University of Oxford - Resource Allocation Method - (1) to No 4590



<br /> Oxford University Gazette: University's Resource<br /> Allocation Method IN U/L (supplement)

Oxford University Gazette

University of Oxford: Resource Allocation
Method

Supplement (1) to Gazette No.
4590

Wednesday, 20 June 2001



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To Gazette No.
4591 (22 June 2001)

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Introduction

1. This notice summarises the new university
resource allocation method (RAM) which has now been
approved by Council to govern the allocation of
university resources to divisions/OUDCE, and academic
and non-academic services, from 2001--2 onwards. The
paragraphs which follow set out the rationale for, and
main objectives of, the new method, and give details
of the formulaic and non-formulaic elements embodied
within it.

2. Further details on any aspect of the method may
be obtained from relevant staff of the Planning and
Resource Allocation Section in the University Offices
(and in particular Mr M.D. Sibly, telephone: 80303, e-
mail: michael.sibly@admin.ox.ac.uk, or Mrs S.E.
Samuelson, telephone: 80317, e-mail:
simonne.samuelson@admin.ox.ac.uk, or Mrs V.M. Wood,
telephone: 80678, e-mail:
veronica.wood@admin.ox.ac.uk). Details will also be
posted shortly on the Section's Web-site, to be found
at http://www/admin.ox.ac.uk/pra/.

3. The new resource allocation method has been
developed centrally under the aegis of Council's
Planning and Resource Allocation Committee (PRAC), and
it is intended primarily as a method of allocating
resources to divisions/OUDCE, and to service units.
Subsequent allocations of funds to individual
departments, faculties and sub-faculties, are the
responsibility of the new divisional boards. Details
of the application of the new method within each
division may be obtained from the relevant divisional
board secretariat.

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Background

4. The new resource allocation method (RAM) is an
integral part of a programme of measures which the
University is introducing as part of its new
governance structures. In particular it forms an
essential component of the new devolved budgetary
arrangements, whereby responsibility for setting the
principal academic budgets has been devolved to
divisional boards. Whilst Council through the PRAC
remains ultimately responsible for approving proposed
divisional budgets, and for monitoring activity
against them, responsibility for determining detailed
spending decisions now rests with divisions.

5. The new method is also intended to provide an
improved and more comprehensive approach to setting
the service budgets—both academic services and
university collections (including libraries, museums,
and OUCS), and non-academic services (including
Council departments, the central administration,
Health and Safety, etc). The level of service budgets
is an important strategic issue for all universities,
and is especially so for Oxford, given the importance
of many of its facilities not only for the University,
but also for the national and international academic
community and the wider public as a whole. Service
budgets will in future be set by a comprehensive
analysis of the scope and costs of planned activity,
and of how this relates to the needs of academic
divisions/OUDCE, and to the strategic aims and
objectives of the services themselves. For 2001--2,
this new approach proved to be an extremely valuable
exercise, even though relatively little time was
available to undertake it. In future years, in
consultation with academic divisions, the process will
become even more thorough.

6. Another major objective of the new method is to
enable the University and its constituent units to
adopt a more integrated and comprehensive approach to
resource allocation and budgeting. Under previous
arrangements, responsibility for these matters was
usually divided, and it was often difficult to obtain
an overall picture of the level of resources being
allocated to a given activity. The new method seeks to
avoid this fragmentation, and to consider all the
resources available to the University, and how these
are allocated and used. The aim is to make resource
allocation clearer and more readily understood, so
that the level of resources allocated to a particular
subject area or service is clear, and the basis on
which these resources have been allocated is fully
transparent.

7. Overall, therefore, the object of the RAM is to
link resource allocation more closely to the
University's academic aims and objectives, by
directing resources to planned teaching and research
activity, and associated support services, and by
providing financial incentives to divisions and
departments to maximise the University's net income
from all sources.

8. Specific principles which underly the new method
described below therefore include the following:

(a) Resources should follow planned
activity
, and encourage achievement of the
University's policy objectives: this underlines the
vital importance of the new planning arrangements
approved as part of the new governance structure,
development of which will be a major priority for
Council and its committees, for the divisions/OUDCE,
and for the services in the coming years.

