UNIVERSITY OF SOUTHERN

CALIFORNIA

Responsibility Center Management System

Background
The University of Southern California (USC), established
in 1880, was California’s oldest private, research
university. Located on the perimeter of downtown Los
Angeles, USC was a diverse and complex organization. It
ran 19 colleges and schools, more than any other private
university in the United States. USC employed over 3,200
full-time faculty members, and had annual operating
revenues of $2.5 billion. It was the largest private
employer in Los Angeles and the third largest in the state
of California.
 Strategies
The strategic plan focused attention and resources on three areas that had to be addressed for USC to
achieve its goal of providing leadership to the academic world and society as a whole

01 02 03
Meeting societal needs, Expanding USC’s global Promoting learner-centered
through research and presence, through education, through adaptive
education that examines, collaboration with and flexible approaches that
anticipates, and resolves institutions around the redefine learning, as the
pressing societal urgencies world, especially in the context and content of higher
Pacific Rim; and education change rapidly
 Strategies
The plan also identified four strategic capabilities that should be developed to position USC for success
these were:

span disciplinary and school

01 boundaries to focus on problems of 02 link fundamental to applied
research
social significance

03 build networks and partnerships

04 increase responsiveness to
learners
The Management System
Prior to RCMS
Prior to implementation of RCMS, decision-making
power at USC was centralized. One senior
administrative officer – the provost – played the key
role in all major resource allocation decisions. in the
old system, financial accountability for the unit
heads was weak. Each university unit had its own
financial statement, but the statements were not
complete.
RCMS Design Principles

Work on the RCMS began in 1981, at the beginning of a period that promised to be difficult because
significant declines in the population of traditional college-aged persons necessitated budget cuts. The RCMS
was designed by a Task Force on Budget Incentives appointed by then-university president James Zumberge.

The objectives of systems like that used at Penn included “clarifying roles and responsibilities
between local and central units, linking cause and effect through revenue and indirect cost allocations,
placing local academic planning decision making in a cost/benefit context, and unleashing
entrepreneurship.
 RCMS Design Principles
USC’s design task force developed the following nine management principles to guide their
development of the USC RCMS:

1. Responsibility should be commensurate with authority, and vice versa.

2. Decentralization should be proportional to organizational size and complexity.
3. Locally optimal decisions are not always globally optimal: central leverage is required to
implement corporate (global) priorities.
4. Outcome measures are preferable to process controls.
5. Accountability is only as good as the tools which measure it.
6. Quantitative measures of performance tend to drive out qualitative measures.
7. Outcomes should matter: plans that work should lead to rewards; plans that fail should lead to
sanctions.
8. Resource-expanding incentives are preferable to resource-dividing ones.
9. People play better games when they own the rules
 Responsibility Centera

Revenue Centers Administrative Centers

Revenue centers were organizational Administrative centers were entities

units to which revenues could be that did not generate revenues
uniquely attributed. directly but performed activities that
supported the revenue centers

The academic revenue center managers were evaluated in terms of

their units’ academic excellence, generation of sponsored research
grants, faculty development, fundraising, and bottom line financial
performance.
 Performance Reports
The financial reports included four primary categories of accounts:

Revenue Expense Partcipations & Subvention

Designated & Undesignated Direct & Indirect Expense Participation & Subvention
revenue
 Revenues
The revenue centers were allowed to keep the revenues they generated. The university generated two types
of revenues: designated and undesignated

Designated Undesignated
\

The designated revenue funds They came from tuition and fees,
had to be used only for the unrestricted gifts, and indirect cost
recoveries from government
specific purpose for which they
contracts. Tuition revenue was
were given and were not allowed credited 100% to the revenue center
to be transferred to an offering the course taken. The
undesignated account without indirect cost recoveries were
prior permission from the central determined by formula negotiated
administration with each funding source
 Expense
Direct Indirect
The direct expenses of a Indirect expenses included the
revenue center included costs of shared resources,
the costs of the people such as buildings, utilities,
and the equipment and various kinds of support
directly assigned to that provided by the
center administrative centers

the university relied on a complex set of allocation methods.

