since RCMS emphasized financial priorities most deans could not see the financial benefits of multidisciplinary research. They also noted that such research could even be a financial drain on a revenue center, depending on how the costs and revenues of the cross-revenue-center work were shared. Abas Taha, the chairman of the subcommittee of the University Research Committee that prepared the report critical of RCMS said: The biggest obstacle to multidisciplinary research is territoriality. Any efforts to institutionalize a turf, which is what RCMS does, will lead to action to protect that turf. I can give you perhaps 20 examples where this system has stifled interdisciplinary work. For example, I know of instances in which deans have upbraided faculty members for getting involved with someone from outside their revenue center. The subcommittee members could not find much evidence that UMQ professors were engaging in significant amounts of multidisciplinary research, and they blamed the RCMS, at least in part. They proposed that overhead revenue for multi-revenue centers projects be assigned in a manner proportional to the costs the units will occur. They also suggested that the Research Leadership Fund could be used explicitly to encourage multidisciplinary research proposals. Discouragement of the seeking of outside grants The Research Committee report noted that some personnel are discouraged from seeking some outside funding grants. These grants appear unprofitable to the unit because they do not provide for full recovery of the expenses charged to the revenue center. For example, the government recovery rate of 60.5%, which was higher than the recovery rates allowed by many foundations, did not cover the overall UMQ average overhead rate, which was approximately 68% of direct costs. And the actual overhead rates in some departments, such as science departments that had to maintain expensive laboratories, were much higher than the university average. The research committee urged university administrators to study their allocation methods and to consider discontinuing the allocation of some categories of expenses, such as the relatively fixed indirect expenses (e.g., space. general administration). This change would allow units to price at least some research grants on a marginal cost basis. 4. Encouragement of course proliferation The critics who believed that the RCMS encouraged course proliferation based their belief on the knowledge that school earned tuition revenue only if students signed up for courses they offered. Thus, many schools. and even departments, offered similar or even identical courses (e.g., statistics, communications) in order to retain all of its students' tuition dollars at their school. The faculty voicing this criticism believed that it would be more likely for courses to be taught in the department best suited to offer it if the pressure for revenue generation was lessened. Some RCMS critics also noted that some schools offered gut (excessively easy) courses that might be deemed inappropriate for an institute of higher education (e.g., a course that just shows films) or tolerated professors who grade liberally to keep their courses popular because popularity brings with it additional revenues, 5. Encouragement of end-of-period financial game playing Neither the committee report nor the open letter mentioned the problem of end-of-period financial game playing, but some other critics within the university believed that RCMS encouraged such actions. They noted many examples of revenue center managers moving revenues and expenses between fiscal years depending on whether they were in a budget surplus or deficit position. These managers were motivated to do so because meeting their budget target was an important part of their job. Most of them believed that if they failed to achieve their budget two years in a row they would probably be replaced. The managers had used many methods of moving monies between reporting periods. For example, they could ask donors to accelerate or delay their contributions, or they could deposit June donations immediately or wait until after July 1, the start of the new fiscal year. And they could move expenses between years by, for example, accelerating or delaying discretionary expenditures or by asking faculty and staff members to submit requests for reimbursement of expenditures already made in the current or following fiscal year. The deans and many others the university did not consider such manipulations unethical because they had observed top-level university administrators taking the same types of actions. The university had never posted a deficit for a fiscal year, but sometimes administrators had to take end-of-year actions to maintain that record. They believed the continuing record of budget achievement and surpluses was desirable because it provided evidence that the school was well run and contributed to the high-quality (AA) bond rating UMQ was given by Trust and Poor's. Both of these indicators facilitated the raising of capital and donations from a alumni, foundations, and the investment community. As Abdul Karim noted, "Big donors will not give to a school running a deficit. They assume the people there can't handle the money." Required: a) How can the implementation of the control systems improve