We are navigating an unprecedented era in higher education. Demographic shifts, fewer high school graduates, options beyond higher education, waning public confidence, diminishing state appropriations for public institutions, declining federal spending on higher education, accelerating technological change and evolving student preferences—now heavily weighted toward professionally oriented and STEM programs—and families’ and students’ insistence on clear, lucrative career outcomes have radically altered the higher education landscape. Increasing enrollments and revenue every year to keep pace with rising costs and the new demands placed on higher education is no longer a given and requires institutions to significantly modify or even overhaul their financial structures, so every dollar is purpose‑driven and aligned with their core mission and strategic priorities.
Once a reliably expanding sector, higher education now faces shrinking revenues, retrenchment, mergers and even closures. While the global pandemic accelerated these pressures, signs of sector softening emerged well before 2020. In this new normal—characterized by continual disruption—budget models will come under unprecedented scrutiny and must evolve to meet future higher education needs. Instead of a one‑size‑fits‑all approach, many institutions are pursuing hybrid financial frameworks: integrating line‑item budgeting with zero‑based reviews; embedding responsibility center management, tying resource allocations to performance metrics; and implementing incremental mechanisms to ensure year‑over‑year stability. The goal is to optimize cost structures, enhance transparency and maximize return on investment from strategic academic and research initiatives.
However, persistent structural challenges remain. Labor is the largest fixed cost for most colleges and universities, but institutions cannot reallocate faculty and staff as nimbly as the market demands or pivot as swiftly as industry when enrollment patterns shift. Inflation outpaces the sector’s ability to raise tuition, eroding purchasing power as costs increase significantly. With undergraduate enrollment projected to decline over the coming decade, these headwinds will intensify budgetary pressures and test institutional leadership. Numerous articles and essays have addressed this issue. Below, we examine several leading budget models through the lens of our higher education experience, share our perspective on their strategic advantages and tradeoffs, and recommend how to craft a blended financial model fit for the challenges ahead. Based on our experiences, we also provide some key points to consider when adjusting or transforming budgets.
Responsibility Center Management (RCM) Model
Responsibility center management (RCM) is a widely adopted budget model, especially at large, research‑intensive institutions, that delegates operational authority and financial accountability to divisions such as schools, colleges, departments and other semiautonomous units. Under RCM, each unit retains its revenue streams—its allocated share of net tuition revenue from enrolled students, designated gifts, endowment distributions and indirect cost recoveries from external grants and its share of state appropriations and other jointly generated revenue—and assumes responsibility for both its direct expenses and a proportionate share of university‑wide costs such as facilities, IT, finance, admissions, student success and library services. In practice, this structure rewards entrepreneurial initiatives. Units that launch new programs or forge external partnerships generate enhanced revenue, and they may retain and reinvest in strategic priorities rather than see surpluses absorbed centrally.
Advantages (Pros)
RCM’s greatest strengths are its transparency and accountability. By clearly delineating which revenues and costs belong to each unit, RCM aligns financial incentives directly with mission‑driven performance and goal achievement. This model motivates university leaders—deans and department chairs—to expand high‑demand programs, enhance student recruitment and pursue external funding, bolstering their unit’s financial foundation. Moreover, because dollars follow revenue-generating activities, institutional leadership can swiftly redirect resources toward emerging academic or research initiatives. In this way, RCM fosters an entrepreneurial culture in which spending prudently and strategically reinvesting surpluses become central to each unit’s success.
Tradeoffs (Cons)
Despite these advantages, RCM comes with tradeoffs. When units compete for limited net tuition dollars, internal collaboration can suffer, and mission‑essential but revenue‑constrained areas often require explicit central subsidies. As a behavioral model, RCM can generate unintended incentives or be gamed without rules and metrics carefully calibrated to long‑term institutional objectives. Furthermore, because labor and infrastructure represent high fixed costs, units cannot downsize or reallocate resources as nimbly as the changing market demands, introducing financial volatility. Without smoothing mechanisms—such as multiyear rolling averages or dedicated reserves—RCM can produce unpredictable swings in unit budgets that undermine effective planning.
In summary, RCM embeds entrepreneurial risk‑and‑reward dynamics, strategic alignment and fiscal discipline at the unit level. To temper its volatility and ensure stability, many institutions enhance RCM with elements of activity‑based costing (e.g., one-degree offering could cost more than others), performance‑based funding (e.g., tied to desired outcomes such as publications, grant funding and graduation rates) and multiyear smoothing (averaging over the past x years) mechanisms. When thoughtfully designed and governed, these blended approaches—often incorporated as a guardrail—can create a nimble, mission‑driven financial ecosystem that aligns every dollar with institutional priorities while supporting sustainable growth and innovation. No matter what choice of budget model, there are no doubt elements of RCM in setting the budgets whether intentionally or unintentionally.
