Copyright 1997 CAUSE. From CAUSE/EFFECT Volume 20, Number 3, Fall 1997, p. 22-29. Permission to copy or disseminate all or part of this material is granted provided that the copies are not made or distributed for commercial advantage, the CAUSE copyright and its date appear, and notice is given that copying is by permission of CAUSE, the association for managing and using information resources in higher education. To disseminate otherwise, or to republish, requires written permission. For further information, contact Jim Roche at CAUSE, 4840 Pearl East Circle, Suite 302E, Boulder, CO 80301 USA; 303-939-0308; e-mail: [email protected]
by Martin D. Ringle
At the end of the 1980s many colleges and universities developed financial models for technology based on then-current assumptions about student ownership of microcomputers, hardware life-cycles, maintenance contracts, and other factors. Many of these assumptions are no longer valid. With technology costs and revenue opportunities changing so rapidly, it is clear that future financial strategies will need to be more agile and adaptable than ever before. This article presents financial models drawn from more than 20 independent colleges and universities and discusses how they have been used to define a technology financial strategy at Reed College.
In 1943, Thomas Watson, chairman of IBM, said, "I think there is a world market for maybe five computers." Nearly 40 years later, Bill Gates, founder of Microsoft, said, "640K ought to be enough for anybody." Remarks such as these underscore a vital point: predicting the future of technology is a risky business, even for the most successful people in the history of computing. Unfortunately, this is the business for which chief technology officers are hired. As the pace of technology accelerates, our ability to deal with an uncertain future -- whether through intuition or the process of strategic planning -- becomes ever more critical to our institutions.
At the center of every long-range technology strategy -- beneath all the policy and procedural statements on standards, equipment, software, networking, and staffing -- lies the key to success or failure: the financial model. For many institutions, however, a financial model is barely visible in their technology planning efforts. All too often, neither technology officers nor financial officers have a complete picture of how much the institution is really spending on technology nor how such dollars are being spent. Under these conditions, prioritization of funding items for technology is difficult, if not impossible.
This article examines financial models for technology and the priorities they need to address. The primary data on which the discussion is based are drawn from trends among a reference group of 25 private, liberal arts colleges from 1986 through 1996. In some respects, this is an update of the 1992 paper, The Cost of Computing: Shining a Light into the Black Hole, by David Todd and myself.1
It should be noted that while many aspects of funding, budgeting, and expense control differ substantially between private undergraduate colleges and other types of institutions, many of the observations in this paper can be applied to almost any college or university.
Discussions of financial models for technology are often quite complex, especially when they focus on the maze of accounting practices that can be used to manage funding and expense control. The foundation of a good financial model for technology, however, can be understood in relatively simple terms. It must:
Institutional priorities
A common weakness of many financial models for technology is that they assume rather than explain the relationship between technology and the institution's other priorities. Technology officers, immersed in the challenge of keeping up with skyrocketing user demand, frequently overlook the fact that senior officers are juggling funds for technology with other pressing items such as deferred maintenance, faculty and staff salaries, and financial aid. Technology officers must be able to articulate a clear understanding of how technology fits into the overall institutional strategy and what this implies for the total funding picture.
Financial limitation
An axiom of organizational funding is that there is never going to be enough to meet everyone's needs. To be successful, a financial model for technology must be designed with sensitivity to what is possible and practicable, given an institution's financial constraints. Models that focus exclusively on technical or user demands may fail to provide senior officers with realistic options and may not, therefore, be of much value in building a workable funding strategy. It may be necessary, however painful, to acknowledge that an institution simply cannot afford to provide certain technology services unless it is willing (and able) to sacrifice funding in some other area of the budget.
User endorsement
Technology financial planning is all too often a back-room exercise conducted by the chief technology officer, alone or with a small group of trusted colleagues. Such planning does absolutely nothing to moderate user demand nor to promote understanding of the limitations faced by the information technology organization. The more awareness that users have of information technology financial constraints, the better. It is important that a financial strategy reflect, to as great a degree as possible, technology needs as perceived by users. A user endorsement of the financial plan for technology, based on an understanding of fiscal limitations, may help to garner new institutional resources while it helps -- at least temporarily -- to moderate user demand.
