This is the second installment on budgets; the first part can be found here. We continue describing various budget models, then offer key points for developing a new budget or evolving a current one.
Incremental Budget (IB) Model
The incremental budget (IB) model is probably the simplest to understand and apply, though setting resource levels for the first time can be challenging or should use a blended approach with other models. Essentially, this model builds a new budget for the fiscal year based on the previous year’s budget. It adjusts allocations up or down by factoring in changes such as revenues, enrollment and inflation within the broader framework of institutional expenses.
In its purest form, this model does not deeply analyze historical data trends or market trajectory. Implementing it effectively usually requires a stable institutional environment.
Advantages (Pros)
The incremental model works most effectively in periods of institutional stability or when an institution can manage enrollment and revenue generation predictably, particularly if it has large applicant pools and low acceptance rates, so it can control program size. In such environments, the model is straightforward and effective, minimizing disruption, enhancing predictability and easing annual budget pressures on leaders.
Tradeoffs (Cons)
Drawbacks to the incremental model include its tendency to reinforce the status quo, offering limited incentives to innovate, grow or take strategic risks. It can delay identifying emerging issues and relies heavily on historical trends, which is acceptable in stable conditions but less effective in dynamic or shifting environments. The model may continue funding programs that are in decline and, depending on its application, stifle innovation and experimentation with new initiatives.
In summary, the incremental model can be a useful approach when institutional conditions are steady. It can also be adapted into blended models, for example, where the incremental increase is tied to performance metrics, enrollment growth or other revenue-generating activities. Additionally, incremental budgeting can be incorporated into models like RCM by averaging metrics and revenues over a multiyear period to smooth fluctuations and enhance planning.
Strategic Budgeting (SB) Models
Strategic budgeting (SB) models tend to be more structured and focus on the university’s highest priorities and long-term ambitions. Of all the budget models, this one most directly ties each dollar to the strategic plan and the institution’s vision for the future. It is forward-looking and mission-driven, prioritizing future needs and institutional aspirations over historical practices or legacy initiatives.
This model emphasizes long-term impact—putting the university on a critical path to realize its goals. Especially with launching a new strategic plan, it enables resource allocation and reallocation toward top institutional priorities. Because strategic plans are typically developed with broad campus and stakeholder input, that engagement often leads to greater buy-in—at least during the early stages of implementation.
Advantages (Pros)
Strategic budgeting’s primary strength is its focus on long-term institutional goals. By tying every dollar to a strategic objective, the model helps maximize resources and concentrate investments on what matters most to the institution. Since strategic plans are usually created through inclusive, campus-wide processes, the resulting budget decisions tend to reflect a shared vision and broad stakeholder input, keeping the institution focused and disciplined on the critical path that defines their future goals.
Tradeoffs (Cons)
The model does carry risks, particularly if investments are tied to ambitious initiatives with uncertain outcomes. It requires a high degree of discipline and may face criticism from units with declining relevance or those not central to the future vision. It can lead to underspending on longstanding priorities and a decline in the revenue these longstanding priorities generate, as long-term stakeholders feel abandoned. Strategic budgeting also demands significant data infrastructure and administrative capacity to monitor progress and adjust course. Additionally, aligning strategic priorities with long-term labor obligations and legacy costs can be challenging.
In summary, it is likely not feasible to apply the strategic budgeting model in its purest form, as many strategic plans include a mix of aspirational goals and actionable strategies. Allocating funds based solely on ambition can be difficult and, to some extent, not even possible. However, staying aligned with the institution’s strategic direction is essential, and a blended approach where the SB model guides funding priorities can be both practical and powerful.
Activity Based Budgeting (ABB) Models
The activity-based budgeting (ABB) model is, in some cases, the hardest to understand. It is by definition a blended model of what has already been discussed. It is essentially based on a detailed analysis of activities, cost drivers and revenue sources.
What differentiates this model from others like RCM is the formation of various groupings. Activity groupings might include instruction, research, public service, academic support and more, and they may or may not align with traditional units or be solely in one unit. For example, a grouping that doesn’t fit neatly into the traditional higher education template might be a transdisciplinary initiative or program—one that cuts horizontally across the vertical silos of typical academic structures. These cross-disciplinary and cross-functional programs are becoming increasingly important in higher education.