Performance-Based Outcome (PBO) Model
Performance-based outcome (PBO) budgeting can have elements of the RCM model, such as revenue generation, but it can also incentivize other metrics and priorities that may not necessarily be in the revenue stream directly. In most cases, some metrics in performance-based modeling include those described in the RCM model, such as a proportion of the student net-tuition revenue. Other metrics to incentivize outcomes might include scholarly publication numbers or quality of faculty research, retention rates and graduation rates of students, student time-to-completion or graduation, a philanthropy target for scholarships, number and success of low-income or first-generation students, national or discipline-specific rankings for a unit, reducing energy costs in a unit building, for each of the particular units. The performance model focuses on desired outcomes—usually enhancing academic excellence and reputation—that may or may not be directly or indirectly related to revenue. Performance models, much like RCM models, often decentralize budgets down to units, as the units are the ones held to metrics, outcomes, standards and measurables.
Advantages (Pros)
One of the performance model’s greatest strengths is transparency and accountability, focusing on the metrics that will advance the institution. It provides a budgetary means to measure excellence and provides institutional leaders with insight into how the budget generates well-defined outcomes. It is a way to drive toward results. For public institutions, the state funding model often can be performance-based and driven by outcomes. The model also spotlights weaknesses, enabling leadership to plan strategically to work with units that missed metrics to improve outcomes in subsequent years. The model benefits units that seek excellence in all they do and overall resonates with more entrepreneurial and competitive-driven leaders.
Tradeoffs (Cons)
Applying such a budget model requires thoughtful consideration of which metrics to utilize and why, as well as how often to change or refine them to stay aligned with the institution’s priorities. This model also requires a robust data set to avoid criticism that the method for counting or measuring metrics is flawed. Well-defined outcome metrics matter. Institutional leadership should also have a process ready to help units improve if they are challenged to meet the metrics, so units feel supported in their efforts to improve or retool their programs to better align with student and institutional priorities. In a time of decreasing resources, programs that start experiencing declines due to the rapidly changing landscape can suffer an irreversible downward spiral without efforts to better align with student demand and the institution’s priorities.
In summary, embedding performance-based metrics into a budget model will incentivize units to drive toward institutional goals and priorities. Because of the decentralized nature of performance-based outcome budgeting, there is certainly overlap with the RCM models. Performance models may also consider revenue generation as a metric, with added performance-based outcomes, so this model can often be blended with or even resemble an RCM model.
Centralized Budgeting (CB) Model
Centralized budgeting (CB) consolidates budget authority with the president or chancellor and the institutional leadership team. While it would be difficult to ignore revenue generation or outcome-driven metrics when allocating resources, this model directs funding toward the institution’s highest-priority areas and needs. For example, an institution implementing a new strategic plan or undergoing a significant pivot, where returns on investment may not materialize for several years, might prefer a centralized approach. It allows leadership to allocate resources quickly to key investment areas, even in the absence of immediate financial returns or performance metrics. This model is often more practical at smaller, more focused institutions. At medium to large institutions, the practicality of a fully centralized budget model is more limited.
Advantages (Pros)
One of the greatest strengths of the centralized budgeting model is its ability to respond rapidly to environmental changes or emergencies and crises—such as a drop in enrollment, a decrease in research funding, or the impact of significant inflation on spending. The ability to reallocate funds quickly is a key advantage. It also enables the leadership team to reduce duplication such as offering similar courses in multiple units, maintaining multiple software licenses or subscriptions or entering into consulting agreements that could be coordinated centrally to conserve resources.
Tradeoffs (Cons)
If the leadership team does not actively seek input or closely follow key outcomes, metrics and revenue trends, the centralized budget may lead to underfunding or overfunding programs and initiatives. It might also result in a lack of transparency between units, as leaders may not fully understand the performance data or rationale behind budget allocations. Additionally, the model may not adequately support and could even deter entrepreneurial initiatives or innovations within specific units. It may also result in a laissez-faire attitude, comfortable relying on historical and stable trends, which is not the situation in which we find ourselves today in higher education. In its purest form, this model would be difficult—if not impossible—to implement and achieve the desired outcomes at midsize to larger institutions.
In summary, the centralized budget model is more appropriate for smaller institutions, where institutional leadership can closely monitor and track progress and identify issues and trends to adjust resources. In the end, setting up such a model would probably utilize tactics of RCM and performance-based outcome models to set the initial budget and may rely on incremental budgeting practices to adjust funds year over year.
