More states across the country are switching to performance-based budgeting as a funding method for public universities. By mid-2018, 36 states had already approved or enacted a performance-based funding plan for their respective schools. During a time when resources are limited, and the cost-benefit analysis of higher education is in question, there’s a need for better budgeting techniques that ultimately improve performance. In other words, funding should be focused on promoting outcomes rather than inputs.

When higher institutions being driven by goals such as graduation rates, GPA, or employability of students, the overall quality of education tends to increase. Furthermore, limited resources will be maximized towards specific outcomes that elevate performance. 

Implementing performance based budgeting sounds easier than it is. Higher ed institutions need to plan for this approach from the ground up- taking time to establish measurable and achievable goals that they can use to get more funding.  

What Is Performance Based Budgeting?

Performance based budgeting is an approach where institutions are evaluated against specific outcome objectives. Funding decisions are based on how well the institution meets its benchmarks. 

Under a performance based model, budgets are prepared in proportion to goals/outcomes. Such an approach allows for funding bodies (such as states and grant organizations) to better evaluate performance and determine the effectiveness of budget plans. A performance-based model could be a formula that’s based on key performance metrics or a targeted model that aims to reward a specific outcome. For example, a higher Ed institution that increases its graduation rates may be directly funded under a performance-based approach.    

Why Performance Based Budgeting Makes Sense In Higher Ed 

There are many reasons why performance-based funding is effective. By focusing on outcomes rather than inputs, the institution will be more efficient and effective during daily tasks. Furthermore, it establishes a culture of accountability as higher performance results in more funding for future activities. When clearly-defined goals and objectives drive institutions, they’re more likely to achieve those outcomes. 

Performance-based budgeting also makes it easier to track funds after they’ve been disbursed for a specific cause. If the Higher Ed institution is to be funded based on student retention rates, then additional resources can be channeled towards this goal- based on performance. 

The primary challenge that Higher Ed institutions face is increasingly tight budgets. Many funding organizations (such as state governments) are looking to cut funding to Higher Ed due to limited resources. By following a performance-based approach, justification can be made as to how resources are being used during every budgeting period. 

Tying budgets to specific, measurable, and attainable outcomes is one of the most effective ways to keep the money flowing. Budgets that are flexible and responsive are also better suited to handle the complex tasks that are required in Higher Ed. 

Implementing A Performance Based Budgeting Approach 

As promising as performance-based budgeting sounds, this approach can turn into a nightmare if you don’t plan properly. For example, unrealistic goals may limit funding opportunities and further complicate the challenges being faced by a particular institution. 

In cases where low performance can be tied initially to limited funding, then decreasing funding below current limits will compound the issue. This is why proper planning and benchmarking is critical. By setting the right types of goals/objectives, performance-based budgeting will elevate performance without having unintended negative consequences. 

Implementing this approach should include the following steps:

1. Start with a method for allocating resources

Even before a performance-based approach can be implemented, you’ll first need a plan for allocating resources. Resources should be directed towards supporting critical functions within the institution. However, the performance-based budget should be structured such that fluctuations in performance don’t end up crippling critical operations. The performance-specific areas of your budget should be scalable such that more resources directly result in better performance (and vice-versa). 

2. Establish a culture of accountability

Those who determine performance (and those responsible for measuring performance standards) should be held accountable for their specific tasks. For example, a career center that receives performance-based funding for connecting students to internships should have career professionals who clearly understand their roles. Career staff who are being driven by established goals are more likely to encourage and assist students when such students are seeking professional opportunities. 

3. Have transparency in the budgeting process

The budgeting process should also be transparent such that everyone understands the effect they have on the bigger picture. If all stakeholders are aware of the consequences of their actions, they’re more likely to hold themselves accountable and remain motivated. 

4. Limit consequences when goals aren’t met

Finally, performance-based budgeting shouldn’t be a punishment for not attaining goals/objectives. It should be tailored towards boosting efficiency, accountability, and performance while minimizing unintended consequences. This can be done by focusing on the core needs of the institution rather than being consumed by goals/objectives. 

Lisa David

As a partner at eCapital Advisors Lisa David is responsible for the go-to-market strategy and solution delivery for clients and prospects. She brings her extensive experience as a sales leader and technology expert to her role in marketing and business development. Her favorite part of the job is the perspective of the “before and after” for prospective customers—hearing about the success of analytics and what it did to improve their business in a meaningful way.

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