Flexibility
With changes coming so quickly and from so many different directions, it is imperative that the priorities embedded in a financial model be as flexible as possible. Winning strategies are those that make it relatively easy to modify funding sources, allocation priorities, and technology decisions, as circumstances require. In lieu of a single comprehensive, long-range technology strategy, institutions may be better off defining a set of agile and adaptive short-range strategies that fit together to form an overall plan.
The first thing that usually comes to mind when considering spending priorities for technology is equipment. Increasingly, however, budgetary emphasis for technology in higher education is being directed toward people rather than equipment. In part, this is the result of the growing realization that user satisfaction seems to correlate far more consistently with staff support than it does with hardware availability.
The increasing priority given to staffing is evidenced by the growth in the percentage of the information technology budget devoted to personnel. Within the reference group of liberal arts colleges, for example, expenditures for staff salaries increased from 41 percent in academic year 1989 to nearly 58 percent in 1995 (Figure 1). During the same period, median staff size in the reference group grew from 13.9 to 19.3 FTE (Figure 2). The two areas of staffing that experienced the greatest growth were user support and network services. Most recently, new staffing has been concentrated in the areas of Web materials development and Web server management.
Despite the growth in staff size, more than 90 percent of the chief technology officers surveyed indicated that the demands for expanded user support and more sophisticated technical services have risen more quickly than increases in staff size. To make matters worse, nearly half of the schools are seeing a reduction in staff longevity,2 and all but a few are feeling intense pressure from salary competition with the private sector. Smaller colleges, especially those located in rural or remote areas, have been very hard pressed to hire and retain qualified staff in numbers that are sufficient to meet the demand.
By all indications, recruiting and retaining high-quality staff is going to become the single biggest financial challenge for information technology organizations in the years ahead, despite the fact that there are more qualified people in the technology job market than ever before. What can be done to address the problem (other than simply increasing the overall information technology budget)?
Allocate more funds for personnel
If the percentage of the information technology budget for staffing is relatively low, then one should consider reallocating funds from line items such as maintenance contracts (see below). Schools that are already spending close to (or above) 70 percent of their information technology budgets on personnel, however, should be very wary of increasing staffing dollars further, since this could trigger serious problems with funding for operations, equipment replacement, and so forth.
Help your staff improve themselves
Although salary budgets have increased substantially, funds for staff development -- workshops, seminars, conferences, and training -- have generally remained flat or have decreased during the past five years. Providing opportunities for staff to acquire new skills and take a break from daily routines can be an extremely cost-effective way to improve retention and make staff more valuable to the institution. A reasonable target for staff development funding is 3-4 percent of the total information technology budget. Currently, most schools in the reference group spend between 1 and 2 percent.
Provide unpaid leaves
Colleges that allow information technology staff to take periodic unpaid leaves often find that it helps to reduce the cost of recruiting and training new staff. Given the "burnout" conditions of so many information technology jobs, a few months away every few years can be enormously rejuvenating for the staff member and cost-effective for the college.
Outsource
In the past, private institutions, especially smaller ones, had few choices with respect to information technology outsourcing; it was generally an "all-or-nothing" proposition. The lower cost of "doing it yourself" generally won out. Today, there is a growing menu of task-specific outsourcing opportunities that range from piecework Web development to comprehensive network support. While there are drawbacks to outsourcing -- for example, staff loyalty is to the third-party provider rather than to the institution -- the benefits are increasing. In a fast and forbidding job market, a third-party provider may be able to deliver high-quality staff with little or no disruption due to turnover. More and more small colleges, especially those outside of urban areas, are exploring task-specific outsourcing as a strategy for addressing recruitment and retention problems.
Distribute the cost of support staff
More and more information technology organizations, even the highly centralized ones common at small colleges, are recognizing that support staff in client departments may be easier for an institution to fund than staff in the central organization. Such staff can help to ease the burden on central staff in a variety of ways. Rather than being concerned with "control," information technology organizations should focus attention on the best way to hire and deploy staff.
Restrict services
Perhaps the least attractive option for making ends meet is to reduce or eliminate existing technology services. In the long run, however, it is wiser to do a few things well than to do everything poorly. Unfortunately, many information technology officers and organizations are myopic when it comes to making this choice. If financial resources are treated as a zero-sum game, then technology services must be viewed likewise. (Feel free to send photocopies of this paragraph to your computing committees, your staff, and your boss.)