the issues of the new system? Be specific in justifying type of the control system. (20 marks) b) What other advices do you have for Mr Abdul Karim and Samad Ali? (10 marks) THE FINANCIAL MANAGEMENT SYSTEM PRIOR TO RCMS Prior to the implementation of RCMS decision-making power was centralized, with one senior administrative officer playing a key role in all major resource allocation decisions. Abdul Karim remembered that, "The old system was heavily based on personal negotiation. The resource allocation decisions were made behind the scenes in a 'smoke- filled room'." Also, in the old system financial accountability for the unit heads was weak. Each university unit had its own financial statement, but the statements were not complete, as some revenues were neither traced nor allocated to the units that generated them, and unit heads were not sanctioned for producing unfavorable variances as compared to their budget. Salam Munir, finance director for the School of Engineering, recalled: Certain players would consistently overrun their budgets, and some had substantial overruns. Most of the overruns were due to under generated revenues rather than cost overruns. No one had any explicit financial incentive to manage differently. But there were some real, significant informal incentives. RCMS DESIGN PRINCIPLES The RCMS was designed in 1991 by a Task Force on Budget Incentives appointed by Mahmud Akbar, the university president. The Task Force based much of the RCMS design on the system used at the University of Barakah that, in turn, was adapted from the system in use at Great Success Company. Ahmad Jones, the then chairman of GS was on the Board of Trustees at University of Barakah, and he insisted that this kind of system would provide a better alignment of authority and responsibility, and better university management. The Task Force developed the following nine management principles to guide their development of the RCMS: 1) Responsibility should be commensurate with authority, and vice versa. 2) Decentralization should be proportional to organizational size and complexity. 3) Locally optimal decisions are not always globally optimal: central leverage is required to implement corporate (global) priorities. 4) Outcome measures are preferable to process controls. 5) Accountability is only as good as the tools which measure it. 6) Quantitative measures of performance tend to drive out qualitative measures. 7) Outcomes should matter: plans that work should lead to rewards, plans which fail should lead to sanctions. 8) Resource-expanding incentives are preferable to resource-dividing ones. 9) People play better games when they own the rules. The new RCMS system had to include three basic elements that would permit a decentralized management system within the university. First, the university had to be divided into responsibility centers. Second, the performance reports, including methods for tracing or allocating shared revenues and costs to the primary operating units, had to be designed. And third, the extent of decision authority to be delegated to the operating units needed to be clarified. RESPONSIBILITY CENTERS The university was divided into two types of responsibility center: revenue centers and administrative centers. Revenue centers were units to which revenues could be uniquely attributed. Some of these, the colleges, schools, and research institutes, were called academic revenue centers. The other revenue centers, including athletics, residence halls, bookstores, parking operations, and food services, were called auxiliary revenue centers. The administrative centers were entities that did not generate revenues directly but performed activities which supported the revenue centers. Examples included Admissions and Financial Aid, Business Affairs. Financial Services, Legal Services. Library. Office of the President, and Registrar. Most of the responsibilities for raising revenues and expending resources were delegated to the revenue center managers. The central administration maintained some power to implement university-wide goals. As noted in the 1995 UMQ Financial Report: At UMQ, we believe that the primary planning takes place at the operating unit level the school or auxiliary enterprise, or the administrative unit. We believe that people closest to the action know their programs, their customers, and their markets best; they are the best informed and, therefore, most capable of strategic thinking. The role of central planners is primarily one of coordinating and monitoring. The central administration maintained the power to hold the responsibility center managers accountable for attaining their targets. The academic revenue center managers (i.c., school deans) were evaluated in terms of their units' academic excellence (research and teaching), generation of sponsored research grants, faculty development, fundraising, and bottom-line financial performance. Their performances were reviewed formally every five years. PERFORMANCE REPORTS UMQ produced an elaborate set of reports to facilitate control of each responsibility center's operations. A monthly financial report presented the current months and year-to-date performance as compared to budget. Other reports provided information on gifts, grants, enrollments, students, personnel, space usage, and the detailed