Fund-source groupings include restricted, unrestricted, auxiliary, designated, endowment, facilities, grants and contracts, net tuition and state subsidy.
Activity-based campus activities may include student credit hours delivered, student enrollment and completions, research funds secured, clinical services delivered (e.g., in health or medical colleges), community engagement events and administrative support services. The activities tracked can also include expenses that are difficult to measure, such as the amount spent on information technology, are embedded in almost every unit of a university. The ability to better understand the extent and possible duplication of these costs can be helpful to build a more efficient budget.
This activity model considers both the activity and fund groupings through a macro-level lens, attempting to add up everything in an activity area.
Consider student success. In many budget models, student success might be housed only within academic affairs, and metrics like retention, graduation and placement rates would be used to allocate resources to academic units. In reality, student success spans academics, student life, tutoring, health, career services, advising, student life experiences and more. Other models may overlook the true total cost of student success or treat contributing units as simple cost centers. By grouping all related activities together, activity-based budgeting provides a more accurate picture of the full cost of this critical outcome.
Advantages (Pros)
This model brings a high degree of transparency to how resources are utilized across specific campus activities, from teaching and research, student life and student success to administrative processes. It helps estimate the true cost of each activity, providing a more holistic assessment across units. It also incentivizes collaboration over competition, since shared success in cross-unit activities benefits the whole institution.
Tradeoffs (Cons)
The model’s complexity is a major challenge. Attempting to allocate each dollar of revenue or cost to specific activities is time intensive and often difficult to execute precisely. Gathering the necessary data and accurately attributing proportional effort can tax time and resources. Another challenge is that the horizontal cost pools will likely cross over the traditional vertical lines of managerial responsibility, making it difficult to establish clear lines of responsibility for financial and program management.
In summary, if you’re new to budget models, activity-based budgeting may resemble others at first glance. However, its distinction lies in its effort to fully capture both costs and revenues by activity, rather than by traditional academic or administrative units. It is particularly well suited to transdisciplinary efforts, which naturally cross academic and divisional lines. If you’re more experienced with budget models, you’ll recognize its significant overlap with other models, though its focus on full cost accounting and cross-functional collaboration sets it apart.
Blended Budgeting Models
Choosing or changing a budget model depends on many factors: the institution’s size, scope and type (public vs. private vs. for-profit), its complexity, its strategic goals and long-term vision, its current financial outlook and present financial position.
Given today’s massive and seemingly endless challenges, it is highly unlikely that any institution can implement a budget model in its purest form. Most institutions have either evolved toward blended models or are in the process of making such a move. These hybrids provide the flexibility to allow growth in expanding units, incentivize institutional priorities and maintain some year-to-year stability without drastic fluctuations.
For example, a university might use an RCM model combined with performance metrics from an outcome-based model, a multiyear averaging approach to stabilize budget swings, alignment with strategic plan priorities, a zero-sum mechanism at the unit level and elements of activity-based budgeting tied to the critical path of institutional goals.
Alternatively, institutions may apply different models at different organizational levels. For example, the university-wide budget may be aligned with a strategic model, academic affairs may operate under RCM principles, colleges may use performance-based budgeting, and departments may apply a zero-sum model.
We have deployed an RCM-like model for years at our institution, with various renditions to average out over the years and avoid large swings in the budget model (e.g., multiyear averages). We are adopting a new model in the coming years, after about a year of contemplating how to deploy resources in fair and equitable ways during disruptive times, which involves elements of RCM, PBO, IB and ZBB.
There are many ways to design a financial model, and each institution is unique, whether it’s a small liberal arts college or a large, comprehensive, public land-grant university. Models may differ, but the common theme today is disruption and the need for adaptive, sometimes radical, shifts in budgeting.
Each institution also has different enterprise systems and methods for data capture. Technology, data analytics and artificial intelligence will all play increasingly critical roles in the platforms used for budgeting. Some institutions use modern AI-enabled systems while others rely on legacy or even homegrown platforms. When possible, leverage the best technology available and enhance older platforms with add-on tools to support your model. Technology matters, from ease of use and real-time insights to mitigating frustration from inaccurate or delayed data.