Probably most easily overlooked is the need to plan for replacement of equipment when it becomes obsolete. With today's technology, the useful lifespan of equipment is ... but a few years. Universities that are struggling to ... fund ... equipment hardly want to worry about replacing [it] in the foreseeable future.3
These were prophetic words in 1989. As predicted, a great deal of the computing equipment on campuses is now obsolete. While colleges and universities are aware of the need for replacement strategies, relatively few have taken the necessary steps to address the problem. An informal poll of chief technology officers4 conducted during 1995-1996 indicated that while more than three-fourths of their institutions had established, or were in the process of establishing, policies for the regular replacement of computing equipment, fewer than a quarter of those institutions had identified or allocated sufficient funds with which to carry out those policies.5 Like deferred building maintenance, this is a problem that promises to get worse as time goes on. What can we do?
Don't depend on the kindness of strangers
Grants, gifts, capital allocations, and end-of-year excess funds are not the way to finance equipment replacement. The only effective way to deal with this problem is to do an inventory, price out the total replacement cost, divide by the preferred number of years in the replacement cycle, and then put the resulting figure -- underlined and in red -- in front of everyone: bosses, committees, trustees, staff, and constituents. The first step in getting a realistic line item in the operating budget for equipment replacement is to do the arithmetic and publish the results.
Take a careful look at unit cost
It used to be a truism that while the capacity of hardware continually increased, the unit price stayed fairly constant, somewhere between $1,600 and $2,000 for a typical desktop configuration. For strategic budgeting purposes, schools in the reference group used a median figure of $2,000 per desktop for more than six years. During the past year, however, the median figure has jumped to nearly $2,400, driven by the appetites of more sophisticated users who want high-resolution monitors, removable media back-up devices, high-speed network and mobile connections, and other niceties. Can we really afford to provide such platforms? Not likely. We have to restrict the baseline unit cost and somehow limit its growth to the level of inflation.
Increase the life-cycle
A majority of schools that have equipment replacement policies for desktop computers endorse a life cycle of five years, though about 20 percent have longer cycles (between six and 10 years). A number of colleges and universities, such as Wake Forest, are attempting to support cycles of four years or less. In the private sector, replacement policies of less than three years are not uncommon.
The problem with many of these "endorsed" life cycles is that schools are not fully funding them and, in many cases, simply aren't in a position to do so, now or in the foreseeable future. Funding a four-year replacement policy at the "50 percent level" (as several schools indicate they are doing) is just a politician's way of describing an eight-year life cycle. Schools with a fully funded eight-year cycle, however, may be better off than schools with paper policies that lack realistic institutional support. Facing up to fiscal limitations means deciding how many years (on average) a machine can be useful for faculty, students, and staff -- and funding replacements at that level. If an institution can only afford a seven-year replacement cycle, then it needs to acknowledge that fact, budget accordingly, and get on with the rest of its planning activities. If it determines that it simply cannot live with such a cycle, then it needs to provide sufficient cash in the operating budget to shorten the cycle. Period.
Tighten the perimeter
During the late '80s, many schools discovered that they could get more "bang for the buck" by reallocating used equipment. For example, Brian Hawkins of Brown University and his colleagues correctly pointed out that:
The half-life of a piece of equipment in an engineering department may be only two years, whereas the half-life of that same piece of equipment in another department may be four years. Reallocation of equipment is essential for the effective utilization of technology over its life cycle.6
Nearly every school has exploited this strategy in one form or another. After a decade of reallocation, however, many schools are now finding that their installed base has grown enormously and they are financially unable to include all machines within a regular replacement pool. The only practical solution is to define a sub-set of the installed base -- a smaller perimeter -- that will be eligible for regular replacement. (Unfortunately, maintaining, rather than replacing, machines can prove to be just as costly in the long run.)
Promote student ownership
Each year it becomes a little more practical and a lot more desirable for students to own their own computers. Networked residence halls, falling prices, and more "consumer" availability are helping to accelerate student ownership, currently averaging more than 60 percent. Institutional incentives, such as loan programs, bundled software, one-stop shopping, and convenient user support, can be applied to further increase student ownership.
