MCS Report On Piedmont University

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Report on Piedmont University

Case Study analysis on Piedmont University

Submitted to: Dr. Monica Singhania

Submitted by:

Group L
Gagandeep Singh Dhingra N-22

Mayank Jain N-41

Sarita Tirumala N-65

Zia Al Nasir Khan N-86

Paramjeet Singh S-48

Faculty of Management Studies

PT-II Year (4th semester)

North Campus, University of Delhi

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Acknowledgement

We would like to show my greatest appreciation to Dr. Monica Singhania who rendered her assistance
and cooperation during the course of study. Without her encouragement and guidance this study would
not have materialized.

We would also like to show our sincere gratitude to Faculty of Management Studies, and its resources
for providing us a platform to understand, analyse and conclude the study on Piedmont University. The
case study focuses on analysis of various departments of Piedmont University as cost centers, revenue
centers etc. and their importance to convert Piedmont University into a profitable venture.

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Table of Contents

1. Acknowledgement .............................................................................................................................2

2. Table of Contents ...............................................................................................................................3

3. Objective............................................................................................................................................4

4. Background of the Case......................................................................................................................5

5. The Proposal of Neil Malcolm.............................................................................................................6

6. Critical analysis of the Proposal .........................................................................................................8

7. Recommendations..............................................................................................................................9

8. Questions answered ........................................................................................................................10


I. How should each of the issues described above be resolved?

II. Do you see other problems with the introduction of profit centres? If so, how
would you deal with them?

III. What are the alternatives to a profit centre approach?

IV. Assuming that most of the issues could be resolved to your satisfaction, would
you recommend that the profit centre idea be adopted, or is there an
alternative that you would prefer?

9. References ......................................................................................................................................12

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Objective
 To provide insights into management control systems for service organization

 To propose a solution to Piedmont University to convert it into a profit making venture

 To analyse and understand the importance of forming profit centers, expense centers etc and
its relevance to Piedmont University.

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Background of the Case

Professor Scott became the president in 1984. At that time the university was facing declining
enrollment and increasing cost. The deficit resulted from using the principal of quasi-endowment
funds. Professor Scott instituted measures to turn the financial situation around by applying the
following:

 Raised tuition.

 Froze faculty and staff hiring.

 Reduced operating cost.

The above did not seem to improve the situation of declining enrolment.

In the present situation of financial control, annual expenditure budgets were allocated from
Deans and Administrators of support departments. Budgets were usually approved with minor
changes with emphasis on monitoring major items and less focus on adhering to ‘other items’.
Overall it can be said that there was a lack of budget discipline.

In 1986, Mr. Malcom who was a Piedmont alumni and partner in local consulting firm,
volunteered to examine the situation and offered the following recommendations:

1. Increased recruiting and fund raising activities.

2. Recognized the university into a set of profit centers.

At the time the principal means of financial control was an annual expenditures budget
submitted by the dean of each school and other support departments’ heads. Malcom proposed
that the deans and other department administrators would be responsible for both revenues and
expenditures of their activities.

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The Proposal of Neil Malcolm


In 1986 Hugh Scott appointed a Management consultant to control the situation. The consultant Neil
Malcolm was alumnus of the same university and volunteered to analyze Piedmont University finances

His most prominent recommendations were as follows:

 Increase student recruiting and fundraising activities

 Re-organize Piedmont University as ‘set of profit centers’

He proposed the reorganization of Piedmont University into profit centers. Besides this major proposal
he also offered that deans and administrators should submit budgets for both revenues and expenses.
Majorly he hinted at general shift in responsibilities. He stressed new procedures for:

 Crediting revenues to profit centers which earned them

 Charging expenditures to profit centers responsible for them

Rough estimates of 1986 Impact of Proposals is given in the tabular form in the following page.

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Estimates of 1986 Impact of Proposals

Rough estimates of 1986 Impact of Proposals ( $ Million) Revenues Expenses Difference

Profit Center:

Undergraduate liberal arts school 30.0 29.2 3.8

Graduate liberal arts school 5.6 11.5 (5.9)

Business school 15.3 12.3 3.0

Engineering school 17.0 17.3 (0.3)

Law school 6.7 6.5 0.2

Theological school 1.2 3.4 (2.2)

Unallocated revenue 5.0 -- 5.0

Total, academic 80.8 80.2 0.6

Other:

Central Administration 10.1 10.1 0.0

Athletics 2.6 2.6 0.0

Computers 3.4 3.4 0.0

Central maintenance 5.7 5.7 0.0

Library 3.4 3.4 0.0

Total, other 25.2 25.2

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Critical analysis of the Proposal

Reorganization of university as ‘Profit Centers’ was most important and controversial recommendation

