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How resource allocation fits into the planning cycle

By Charles Kim and Jason H. Sussman
September 11th, 2019

With this article, we continue a series to help leaders of U.S. colleges and universities with the planning and management needed to navigate a rapidly changing business environment. In articles 1 and 2, we described the problematic form of capital resource planning that currently is in place in many institutions, and highlight a way for leaders to advance to a more highly developed and integrated planning process. The third article describes the breadth of investments leaders can and should include in a contemporary definition of capital resources.

This article describes a high-quality process for allocating capital resources and its fit into a recommended planning and funding cycle.

Resource Allocation––Why So Difficult?

Resource allocation is the process by which leaders of an institution define available capital resources and make resource-deployment decisions for re-investment purposes, investment in future growth, or as cash reserves on the balance sheet.

Sounds simple, right? Not really, as many of you may experience.

Often, the key challenge stems from the fact that the process is a strategic one, but that sufficient capital resources are not available to fund all desired strategies, so the process becomes political instead. Leaders must make choices. Their decision-making process and the choices that emerge are critical to the long-term sustainability of all colleges and universities. Resource allocation must ensure the continued financial strength and mission effectiveness of the institution.

How is this best assured?

Allocating Resources within a Planning Cycle

The recommended resource-allocation process, that has a proven multi-decade record of accomplishment in non-profit organizations and for-profit companies, supports a university or college’s strategic goals by doing the following:

• Linking financial planning and capital resource planning to the organization’s strategic plan
• Providing a financial context for allocation decisions that incorporates the strategic, mission, and operational aspects of the desired “portfolio” of alternative investment decisions
• Ensuring a resource allocation process that is rigorous, including comparisons among initiatives for transparent decision making throughout the institution

This resource-allocation process allows universities and colleges to find an acceptable balance between the need for continuing strategic investment and the ability to generate resource capacity. Such an approach brings together, into one cycle, strategic planning, financial and capital planning, and annual budgeting, as shown below.

The process starts with the strategic planning process. This process identifies the market- and mission-based strategies that leaders want to pursue to achieve institutional objectives, and that require funding in the next five to 10 years.

In the next stage, the financial planning process, leaders quantify the broad capital requirements and potential effects of the defined strategies, evaluating whether they can implement strategies within an acceptable credit context. At the same time, leaders look at how to optimize the use of external debt and philanthropy (capital structure) to fund the identified strategies in a manner that ensures maximum flexibility and the lowest possible cost of capital.

The prioritization of specific resource-investment opportunities is an iterative step that occurs through an institution’s capital resource-allocation process. The annual budgeting process, which creates a current-year implementation and operating plan, integrates the targets of the strategic and financial plans with the specific investment decisions of the resource-allocation process.

To succeed in a competitive environment, leaders must competently manage the cycle through feedback and control mechanisms at every stage. To do so involves understanding the technical and mathematical relationship between cycle components. Success or failure with one component affects success or failure in other parts of the cycle.

The Resource Planning and Management Cycle
Source: Kaufman, Hall & Associates, LLC

How Budgeting Differs from Resource Allocation

The differentiation requires improved understanding in higher education. As shown in the figure, capital or operational budgeting is a small piece of the comprehensive resource-allocation process. It is the administrative process used by institutions to spend allocated dollars, involving detailed listing of purchases during the next fiscal year. Budgeting often relates only to “routine” items or recurring expenses that fall under the purview of either schools or departments. The process does not include consideration of what the allocation should be or the short- or long-term implications of investment in each potential project. That strategic evaluation occurs during capital resource allocation to ensure the strategic and financial health of the institution.

Using the Cycle

Use of the resource planning and management cycle helps to foster a culture that respects the relationships among strategic objectives, resource capacity—i.e., the resources required to fund strategic and routine capital needs—and financial risk. Dollars allocated to specific initiatives reflect the organization’s long-term financial vision and create an overall portfolio that will generate an optimal return.

Leaders of high-performing organizations recognize that operating margins are the key ingredient for cash reserves and credit quality that allow access to the debt markets. Such margins result from persistent, focused management of all aspects of the organization’s decision-making processes.

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