items affecting the revenues and expenses of each responsibility center. The financial reports included four primary categories of accounts: revenues, direct expenses, indirect expenses, and participation/subvention. These are explained as follows. a) Revenues The university generated two types of revenues: restricted and unrestricted. More than 25% of the total funds available to support operations were restricted, meaning that they were given to the university for a specific purpose or project. These funds came from grants and contracts, from the federal government and other sponsors of specific research projects, gifts from private donors and foundations, and income from endowments to support specific individuals and/or activities. The restricted revenue funds had to be used only for the specific purpose for which they were given and were not allowed to be transferred to an unrestricted account without prior permission from the central administration. The other revenues were unrestricted in purpose. They came from tuition and fees, unrestricted gifts, and indirect cost recoveries from government contracts. Tuition revenue was credited 100% to the revenue center offering the courses taken. The indirect cost recoveries were determined by a formula negotiated with each funding source. For example, in fiscal year 2001, UMQ's indirect cost recovery rate on government projects was 60.5% of direct costs; that is, for every S1 reported as the approved direct costs of a research project, the university received an additional 60.5 cents to help cover indirect costs. But on projects funded by the Oil Foundation, the recovery rate was only 8%. b) Expenses The direct expenses of a revenue center included the costs of the people and equipment directly assigned to that center. Indirect expenses included the costs of shared resources, such as buildings, utilities, and various kinds of support provided by the administrative centers. The indirect expenses were allocated to the revenue centers on the basis of cause and effect, benefit derived, or common practice. Exhibit 3 shows the indirect cost pools generated by the various administrative centers and the rules that governed their allocation. Samad Ali, vice president of budget and planning, acknowledged that the allocations were based on: Imperfect rules, some of which are totally arbitrary. We used Federal government allocation guidelines as a guide, but we also put together a group of deans and administrators and hammered the rules out. Abdul Karim concurred: Allocation of indirect costs is done with thumbnail methods that are much less precise than precise. No study was done, but the allocations are somewhat thoughtful. We developed rules of thumb and tried to remove blatant inaccuracies. c) Participations and subventions University administrators used a system of participations and subventions to maintain a degree of control over university-wide resource allocation decisions and to even out the distribution of monies between revenue centers. The participations were contributions required from all revenue centers in equal proportion to further the objectives and well-being of the total university. Each revenue center contributed 20% of the sum of its tuition and fees, sales and service income, and indirect cost recoveries. These contributions were redistributed to revenue centers as block grants called subventions. In the revenue center financial reports, the participations were shown as negative indirect income, while the subventions were shown as positive indirect income. The participation/subvention feature of RCMS provided university administrators with a means to implement university priorities and goals. When they made their allocations of subventions the administrators, particularly the provost and president, tended to focus on two key factors: (1) differentials in the costs of educating students in different fields; and (2) the revenue centers' cost/quality ratios. The cost of educating students varied widely between schools. Some schools could educate their students effectively by teaching them in large sections, while others had to provide instruction in small classes or in expensive laboratories. Samad Ali explained: The cost of educating music major is large, especially in a conservatory- like program like ours. The dominant mode of instruction is one to one: a master pianist and pupil on the same bench. Business education is much less expensive; as accounting and finance can be taught well to classes of 25 or 50, or even more. But we as a university have decided to charge both music and business students the same tuition. Common price, but most uncommon unit costs! Part of the subvention allocations was aimed at evening out this cost disparity. This pattern can be seen in Table I which shows the 2001 summary income statement numbers for the schools of Business and Music. The other major factor underlying the subvention allocation was a subjectively determined cost/academic excellence ratio that represented what the university administrators perceived they were receiving for their investment. This is illustrated in Figure 1. A school located near point number 3, such as UMQ's School of Music, with both high cost of instruction and high academic excellence, is most likely to get a disproportionately high subvention. It