Zero-Based Budget (ZBB)
Zero-based budgeting (ZBB) is a method of budgeting where all expenses must be justified for each new budget year. In its purest form, it is just that simple—a breakdown or justification of previous year spending and building an entirely new budget each year. Instead of starting with the previous budget and making additions or reductions, ZBB begins from a budget of zero, requiring a fresh evaluation of every expenditure. This approach compels budgeters to justify each expense, regardless of whether it was approved in the past. While it can be applied in multiple ways, unit leaders typically make an annual bid for resources, and administrative oversight holds them accountable to performance metrics and institutional priorities.
Advantages (Pros)
ZBB enables the institution to see strengths and weakness in the budget more rapidly thanks to year-over-year scrutiny, reducing the renewal of outdated, low-impact spending. This approach supports more rapidly repurposing resources from low-impact to high-priority areas. Such frequent oversight elevates accountability tracking and transparency.
Tradeoffs (Cons)
ZBB is a time-intensive and data-driven process. For medium to larger institutions, this method may be impractical or burdensome to apply, especially in its purest form. It can also dilute decision making at the local level and, if not careful, put at risk units that are stable and operating effectively.
In summary, the ZBB approach is a way to target strategic allocation and reallocation and instill strong fiscal stewardship if implemented thoughtfully. It can create a strong synergy between the central CFO and the divisional CFOs, as they will collaborate on budgets much more frequently. ZBB is a rigorous model to apply, perhaps the most time-intensive budget model. It is difficult to implement practically for larger institutions. It can, however, be a budget tool for units to use with new, emerging or struggling programs to increase oversight as programs ramp up or decline.
Zero-Sum Budgeting (ZSB)
Zero-sum budgeting (ZSB) is a modified form of ZBB that can help a university prioritize resource allocations among academic programs and units. ZSB is a budget methodology that evaluates each academic program’s financial performance within a college or school without the cross-subsidization of other academic programs that is common in the RCM budget approach. This approach requires the provost-level or dean-level leadership to evaluate how much they are willing to subsidize an academic program although the overall college or school may be generating a surplus.
Enforcing this approach requires chairs to justify the amount of subsidization their non-revenue-generating or underperforming programs should receive and encourages them to develop plans to improve the underperforming program’s financial performance. This budget approach also encourages deans and provosts to assess the negative impact the subsidization has on under-resourced academic programs or the opportunity cost of not being able to allocate those dollars to new or higher performing academic programs.
The ZSB budget model is highly flexible but requires a strategic decision each year about what programs to subsidize, how much subsidy to provide to a program and the opportunity costs associated with these decisions. The model requires great discipline and more frequent allocation decisions from both central and unit leaders responsible for their budgets. It arguably enforces the highest degree of transparency and accountability, particularly at the unit and program levels.
Advantages (Pros)
Zero-sum budgeting allows for more granular oversight and control, making it easier to monitor budget performance at the unit level. It quickly identifies financial issues for a program, unit or department, especially when enforced for every academic program a department offers. Because it requires ongoing justification of resource needs, it fosters accountability and exposes underperforming or struggling units.
In times of decreasing revenue, the model helps institutions prioritize which activities and programs to subsidize beyond their direct revenue streams. When applied at the department or smaller unit level, financial performance becomes more visible, though it can be labor-intensive to manage. It also allows leadership to identify problems earlier and pivot more quickly, rather than discovering issues that might be buried within larger, aggregated budgets. ZSB offers a strategic approach to the age-old problem of how to prioritize where to reallocate resources from when revenues are not growing or, worse yet, are declining in order to generate the needed revenue growth and avoid equally cutting all the slices of a shrinking pie.
Tradeoffs (Cons)
The main disadvantage of zero-sum budgeting is that, when applied at a granular level and benchmarked against metrics or revenue performance, it requires significant resources to adequately monitor the performance of so many programs. It also demands a robust data infrastructure and constant data collection.
Applying zero-sum budgeting in a university environment can be challenging, given long-term academic programs develop a feeling of ownership to their faculty lines. Cross-subsidization of academic programs has long existed at colleges and universities and is often taken for granted. While increased transparency regarding every program’s financial performance is certainly needed, redistributing funding among academic programs often requires constant prioritization of programs and cost and time to change an academic program’s cost structure. If an institution implements this model in its purest form, it has the benefit of identifying underemployed financial resources that can be redirected to support new initiatives or provide increased investment in existing programs. However, temporary enrollment fluctuations are common, and decision makers must determine if enrollments are likely to return in the future or risk creating the problem of how to return resources to a program that was previously cut. Annually monitoring and justifying each unit’s budget can also be time-consuming, labor-intensive and exhausting for staff and leaders alike.
In summary, the ZSB model cannot be executed in a vacuum. It will probably rely on blended models such as RCM or PBO budgeting to set and track budgets. It can be a blended model, setting the budget initially and each year with RCM or PBO budgeting, or the provost or deans can take an RCM-type model and apply ZBB to the units that report to them.
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