University administrators, in collaboration with revenue center
managers, determined what centers shared what cost pools and how
the costs would be spread across pool participants.
 Participation & Subvention
Participations were contributions required from all academic revenue centers, based on an equal
proportion of tuition and fees, sales or service income, and indirect cost recoveries, to further the
objectives and well-being of the entire university. In the revenue center financial reports, participations
were shown as negative indirect income

These contributions, along with revenues from other discretionary funds (investment income and
income from endowment restricted to the provost), were redistributed back to revenue centers as block
grants historically called subventions. When they made their allocations of subventions, the
administrators, particularly the provost and president, tended to focus on three key factors:
(1) differentials in the costs of educating students in different fields;
(2) the revenue centers’ cost/quality ratios; and
(3) university priorities.
Participation & Subvention

A school located near point 3 with both high cost of

instruction and high academic excellence, was most likely
to get a disproportionately high subvention. It offered
high-quality programs and research productivity but was
unable to cover its costs through tuitions. A school located
near point 4 was valuable to the university because it
offered high quality and financial independence. It could
probably provide funds that can be used in other parts of
the university, but administrators had to be careful to allow
it to keep enough funds to maintain its excellence. A
school located near point 2 was in trouble. It was a
candidate for new leadership or program discontinuance.
 Intercenter Bank
The RCMS included one other significant element, an Intercenter Bank. This bank provided
revenue centers, but not administrative centers, the opportunity to carry unrestricted funds across
fiscal year boundaries.
The Intercenter Bank was used both by revenue centers reporting surpluses and by those
reporting losses. If a revenue center had a surplus, it was given an account in the bank and
provided interest on the account balance at the fiscal treasury-bill rate as of July 1 of the year just
started. These revenue center managers were to spend their account balance in future years, but
only up to a maximum of 20% of the balance each year. Conversely, revenue centers with a deficit
were assigned a loan from the bank that charged interest at the treasury-bill rate. They had to
budget for repayment of the loan at a rate of at least 20% of the beginning balance each year.
 Criticism of RCMS System
1. Discouragement of innovation
The discouragement-of-innovation criticism stemmed from the belief that the RCMS forced deans to
think of their mission more in financial terms than in terms of their academic mission. Some believed
that the financial pressure discouraged innovation and even teaching quality. Another group of critics
believed that innovation and initiative were stifled because RCMS institutionalized decentralization
only to the level of the deans and, thus, did not go far enough.
 