(b) Comprehensiveness: it is
important that account is taken of all University
income and all planned expenditure, from the very
beginning of the resource allocation process. This
will not only encourage clarity and coherence, but
will also enable the University to make the most of
the resources available for particular activities.

(c) Clarity, stability, and
simplicity
: it is important that the process of
resource allocation should be readily understood, so
that it is clear why a particular level of resources
flows to a particular area of activity. Greater
transparency of this sort will also enable divisions
and their constituent units to know more readily how
planned changes in activity will affect income levels.

(d) Incentives: arising from
this, the new method makes it possible to incorporate
a range of incentives to encourage the achievement of
particular policy priorities, the maximisation of
income from all sources, and the more efficient use of
resources. The detail of the incentives can be
altered, so that changes in external circumstances, or
changes in the University's own priorities, can be
accommodated.

9. The new method is the outcome of a considerable
amount of detailed development work, and consultation
with divisional boards and other bodies. Council
believes that it now forms a balanced and integrated
package, which will provide a robust and well-grounded
basis for future resource allocation within the
University. It will foster greater coherence and
clarity in resource allocation, and more effective
planning. It will also encourage better cost
awareness, and thus make clearer the financial
implications of particular policy decisions. Above
all, it will better equip the University to achieve
its academic purposes.

10. At the same time Council also recognises that
more development work is needed (and some examples of
this are given at the end of this note). This work
will be undertaken by PRAC, in consultation with
divisions and other units, next year. In addition,
introduction of the new method represents a major
change which requires careful management. Transitional
arrangements are necessary, and further details of
these are given below.

11. The new method also relies heavily on the use of
accurate data on financial, staffing, and student
matters. It highlights the importance of improving the
quality and flow of management information in these
areas within Oxford. The new resource allocation
method will both encourage, and be served by, the
improvements in these areas which have already been
initiated, and will continue over the next few
years.

12. Council also thinks it is essential to distinguish
between the impact of the introduction of the new RAM,
and the general financial constraints which affect the
University. The University's overall financial
position is unaffected by the new method: the volume
of resources available for distribution is not
influenced by it. As pointed out above, however, it is
hoped to use the method to give incentives for
improving the financial position and it will also
enable the financial position of all budget areas to
be scrutinised and analysed more effectively.

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Details of the new resource
allocation method


Funds available for
allocation

13. The starting point for resource allocation under
the new method is to estimate total university income
for the forthcoming year. For 2001--2, the first year
of operation of the new method, the estimated total is
currently just c.£343m.

14. This total comprises income from a variety of
sources. The two biggest elements are HEFCE grant
(£122.5m in 2001--2), and income from research
grants and contracts (estimated at £127.6m for
2001–2). Other significant components include
income from university composition fees and trust
funds. It should be noted that whilst some elements in
the total are known with a high degree of certainty at
this stage (especially the HEFCE block grant), other
elements remain estimates, and the actual level of
income will be dependent on factors such as the level
of student recruitment, and continued success in
obtaining research grants and contracts.

15. The next step in the new method is to set aside
from this estimated total funds which are to be held
centrally and are thus not available for distribution
to divisions/OUDCE, or for the funding of services.
There are two principal elements here: the transfer to
colleges of the college fee replacement income
(£34m), and provision for central contingencies,
reserves, or special initiatives, amounting in
2001–2 to approximately £7m. (This figure
has been kept as low as possible in 2001–2 given
the general pressure on resources.) This leaves
remaining income of approximately £302m for
allocation in 2001–2.

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Basis for allocations

16.The method for distributing this sum comprises
three distinct components:

—direct allocation of a substantial proportion of
total income to divisions/OUDCE, and to services, on
the basis that the income in question is clearly
generated directly by the relevant unit;

—the formulaic allocation of remaining income to
divisions/OUDCE; and

—a formulaic infrastructure charge, to fund those
elements of service budgets which are not covered by
the direct allocations at (a) above.