offers high quality programs and research productivity but is unable to cover costs through tuitions. A school located near point number 4 is valuable to the university because it offers high quality and financial independence. It can probably provide funds that can be used in other parts of the university, but administrators will be careful to allow it to keep enough funds to maintain its excellence. A school located near point number 2 is in trouble. It is a candidate for new leadership or program discontinuance. INTERCENTER BANK The RCMS included one other significant element, an Intercenter Bank. This bank provided the revenue centers the opportunity to carry unrestricted funds across fiscal year boundaries. It thus provided revenue center managers with incentives to produce year end surpluses rather than just to meet a break-even bottom line. And it reduced the 'use it' or 'lose itinentality, present in some not-for-profit organizations, which causes managers to spend all the money that had been approved in their budget before yearend. The Intercenter Bank was used both by revenue centers reporting surpluses and by those reporting losses. If a revenue center had a surplus (i.e. a positive unrestricted fund balance at the end of the year), it was given an account in the bank and provided interest on the account balance at the annual treasury-bill rate as of July 1 of the year just started. These revenue center managers were allowed to spend their account's principal balance in future years, but only up to a maximum of 20% of the balance each year. Conversely, revenue centers with a deficit were assigned a loan from the bank and charged interest at the treasury-bill rate. They had to budget for repayment of the loan at a rate of at least 20% of the beginning balance per year. CRITICISMS OF THE RCMS SYSTEM The five basic criticisms of the RCMS system voiced in 2001 by one or both of the faculty groups or other critics were that the system discouraged innovation, multidisciplinary research, and the seeking of some outside grants and that it encouraged both proliferation of redundant and inappropriate courses and end-of- period financial game playing. 1. Discouragement of innovation The discouragement of innovation criticism, which the Research Committee considered the most important problem, stemmed from three concerns. First, some critics believed that the RCMS system forced deans to think of their mission more in financial terms and not in terms of their academic mission. The open letter to President stated: The system in place makes few allowances for the various missions and contributions of the academic units of the university. Those units unable to show a profit under current budgetary formulas are condemned to live in a deficit situation, to depend upon subventions given after demeaning negotiations, and to face inferior status among other units in the university. Many believed that the financial pressure discouraged innovation and even teaching quality. The committee report noted that, "Innovators whose ideas do not imply immediate income feel that no one in the system will give those ideas a sympathetic hearing and so are discouraged from innovating." And one critic added that, "Faculty under pressure to produce income are not focused on students." Some critics even believed that the emphasis on financial performance would lead university administrators to hire deans with, perhaps, more financial management abilities than leadership vision for their school. Second, another group of critics believed that innovation and initiative were stifled because RCMS institutionalized decentralization only to the level of the deans and, thus, did not go far enough. Deans were unlikely to carry the delegation any further and, as a consequence, the university was stripped of the entrepreneurial energies of many faculty leaders. And third, some critics observed that much of the power and discretionary funds had been taken from the top-level administrators and their roles essentially became those of administrators, not leaders. One critic noted that, "Neither President Mahmud nor Provost Saad has become identified with any public position. All the leadership that is being exerted is coming from the (good) deans." As a partial solution, the Research Committee report suggested that UMQ should create a Research Leadership Fund of at least $1 million per year to be used time-limited support of innovative projects. These projects should involve large expenditures, of at least 550,000/year, because another program was already in place to provide smaller grants to support individual faculty research projects. In the new program administrators or researchers would apply for funds, and the approval process would be administered by the Vice Provost for Research. 