2. Discouragement of multidisciplinary research
Some faculty believed that the best research, particularly that of an applied nature, was
multidisciplinary, involving researchers with different skills and perspectives. But since RCMS
emphasized financial priorities, most deans could not see the financial benefits of multidisciplinary
research. Critics noted that little multidisciplinary work was being done at USC. They blamed the
RCMS, at least in part, and cited examples in which deans had reprimanded faculty members for
getting involved in research with someone from outside their revenue center.
 Critcism of RCMS System
3. Discouragement of the seeking of outside grants
Some faculty were discouraged from seeking some outside funding grants because those grants
appeared to be “unprofitable” to the revenue center. This is because those grants provided indirect
cost recoveries at rates lower than the departments’ actual spending rates. Furthermore, the indirect
cost rates in some departments, such as those with expensive laboratories, were several times
higher than the overall university average
 Criticism of RCMS System
4. Encouragement of “inappropriate” courses 5. Encouragement of end-of-period financial gameplaying
Some courses tended to proliferate across campus Many examples were cited of revenue center
because tuition revenues were captured by the school managers moving revenues and expenses between
who offered the course. Thus many schools offered fiscal years depending on whether they were in a
similar or even identical courses (e.g. statistics, budget surplus or deficit position. The deans and many
communications) in order to retain all of the tuition others within the university did not consider such
dollars at their school. Some schools were also manipulations unethical because they had observed
accused of offering courses that were popular for the top-level university administrators taking the same
wrong reasons, Among the examples cited were “gut” types of actions.
(excessively easy) courses that fell below traditional
university standards and the toleration of professors
who graded “liberally” to keep their courses popular.
 Criticism of RCMS System
6. Debates about the fairness of cost allocations
Under RCMS, each revenue center was responsible for the full costs of its operations, including its
share of indirect costs, the allocated costs of centralized support services. Since the inception of
RCMS, the university relied on a complex set of allocation methods. University administrators, in
collaboration with revenue center managers, determined which centers shared which cost pools and
how the costs would be spread across pool participants.
Not surprisingly, the system caused much tension and many debates about the fairness of the
allocations of indirect costs. Deans would closely examine their indirect costs and compare them
with their perceived usage of central services. Then they would argue as to why they should not be
charged with costs from a given pool, or charged only at a reduced rate perhaps because the central
services duplicated services provided locally by the school or because they simply did not value the
centralized services.
 Refinements Over the Years
Over the years, USC administrators made a number of changes to the RCMS to try to address some of
the criticisms of it. These changes included the following:
1. Centralization of General Education courses
In fiscal year 1998 (FY98), the offering of all General Education (GE) courses for undergraduate
students was centralized in the College of Letters, Arts and Sciences. The various schools loved the
opportunity to offer GE courses because they provided access to large numbers of students, many of
whom were non-majors who might develop an interest in the School’s offerings. This change created a
large revenue boost for the College and significant revenue challenges for some other schools.
 
 Refinement Over the Years
2. Centralization of doctoral program finances
In FY03, the finances related to doctoral education were centralized. This was done to
encourage crossschool cooperation, to make sure that the best teaching and research
assistants were employed. After the change, starting in FY03, all of the PhD revenue was
captured centrally and used to cover all the costs of PhD student fellowships, teaching
assistantships, and research assistantships. This change allowed schools to hire the best PhD
student help for their courses and research projects without concern for possibly adverse
financial consequences.
 Refinement Over the Years
3. Removal of constraints on capital investments
In FY02, USC’s trustees adopted a centralized capital program that enabled the
university to use debt capital, as well as other resources, to build capital projects
more quickly. Academic deans would still be responsible for fundraising, but gifts
intended to fund an academic building would be heavily levered. Early evidence
suggested that many deans were reenergized in their efforts to seek new monies for
construction of new facilities. Many new facilities were being built and planned.
 Refinement over The Year
4. Changing of the participation “tax”
Then-provost Lloyd Armstrong decided that he wanted to change the tenor of the budget
meetings and to increase the decentralization level. Thus, at his direction, the participation rate
was lowered in FY95 to 10%. It was lowered again in FY00 to 3.4%. Since then the
participation rate had been increasing gradually. When the participation rate was 5% or lower,
most of the schools could balance their budgets even without receiving a subvention.
 
 Refinement Over the Years
5. Modifications of assignments of indirect costs
The methods used to allocate indirect costs to revenue centers were complex and
controversial. University officials sought to simplify the situation. In FY00, it
was decided that the 157 cost pools would be collapsed into one. The allocations
of indirect costs in FY99 would become the new baseline going forward. Future
years’ allocations were determined simply by applying the average rate increase
in all the administrative cost pools, regardless of how much of the central
services they and their students consumed.
 
 Refinement Over the Year
6. More flexibility in the use of Intercenter Bank funds
The Intercenter Bank was originally intended to allow some cross-year flexibility in the use of
funds. Academic units generating surpluses could put those surplus funds into the Intercenter Bank
and withdraw a portion of the balance in a subsequent year to use for any purpose. In the original
RCMS design, the dean had to withdraw 20% of the balance in the subsequent year. Thus the
withdrawal amount was raised in a later year to 33% to allow the deans quicker access to their
monies.
 
