Students of management accounting should direct their attention to the UK university sector right now as it appears that the extremely well paid cadre of vice-chancellors wish to imitate British Leyland's 1970s coat allocation death spiral stunt, but with a woke flavouring.
https://twitter.com/HigherEd_UK/status/1735401428578132345
Coat = cost
What is a cost allocation death spiral? And why is it relevant to the British university sector right now?
It's about management not understanding the limits of their own accounts and so destroying their own organisations. Last seen in the great British Leyland fuckup in the 70s
It's about management not understanding the limits of their own accounts and so destroying their own organisations. Last seen in the great British Leyland fuckup in the 70s
Universities, like British Leyland, are divided into lots of departments. Because departments are individual operations they have to have their own accounts and budgets, so that they can keep an eye on their finances. But some of the costs are beyond their control...
...these are the central costs of the larger organisation of which they are a part. This is where it all starts getting political because these costs are controlled by the big boys. In a corporation, that's the CEO & officers, in a university it's the Vice-Chancellor & Pro VCs
...and the problem here is that individual departments in an organisation are usually productive. In a university, they teach and do research. In British Leyland, they made cars and trucks. Central administration isn't productive, it's there to support the rest, and get capital.
Being productive gives someone (or should give someone) a bit of moral weight. Just costing the organisation is a bit embarrassing. Questions get asked. How do the big boys dodge this? They insist on allocating their costs across productive units. That's handy, because...
...it divides the central cost (now called overheads), making them immediately look smaller, and it makes the productive units feel responsible for them, without, of course, giving them any power over them. It also sets productive units against each other. You can improve your...
...department's numbers by winning an argument about how much cost should be allocated to you in a meeting. That's so much easier than actually being more productive. Your boss can favour you by changing the basis of allocation, too, giving the big boys more control...
If this is all a bit morally scooby-dubious, it's fine and grand when money is coming in. It has the useful effect of keeping the big boys and wannabes at each others' throats and out of the hair of those who would like to spend their brief lives on worthwhile things. But when...
But when the pressure is on, and money is tight, this otherwise harmless system for diverting the powerful from annoying ppl becomes a liability. It can turn a crisis into a drama and then a disaster, by means of the cost allocation death spiral. What happens is this...
When the organisation's revenues fall, panic sets in. The organisation starts looking at profitability and because it's all set up around departments in the first place, that's how management think in a crisis. Unproductive units must go, so they look at the unit accounts...
...and pick a productive department with the least "profit", and close it. Wonderful! Next year will see a return to profit! Except it doesn't. That's because the central cost, the overhead, hasn't gone anywhere. That can't be cut. It belongs to the big boys. And so...
...the overheads have to be allocated somewhere else, over fewer departments. That means another unit looks unprofitable, so they close that, then more departments look bad, and the death spiral begins, and destroys all of the productive units, one by one, until it all goes bust.
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