Barrier:
Zero-sum budgeting leaves little incentive for colleges and university employees to create effective and efficient work flows

By Aaron Anderson - Director of Strategic Organizational Initiatives at San Francisco State University, College of Business

April 28, 2011 at 5:16pm

College

University

zero-sum budgeting

efficiency

effectiveness

Moonshots

Reinvent the means of control

Create internal markets for ideas, talent & resources

Transcend traditional management trade-offs

Summary

Zero-sum budgeting has long been the practice for university & college operations, particularly in the public sector. Essentially, when the city, county, and state governments are generating positive cash flows in the proper time frame for college leadership to formulate a budget, the job of those utilizing the funds is to zero out the budget at the end of the fiscal year.

This common budgeting practice presents a "use-it-or-lose-it" gambit that makes it challenging to foster work environments that encourage efficient systems. "Every-tub-on-it's-own-bottom" may promote personal responsibility when it comes to generating revenue to support the operation, but the need to zero out the budget at the end leads to unwarranted wastefulness instead of encouraging resourcefulness and conservation that could otherwise be diverted to reservoirs of slack funds that can be put toward generating organizational innovation.

Description

Say, you are a department chair or director of a particular academic unit. You may or may not have complete control over your annual budgeting process. Moreover, whether you generate your own budget, or you have one handed to you, your mission at work is to prove that you deserve and need the resources allocated by spending them over the course of the year. Spend it all, and you may even see an increase in funding over the following year because you may be able to justify this to whomever makes budget decisions.

If, in the course of operating your department or unit, you fail to prove the need for resources allocated for this fiscal term by not using the full amount over the course of the year, you risk losing it in the following fiscal year. Effectively, the money you saved over the year is pooled back into the general fund and redistributed to other areas of the operation who demonstrate need. This becomes particularly painful if you are down FTE (full time equivalent) employees, you were not allowed to hire new folks, and by operating successfully for a full fiscal year down resources, you've proven you can survive without the personnel. When it comes time to allocate funds in the following year budget, it becomes entirely difficult to justify a request to retain full salary and benefits packages not fully utilized. You lose the position(s). Now what?

The unintended consequence of zero-sum budgeting establishes a deep, culturally fixed mind-set that stifles creativity and deflates the ability of players in the operation to simultaneously increasing efficiencies and effectiveness. Because any savings is not retained by your operation for developing new and inventive procedures, and quite probably lost in any forthcoming budgets to be redistributed to other areas, you become hell bent on spending all capital on whatever you can fathom before the close of the fiscal year. This leads to feeding frenzies where directors and such scurry about to spend all the budgeted monies in whatever way possible to zero out the funds, and thereby justify the next year's equivalent amounts or perhaps a small percentage increase, if you can.

Illustration

See description section above, or add a comment to this post to add more illustrations to demonstrate the problems suggested by this barrier.

Root Causes

The root causes of this particular barrier are institutionalized practices that have led to a defacto, culturally-based & commonly understood and expected way of budgeting that has generated years of long standing tradition on many college and university campuses. The roots are deep and strong. The cultural way of behaving in the face of this practice has become so entrenched that most people can't fathom another way to conduct the fiscal side of a college or university.

Solution

What we need here is an entire extraction of the existing budgeting practice and a wholesale replacement of how we finance school operations. As to what this will look like will require sharper minds than mine. What do you think might be a better way to finance and budget schools and the systems within which they are embedded?

Credits

I may be the only heretic suggesting that the way we budget our college and university operations is fundamentally broken, but unless we acknowledge we have a problem, we will never get to solving them. I have no idea who to credit for this barrier.

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January 3, 2012 at 9:54am

Aaron Anderson

Dear Dr. Masterson, Zero Sum is the term I use, but the meaning, in effect is that you have to use the funds in the current fiscal year so as to justify the same or request for more budget in the forthcoming fiscal year. "This might be more apt to encourage wastefulness," is the point I'm trying to make.

If, instead, what you are suggesting - Zero Based Budgeting - is a ground-up form of budgeting - where you identify the needs, and the budget required to execute on the need to pinpoint the budget for the forthciming year, we might see the barrier reduced.

Thanks for the comment.

January 3, 2012 at 7:02am

Dr. Richard Masterson

Aaron -- I don't understand the definition of "zero-based budgeting," or the second paragraph of the online Summary is just not consisted with your intent.

I thought "zero-based budgeting" meant that the budgeting process started with a zero for each department for each period. From that, each unit had to prove its needs, from the ground up.

In other words, the "use it or loose it" approach uses the previous budget as a base, and, therefore, requires the unit to spend down to zero to demonstrate an apparent need for the full amount in the next period. This might be more apt to encourage wastefulness.

"Zero-base" does not mean "spend down to zero"! On the contrary, it is starting with a zero base with no reference to previous spending. It requires justification for every dollar for every expense, from the ground up.

Perhaps, we need to consider "zero-base budgeting" rather than the "previous-period based" budget planing concept.