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Directly allocated income

17. The directly allocated income (item 1 above)
consists of three principal elements:

(a) All research grant and contract
income
, including 100 per cent of overhead
payments on such grants and contracts (totalling an
estimated £127.6m for 2001–2). It should be
noted that whilst the direct income associated with
research grants and contracts is clearly earmarked and
not available for other purposes, the overhead
payments on such contracts are not earmarked. Although
initially allocated directly to divisions/OUDCE, these
overheads are in part intended to support activities
outside the departments or faculties which provide
immediate support for research and therefore should be
regarded as being available to contribute to the
infrastructure charging designed to help fund service
budgets, dealt with below. Allocating all overheads to
divisions/departments should act as a clear incentive
to them to maximise overhead recovery rates.

(b) Various other earmarked or
directly earned sums
: these include, for
example, earmarked HEFCE funding, grants for museums
and collections from the AHRB, income from a wide
range of trust funds, earnings from training
activities, etc. A significant component of the
£38.6m under this heading (i.e. almost
£22m), consists of funds which are earmarked for
or earned by academic services or other service units.

(c) Certain unearmarked general
funds
, which the University is free to allocate
as it wishes, but which are nonetheless being directly
allocated to academic units because it is felt that
this is the most appropriate way to treat them. The
most important elements in the £25.7m under this
heading consists of income from tuition fees paid by
overseas students, or income from tuition fees which
is for other reasons being allocated directly to the
host department (and in particular OUDCE). The
rationale here is that in those cases where the
University is free to set the level of tuition fees
itself, such fees should be directly allocated, so as
to encourage divisions and departments to consider the
level at which they are set, and how the costs which
are incurred reflect the income earned.

18. It is intended that the direct allocation to
divisions, departments, and relevant services of what
amounts to some 64 per cent of the total available is
not only simple, clear, and transparent, but will also
act as a strong incentive to the relevant units to
increase such income wherever possible, and to
consider carefully how their costs relate to the
income generated.

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Formulaic allocation

19. The second main step in the new method is the
formulaic allocation of remaining income to
divisions/OUDCE. For 2001–2, the total available
is approximately £110m. The formulaic
allocations are based principally on (a)
teaching-related criteria and (b)
research-related criteria. Allocations of funds on
this basis involve a series of linked steps. The first
is to decide how to divide available resources between
those to be allocated on teaching criteria and those
to be allocated on research criteria. For 2001–2
the agreed ratio is 40:60 between teaching and
research, this ratio broadly reflecting the basis on
which the funds are received from HEFCE.

20. Teaching related funds (approximately £47m in
2001–2) are then allocated pro rata to weighted
full-time equivalent home/EU student load. The
weightings primarily reflect differences in costs
between different subject areas, and in the first
instance the basis for these are the weightings used
by HEFCE in its own block grant allocation formula.
Oxford has also introduced an additional weighting (of
1.25) to reflect the additional costs of teaching
postgraduate taught (PGT) students. It should also be
noted that, because student load relating to
postgraduate research students (PGR) in years 1--4 of
their study are used both in the teaching component of
the formula, and in the research component described
below, there is de facto an additional weighting
attributable to such students.

21. The research related allocations are more complex,
but are designed to reflect both the basis on which
funds are received by the University, and also the
quality and volume of research activity in a
particular subject area.

22. The principal component of the research-related
allocation distributes funds pro rata to a measure of
the volume of research activity, weighted to take
account of quality (as reflected in the most recent
RAE) [for 2001–2 allocations, the relevant data
are those relating to the 1996 RAE; for 2002–3,
the data will be those relating to the 2001 RAE], and
a relative cost band weighting (derived from HEFCE's
own research-related cost band weightings). The core
volume measure comprises numbers of staff returned as
research active (`category A'), in the most recent
RAE, who are funded from general income or
NHS-specific funds (this provision chiefly excluding
those research-active staff funded from research
grants and contracts, and some staff funded from
endowments) and PGR load (weighted at x
0.15). These numbers are then weighted by a quality
factor derived from the most recent RAE ratings for
the relevant department or unit, and by an appropriate
HEFCE cost weighting, designed to reflect the
differential costs of undertaking research in
different subjects.