2. Discouragement of multidisciplinary research The Research Committee report expressed concern about the discouragement of multidisciplinary research because the committee members thought that the best research, particularly that of an applied nature, should involve researchers with different skills and perspectives. Some faculty members believed that since RCMS emphasized financial priorities most deans could not see the financial benefits of multidisciplinary research. They also noted that such research could even be a financial drain on a revenue center, depending on how the costs and revenues of the cross-revenue-center work were shared. Abas Taha, the chairman of the subcommittee of the University Research Committee that prepared the report critical of RCMS said: The biggest obstacle to multidisciplinary research is territoriality. Any efforts to institutionalize a turf, which is what RCMS does, will lead to action to protect that turf. I can give you perhaps 20 examples where this system has stifled interdisciplinary work. For example, I know of instances in which deans have upbraided faculty members for getting involved with someone from outside their revenue center. The subcommittee members could not find much evidence that UMQ professors were engaging in significant amounts of multidisciplinary research, and they blamed the RCMS, at least in part. They proposed that overhead revenue for multi-revenue centers projects be assigned in a manner proportional to the costs the units will occur. They also suggested that the Research Leadership Fund could be used explicitly to encourage multidisciplinary research proposals. Discouragement of the seeking of outside grants The Research Committee report noted that some personnel are discouraged from seeking some outside funding grants. These grants appear unprofitable to the unit because they do not provide for full recovery of the expenses charged to the revenue center. For example, the government recovery rate of 60.5%, which was higher than the recovery rates allowed by many foundations, did not cover the overall UMQ average overhead rate, which was approximately 68% of direct costs. And the actual overhead rates in some departments, such as science departments that had to maintain expensive laboratories, were much higher than the university average. The research committee urged university administrators to study their allocation methods and to consider discontinuing the allocation of some categories of expenses, such as the relatively fixed indirect expenses (e.g., space. general administration). This change would allow units to price at least some research grants on a marginal cost basis. 4. Encouragement of course proliferation The critics who believed that the RCMS encouraged course proliferation based their belief on the knowledge that school earned tuition revenue only if students signed up for courses they offered. Thus, many schools. and even departments, offered similar or even identical courses (e.g., statistics, communications) in order to retain all of its students' tuition dollars at their school. The faculty voicing this criticism believed that it would be more likely for courses to be taught in the department best suited to offer it if the pressure for revenue generation was lessened. Some RCMS critics also noted that some schools offered gut (excessively easy) courses that might be deemed inappropriate for an institute of higher education (e.g., a course that just shows films) or tolerated professors who grade liberally to keep their courses popular because popularity brings with it additional revenues, 5. Encouragement of end-of-period financial game playing Neither the committee report nor the open letter mentioned the problem of end-of-period financial game playing, but some other critics within the university believed that RCMS encouraged such actions. They noted many examples of revenue center managers moving revenues and expenses between fiscal years depending on whether they were in a budget surplus or deficit position. These managers were motivated to do so because meeting their budget target was an important part of their job. Most of them believed that if they failed to achieve their budget two years in a row they would probably be replaced. The managers had used many methods of moving monies between reporting periods. For example, they could ask donors to accelerate or delay their contributions, or they could deposit June donations immediately or wait until after July 1, the start of the new fiscal year. And they could move expenses between years by, for example, accelerating or delaying discretionary expenditures or by asking faculty and staff members to submit requests for reimbursement of expenditures already made in the current or following fiscal year. The deans and many others the university did not consider such manipulations unethical because they had observed top-level university administrators taking the same types of actions. The university had never posted a deficit for a fiscal year, but sometimes administrators had to take end-of-year actions to maintain that record. They believed the continuing record of budget achievement and surpluses was desirable because it provided evidence that the school was well run and contributed to the high-quality (AA) bond rating UMQ was given by Trust and Poor's. Both of these indicators facilitated the raising of capital and donations from a alumni, foundations, and the investment community. As Abdul Karim noted, "Big donors will not give to a school running a deficit. They assume the people there can't handle the money." Required: a) How can the implementation of the control systems improve the issues of the new system? Be specific in justifying type of the control system. (20 marks) b) What other advices do you have for Mr Abdul Karim and Samad Ali? (10 marks)