Structuring and Transitioning to Impactful Gainsharing
Strategies to incent better unit budget behavior and reallocate meaningful resources to the center
This study outlines two options for structuring a gainsharing program as well as strategies to help institutions transition to a more strategic budget surplus policy while minimizing pushback.
Current approaches to unit budget surpluses creating resource misalignment
Management of unit budget surpluses represents a significant opportunity to reallocate resources at most colleges and universities. Many institutions utilize a 100% carry-forward policy, where units retain all year-end surpluses.
However, this often results in units accumulating massive reserves while the center struggles for funds. Conversely, other institutions manage unit budgets with a use-it-or-lose-it approach that pulls all year-end surpluses to central administration. This policy often creates a perverse incentive for unit leaders to spend down the balance of their budget at the end of the year to avoid losing funds.
The optimal middle ground between use-it-or-lose-it and carry-forward is gainsharing. Under this approach, units split any budget surplus with central administration. This “compromise” method benefits both units and the institution and combines the advantages of the two more extreme approaches. Because units retain a sizable portion of their surplus, they are incented to find cost savings and better steward resources. Likewise, because a portion of any surplus returns to the center, the institution can grow much-needed funds for larger strategic priorities.
The case for gainsharing
Management of unit budget surpluses represents a significant opportunity to reallocate resources at most colleges and universities. Many institutions utilize a 100% carry-forward policy, where units retain all year-end surpluses. The traditional logic behind this approach is that allowing units to retain their savings promotes better stewardship of resources and encourages units to save up for larger investments. However, it often results in a gross misalignment of resources, as units accumulate massive reserves while the center struggles for funds.
Colleges at one research university have collectively amassed roughly $300 million in reserves through carry-forward, while central administration possesses only $3 million in reserves. At another institution, one CBO had to contact every major bank in the state to locate university accounts and determine how much money academic units were even holding. Ultimately, institutions using a carry-forward approach often struggle to make important strategic investments because the majority of funds are held by decentralized units.
"“We used to allow colleges to keep their surplus funds in their own accounts. We were so decentralized that back in 2003, we had to go around and ask all of the banks in state what university accounts they held.”
"Chief Business Officer
Public Research University
Structure gainsharing agreements
Despite its advantages, only 10% of institutions use a form of gainsharing to manage academic unit surpluses. To help business executives better manage unit budget surpluses, this publication details how institutions can successfully adopt a gainsharing model. The first section details how to best structure gainsharing arrangements. The second section offers two potential transition paths to move to gainsharing over time while mitigating campus resistance to change.
Option one is set fixed percentage of budget surplus to be retained by unit The first and more common option for structuring a gainsharing model is to establish a fixed percentage of budget surplus that units will retain. The key is to establish a gainsharing percentage that effectively incentivizes unit leaders to pursue savings opportunities while still providing central administration with needed resources. The second option is to establish a unique savings target that each unit must hit before gainsharing begins. This allows the center to dictate the funds it needs in advance, rather than waiting to see how much units save.
Successfully transition to gainsharing
Because gainsharing both incents units to find cost savings and returns a portion of those savings to the center, it is typically the approach that brings the most resources to central administration and ensures the most strategic use of funds. However, it also represents a meaningful budgetary change that faculty and staff may resist.
Considerations for implementing gainsharing
- Institutions moving to gainsharing from use-itor-lose-it are often able to pull back even more than 50% of unit surpluses
- Institutions should push for the most aggressive policy culture will allow and adjust the percentage split later if necessary
Leaders will obviously want to transition to the most impactful model while simultaneously minimizing disruption and pushback from faculty and staff. The best strategy for transitioning to a gainsharing program depends on how an institution currently manages unit surpluses. This section details two potential transition paths institutions can follow to successfully migrate to gainsharing, depending on their starting point.
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