To lease or not to lease
During the '80s, computer leasing became less and less attractive to colleges as desktop computing grew, the unit cost of microcomputers declined, and interest rates rose. As John Oberlin has insightfully observed, however:
Leasing has several advantages: 1) it sets a clear expectation that technology will be replaced on a regular life-cycle basis; 2) it shifts the burden of recycling to the vendor, who becomes responsible for disposition of the computers at the end of the lease; and 3) it offers the opportunity ... for the institution to recapture the salvage value of old technology before it goes to zero. 7
Schools that simply don't have sufficient cash on hand to establish an appropriate equipment replacement protocol, should look seriously at desktop computer leasing as a way of addressing the replacement problem.
Will NC save the day?
With everyone in higher education (and the private and public sectors as well) facing similar problems with regard to equipment replacement, the prospect of a "silver bullet" is extremely tantalizing. Will the network computer (NC) envisioned by Larry Ellison of Oracle -- and now heralded by Microsoft, Intel, and many others -- provide a solution that will radically alter the financial picture? Current wisdom within higher education is that it will not. As many of us recall, 10 years ago it seemed as if microcomputers would have a dramatic financial advantage over mainframe technology, thanks to lower "per seat" costs. When we look at the total cost of ownership, i.e., networking, servers, software, and staffing, it is apparent that we are spending more per seat, not less. Even if the price of an NC or "thin client" falls to $500 (or less) the total cost per seat is going to involve additional network bandwidth and more server capacity than are required in the distributed environments currently used. Savings to institutions may be far less than expected and, if the experiences of the past 15 years are at all relevant, they may be nil. The NC may be a winner for functional reasons but it isn't likely to help colleges and universities lower their information technology budgets.
Take advantage of longer warranties
One of the better ideas to emerge from vendors is the three-year warranty for host and server hardware.8 Unlike desktop equipment, there is little to be gained by pushing centralized equipment much beyond a three-year life-cycle. This option allows institutions to immediately shift maintenance funds into equipment acquisition and replacement without paying the additional premium embedded in a lease or other credit arrangement.
Do it yourself
There is a perennial tug-of-war between those who favor maintenance contracts for desktop (and small server) equipment and those who provide in-house maintenance operations. Variables such as proximity to an urban retail environment and the local price of labor make a universal cost-benefit analysis impossible. It is true, however, that many schools are finding that the growing revenue from the maintenance and repair of student (and other) privately-owned equipment is sufficient to subsidize the maintenance costs for college-owned equipment. The speed, reliability, and convenience of in-house maintenance are bonuses on top of the potential financial benefit.
Another measure that can be used for comparison purposes is the number of information technology dollars in the institutional operating budget being spent per student (i.e., undergraduate FTEs). As shown in Figure 4, median expenditures per student among the reference group have almost doubled during the past six years.
While these numbers indicate a trend toward greater institutional emphasis on technology, they shed no light on where additional funds have come from. When asked, many technology officers confess ignorance or reply to the question by saying "the general fund." As those who deal with the finances of colleges and universities are keenly aware, line items do not increase unless other line items decrease or new money is found. So where is the money really coming from?
Tuition and technology fees
A number of institutions appear to be directing larger portions of tuition increases into technology funding. In a few cases, private colleges and universities indicate that they have added identifiable "technology fees" to their room, board, and other fees. For the most part, though, private liberal arts institutions have been very hesitant about creating "required" fees outside of the tuition structure since this can be interpreted by a wary clientele as a maneuver to hide the real cost of attending college.
Cost-recovery (usage) fees
Six years ago, most colleges in the reference group indicated that usage fees played little or no role in their technology funding strategies. (This, of course, is one of the major differences between public and private institutions.) The situation seems to be changing. In addition to the accepted practice of charging for (laser) printing, schools are now levying charges for dormitory network access, PPP dial-in access, and specialized services such as scanning and color printing. Perhaps the most substantial area of usage fees has been telecommunications, where revenues from long-distance services, voice mail, and so forth have been used to underwrite networking and other operating costs.