 Some Senior Management Opinions
about RCMS
Dennis Dougherty
Dennis Dougherty had been USC’s CFO for the entire period that USC had used the RCMS.
He was closely involved in the original RCMS implementation, and he thought the system
had served its purposes well over the years. Dennis stated that “One of the advantages of the
system is that it’s very transparent. You can see everybody’s financial statements. But to
make it work you need good information systems, which not all universities have.”
 
Elizabeth Daley
Elizabeth Daley had served as the dean of USC’s School of Cinematic Arts since 1991.
Elizabeth stated that “RCMS enables USC to attract people who like to build something. The
key message in RCMS is very clear: you bring in the revenue, and you manage it, as long as
what you do is academically sound. It allows a school to establish itself, grow itself, and
manage itself.”
Some Senior Management Opinions
about RCMS
Jim Ellis
Jim Ellis, one of the eight USC deans appointed in 2007, was dean of the Marshall
School of Business. Jim stated that “It’s a good system for a school like this one with
critical mass. It carries with it an “eat-what-you-kill” philosophy. We know how much
we need to raise to cover our expenses and to hire new faculty.”
 Problem and Solution
1. Discouragement of innovation
Come from the belief that RCMS forced deans to think of their mission more in financial terms than in
terms of their academic mission and one committee report noted that “innovators whose ideas do not imply
immediate income feel that no one in the system will give those ideas a sympathetic hearing and so are
discouraged from innovating.”

Solution : Since the purpose/goals of non profit organization doesn’t lie in how much profit they can
generate, instead it must be dedicated to the purpose of the organization. The major defining
characteristics of a not-for profit organization's purpose is it mission or goal. So USC should set a clear
goal of RCMS is to be more in educational terms than financial terms because USC is an educational
institution not a company that is concerned with profit. With a clear goals toward educational terms it
can encourage teaching quality and produce new innovation towards educational terms. Sometimes, the
conflict like this happen in non profit organization, because they are commonly unable to do their jobs
effectively if they fail to determine “what matters most”.
 Problem and Solution
2. Discouragement of multidisciplinary research
Some faculty believed that the best research was multidisciplinary, involving
researchers with different skills and perspectives. But since RCMS emphasized financial
priorities, most deans could not see the financial benefits of multidisciplinary research.
Critics noted that little multidisciplinary work was being done at USC. Some blamed the
RCMS and cited examples in which deans had reprimanded faculty members for getting
involved in research with someone from outside their revenue center.

Solution : USC should make procedures or SOPs to share revenue from projects made
with multidisciplinary research. By making SOPs it will make it easier to divide revenue
evenly so that no one is harmed.
 Problem and Solution
3. An open letter sent by some faculty to President Sample stated: The system in place makes few
allowances for the various missions and contributions of the academic units of the university. Those units
unable to show a “profit” under current budgetary formulas are condemned to live in a deficit situation, to
depend upon subventions given after demeaning negotiations, and to face inferior status among other
units in the university. This is not fair for the small school or colleges because if they continue to run a
deficit then this will tougher for them to cover their expense. This may cause them to be unable to grow
and even their schools and colleges may be closed down if this continues.

Solution : By giving special treatment to small schools so that they can generate their own
income without the need for assistance. this can be done by providing academic initiatives
so that they no longer experience a deficit and can make the school grow. Academic
Initiative funding was defined as specific activities for a limited time period. This Initiatives
funding was allocated to support university priorities.
 
 Problem and Solution
4. In the management principles, it is stated that “outcome measures are preferable than process
control”. This can lead the dean to do unethical behavior to get the highest possible revenue
regardless of the rules and faculty members because this principle is only concerned with results

Solution : USC should not only be concerned with results but also concerned with the
processes undertaken to achieve them. by only prioritizing results this can actually make the
dean and others do unethical things such as cheating by manipulating data. USC should
tighten their action controls such as by using a Fraud Control Plan (FCP). Fraud control plan
itself is a program designed to protect the organization from possible fraud incidents, or a
development of controls specifically designed to prevent, detect, and respond to events
indicating fraud.
THANK YOU