University Council discussed this is detail and in general there was support for of Profit Center. It should
be highlighted that administrators of non-core departments (e.g. Library, Maintenance Dept.) not
included in discussion. There were large areas of disagreement, some of which are highlighted below:

Central Admin Proposed formula unfair to Grad School. Deans did not want responsibility for
Costs allocated costs over which they had no control

Gifts and Too much authority for president; some way of reducing president’s discretionary
Endowments powers sought

Goal of self-sufficiency risks student dissatisfaction, as well as causing much new


Athletics
paperwork

Maintenance Schools seeking authority to outsource maintenance to reduce costs

Computers Fear that usage fees and computer regulation would discourage computer usage

Library Proposed fees (annual and/or usage fees) would increase paperwork

Cross Registration Complex formula for transferring revenues & expenses between schools

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Recommendations
Based on the proposal of Malcom and analyzing the present situation of Piedmont University, it can be
said that profit centre may not always be a correct approach in finding the solutions of problems in
corporate world. Some of the recommendations are listed below:

1. Based on the situation and the type of organization, there should be a mix responsibility centers.

2. The stress should be on improving quality and speed of decisions.

3. There should be appropriate cost allocation.

4. In some situations there should be motivation to increase motivation and creative ideas.

5. In Piedmont University the schools managers to have better control as profit centers.

6. Besides formation of proper responsibility centers other management techniques like balanced
score card, reporting structure & system, transfer pricing and goal congruence to meet strategic
objectives should be used.

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Questions of the Case Answered


1. How should each of the issues described above be resolved?

The views on various departments or sub-organisations are given below:

1. Central administration should function as a revenue centre. Administration should be


accountable for University costs and no allocation to schools

2. Gifts and endowments should be part of Central Admin. The donations should go to
students University may absorb cost as part of administration and schools should have
input into allocation

3. Athletics should be a profit centre. There should be annual fee for users should be
charged. This should be analysed on break-even goal and cost-recovery.

4. Maintenance should function as an expense centre. Schools to have cost based billing
and may seek outside bids.

5. Computer department should function as expense centre. The intent should be to


improve records & assign responsibility to schools. For computer department should
have no monitoring and control.

6. Library should function as expense centre. A fixed annual fees in context of library
should be charged which should be included within tuition fee

7. Regarding cross registration status quo; no charges (maintain spirit of collegiality)

2. Do you see other problems with the introduction of profit centres? If so, how would you deal
with them?

There are some complexities involved with introduction of profit centres. The issues and resolution is
listed below:

1. Profit Center approach doesn’t recognize non-monetary factors (e.g. quality of education and
scholarship) The solution is to focus on core values (MBO (Management by Objectives) &
Balanced Scorecard)

2. There might be competing activities between multiple profit centres (Campus Placements,
Cultural events Alumni etc). Solution here is requirement of better coordination needed under
president’s leadership.

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3. Situation when schools are unprofitable? Some schools may never be profitable yet may still be
essential to goals and objectives of university. Profit centre approach not meaningful in this
case, Discretionary expense centre approach would be more appropriate

4. Unanticipated risks (school’s competing for students, staff strikes, student dissatisfaction, faculty
disenchantment, reputation of university). The solution therefore is to have responsibility
centres approach.

3. What are the alternatives to a profit centre approach?

Profit should be defined in non-monetary terms with stress on performance measures. For instance
individual schools should be gauged on following:

a. Performance Grades & their acceptability by reputed universities

b. Graduates’ employment rates

c. National & international scholarships, awards & accreditations

d. Survey students and employers for satisfaction

e. Trends in enrollment

The support functions should be analysed based on historical costs and costs compared to market costs.
In present environment the intent should be to minimize focus on ‘profit’ and focusing on the vision and
goals of Piedmont University. Some of the prime issues are that students already paying more and are
not allowed increasing faculty. Piedmont University should focus on academics and rebuild quasi-
endowment

4. Assuming that most of the issues could be resolved to your satisfaction, would you
recommend that the profit centre idea be adopted, or is there an alternative that you would
prefer?

The prime issues involved with introduction of Profit centre approach is loss of control for top
management, drop in quality of management, issue of friction over the transfer price and common costs
and organizations units’ competition. Therefore Profit centre approach may be called appropriate but
not necessarily ‘profit focus’ approach. “Profit” should be gauged as the achievement of school’s
objectives. However financial management must still be the priority. At the same time common sense
and organizational culture play a vital role. The exact solution therefore is to apply management
techniques like MBO or Balanced Scorecard and enhancement of management capabilities to ensure
achievement of goals.

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References

1. Management control systems: text, cases and readings By Robert Newton Anthony, John
Dearden, Richard F. Vancil

2. Effective management control: theory and practice by Eric Flamholtz

3. Otley, D., 1994. Management coontrol in contemporary organizations: towards a wider


framework, Management Accounting Research, 5, 289-299.

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