The area with the greatest untapped potential is usage-based Internet access. Currently, most colleges charge flat fees for residence hall network connections. As institutional costs rise, however, colleges may begin to treat Internet access the same way they treat long-distance telephone services, with connect-time charges rather than flat fees.
One-time sources
A surprisingly large number of institutions still rely heavily on one-time funding sources, including capital allocations, discretionary funds, gifts, and grants, to subsidize operational increases in technology support. Though the strategy is frequently described as an "interim" approach, data collected during the past 10 years suggest that some institutions have made little or no progress in the direction of moving key operational costs for technology to stable operational funding sources.
The most problematic one-time funding sources are equipment grants. Unless long-term funding (or a long-term funding strategy) is built into the original grant, the equipment quickly becomes an albatross around the neck of the information technology operating budget. Private foundations and public funding agencies have begun to acknowledge this fact, and many are eliminating grants for equipment altogether or requiring that detailed long-term financial commitments be delineated as part of a grant proposal.
Organizational changes
Another major factor in funding source modification, especially during the past four years, has been increased integration among various technology and information resource organizations. More and more colleges are bringing telecommunications, instructional media, and other services together with computing, networking, and distance education. Most recently, integration of the library with these other services has also increased. For example, in 1989 none of the schools in the reference group had an organization that embraced both technology groups and libraries; nearly 12 percent of the schools have now moved to this type of organization. Whether this becomes a trend -- and whether it ultimately helps to improve the funding picture -- remains to be seen.
Other line items
This is perhaps the most common source of technology funding increases. For obvious (political) reasons, few colleges have been willing to discuss strategies for technology funding that involve reductions of other budget line items. (One school, for example, insisted that it doesn't transfer funds from one line to another; it simply reduces allocations in one line, moves the residual to the general fund, and then increases funding in a different line.)
Acknowledgments
I am grateful to current and past technology officers of the following colleges for their generous assistance: Amherst, Bowdoin, Bryn Mawr, Bucknell, Carleton, Connecticut, Davidson, Denison, Grinnell, Hamilton, Haverford, Holy Cross, Hope, Kenyon, Lafayette, Middlebury, Oberlin, Ohio Wesleyan, St. Olaf, Smith, Swarthmore, University of the South, Vassar, and Washington College (MD). I would like to thank David Todd and Dave Smallen for the many insights they have provided on these issues over the years; and Marianne Colgrove and Kerri Creager of Reed's office of Computing & Information Services, for their invaluable assistance and feedback.
1 This paper appeared in Computing Strategies in Liberal Arts Colleges, Martin Ringle, ed., Mass, Addison-Wesley, Inc., 1992, 69-103. David Todd is currently chief information officer at Montana State University, [email protected].
2 Information technology staff longevity at private liberal arts colleges has traditionally been higher than that of many other types of institutions, both in education and the private sector. The median for the reference group, slightly less than five years, continues to be comparatively high though the gap is narrowing especially in very high demand positions, such as database management, networking, etc.
3 J. Gary Augustson, "Strategies for Financial Planning," in Brian Hawkins, ed., Organizing and Managing Information Resources on Campus, Educom Strategy Series on Information Technology, 1989, 263-280.
4 The poll was initiated by the author during the Educom95 Post-Conference Workshop and pursued by e-mail in spring 1996. There were 72 responses, mostly (but not exclusively) from liberal arts colleges.
5 Within the reference group of liberal arts colleges, more than 65 percent have developed or are developing policies, while only 20 percent are fully funded.
6 Brian Hawkins, Ron Weissman, and Don Wolfe, "Prescriptions for Managing Information Resources on Campus," in Brian Hawkins, ed., Organizing and Managing Information Resources on Campus, Educom Strategy Series on Information Technology, 1989, 229-259.
7 John Oberlin, "The Financial Mythology of Information Technology: Developing a New Game Plan," CAUSE/EFFECT, Vol. 19, No. 2, Summer 1996, 10-17.
8 Digital Equipment Corporation and Hewlett-Packard provide three-year warranties on many, though not all, of their host/server lines. IBM provides them on PC but not on UNIX platforms.
9 J. Gary Augustson, op. cit., 278.
Martin D. Ringle ([email protected]) is Director of Computing and Information Services at Reed College in Portland, Oregon.
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