14 Key Points When Considering a New Budget Model
Based on years of leadership experience across top private, land-grant and midsize institutions, from elite, very selective, selective and open-access universities, here is some advice for contemplating a new model or blended model:
- Understand the fundamentals of each model
Study the features of each budgeting model in its pure form, knowing the outcome is likely a blend. Speak with colleagues at other universities to learn how their models work and how they’ve evolved—the good, the bad and the ugly.
- Engage your board early to understand their guardrails
Boards may have non-negotiable rules, such as balanced budgets across all units, no deficit spending or required maintenance funding. Know these constraints up front.
- Align with state performance metrics (if a public institution)
Many states are shifting toward performance-based funding. Map your budget model to these outcome metrics where appropriate with the state funding model.
- Obtain stakeholder input
Engage faculty, staff and students. Share board expectations and listen carefully. If a unit is underfunded, it may be perceived as undervalued. Units that are growing without more investment may feel underappreciated and rightly ask for more resources. This situation is difficult; the new budget model is unlikely to please everyone.
- Identify mission-critical efforts that require funding without direct revenue
Some institutional priorities may not generate revenue. Determine in advance which ones require funding, how they contribute to the mission as a whole and how to measure their performance in nonrevenue terms.
- Avoid commitment to a single model—build a thoughtful blend
Stay flexible. Choose components that incentivize desired behaviors and outcomes. Be strategic about what you’re trying to achieve.
- Match the model to your institutional culture
An entrepreneurial, outcome-driven institution may lean toward RCM or performance-based models. Traditional campuses with sound finances may benefit more from predictable, incremental approaches.
- Experiment within the model
Even in a conservative budgeting environment, try small pilots of incentive-based components. Measure their impact. You can always scale up or down, eliminate or add.
- Boundary test the model
Before launching, assess the impacts on both high-performing and struggling units. Compare results with your current budget model. Ask: Are these the desired outcomes?
- Pressure test for disruption
One can also experiment with new models, simulating budget outcomes based on historic institutional data to estimate the new model impact on various units. Simulate scenarios: stable environments, inflation spikes, enrollment drops, endowment shortfalls, rising tuition and discount rates, etc. See how the model holds up to change, both small and disruptive. You may even go as far as asking whether the budget model can hold up to another worldwide pandemic.
- Step back and anticipate behavior
People will respond to incentives or find other ways to increase their budget. Consider unintended consequences: Will units try to game the system? Will collaboration suffer? Will the model foster behaviors align with institutional strategy?
- Build in Contingency—The Rainy Day Fund
While it is essential to track every dollar, it’s equally important to establish a strategic contingency—your safety net. This reserve ensures flexibility when unexpected challenges arise, such as a missed fall class, a recession, rapid drop in the stock market, a sudden drop in research funding, a pandemic or an emergent opportunity. Planning for uncertainty is a hallmark of sound financial stewardship.
- Track and Score in Real Time
Budgets can no longer serve as static, yearlong roadmaps. They must be dynamic and responsive. Implement real-time mechanisms such as cross-functional committees to track and evaluate unit-level budgets continuously in alignment with strategic goals. To enhance transparency and decision making, actively involve unit CFOs in this process, so they can contribute to and understand the broader financial narrative.
- Be ready to tweak, modify and pivot often
No model is perfect. Adjust when it stops working or incentivizes the wrong behavior. Budgeting is dynamic; your model should be, too.
Conclusion
There is no one-size-fits-all solution. Your institutional culture and your financial circumstances will heavily influence how budgeting is implemented and received. It’s hard work, but it’s essential. Budgets must be resilient and responsive in times of disruption and change.
Also, never underestimate the behavioral impact budget models can have. While you may design them to drive intentional behaviors, individuals and units will seek to optimize outcomes for themselves, which may or may not align with institutional priorities.
All institutions are facing challenges, some more than others. But a robust, well-designed and adaptable budget model can help your university stay strong and strategic, even amid the myriad disruptions reshaping higher education.
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