23. A significant proportion of the research-related
block grant received from HEFCE is generated on the
basis of the volume of external research grants and
contract income received from UK-based charities:
under the new internal allocation formula, this
funding (some £11m in 2001–2) is distributed
pro-rata to a two year moving average of UK-based
charity research income, weighted for RAE-derived
quality ratings, and HEFCE research cost band
weightings.

24. Two other smaller sums are distributed on the
following basis:

(a) some £5.5m is allocated pro rata
to non-charitable UK research grant and contract
income, again weighted for RAE-derived quality ratings
and HEFCE research cost band weightings; and

(b) a further sum, of some £5.9m in
2001–2, is distributed pro rata to a volume
driver comprising total numbers of research active
staff returned in the most recent RAE, weighted for
RAE quality factors, but not for HEFCE research cost
band weightings.

25. The combination of these four components is
designed to achieve an appropriate balance of
incentives to generate additional research-related
income, to reflect research quality, and to recognise
differential costs. As with the teaching-related
formula, use of externally derived quality and cost
weightings is to be subject to review next year, but
at present is agreed to be the most appropriate way to
proceed.

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Further adjustments: salary
costs and capital charge

26. The basic formulaic allocations on teaching and
research related criteria derived from the above
approach are then subject to two further
modifications. The first of these is an adjustment
designed to reflect the differential costs to
departments and faculties of certain types of academic
appointment—and in particular the relative costs
of CUF/faculty lecturers, and university lecturers.
This adjustment is intended to be financially neutral,
and any plans to move academic posts from one category
of appointment to another will need to be approved by
PRAC and by Council, after consultation with colleges,
as part of the annual planning and budgeting process.

27 . The second adjustment is made by the
application of a capital charge. This is a very
significant feature of the RAM, intended to provide an
incentive to departments to be efficient in their use
of space, and to ensure that they do not expand to
larger premises without being exposed to the financial
consequences which such expansion has for the
University as a whole. The charge is initially set at
£20 per square metre, and is to be levied on
divisions pro rata to the area occupied although some
types of space are excluded from the charge
(particularly recently constructed space funded from
external donations, grants etc. from non-public
sources).

28 . The funds generated by the capital charge
(about £3m for 2001–2) will be redistributed
to divisions formulaically on the basis of total
research active staff numbers, weighted by research
quality weightings, and student numbers (with 1.25
weighting for PGT). This formulaic reallocation of
funds shares some of the same features of the main
allocation formula, but is deliberately different in
certain respects, notably in that it includes all
students, adopts different factors for the
research-related allocation, and excludes any subject
weightings (teaching or research).

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Service budgets and the
infrastructure charge

29 . The approach to setting and providing for
service budgets involves several related steps. The
first is to agree the level of the budget for each
particular service. This is based on an activity-based
analysis referred to in paragraph 4 above, looking
carefully at the costs which need to be incurred in
order to deliver a particular level of service.
Scrutiny of proposed service budgets was undertaken
for 2001–2 by a sub-group of PRAC chaired by the
Pro-Vice-Chancellor for Planning and Resource
Allocation, and discussions were held both with the
Pro-Vice-Chancellor for Academic Services and
University Collections, and with the heads of the
principal services themselves.

30 . Once agreed service budgets have been settled,
the next step is to take account of the direct
allocations of resources made to services, referred to
in paragraph 17 (b) above. In the case of a
number of services, these directly attributable or
directly earned allocations comprise a significant
proportion of the relevant budget: this is especially
the case, for example, with the museums, with
libraries, and with certain aspects of the operations
of OUCS.

31 . The next step is to calculate the proportion
of the agreed service budgets which cannot be met by
such direct allocations, and then to provide funds for
these through an infrastructure charge levied on
total divisional income. This formulaic
charge is based on a number of factors which are
designed, in very broad terms, to represent proxies of
demand for particular services. The principal drivers
being used for 2001–2 are student load, staff
load, and area occupied or maintained. It is
recognised that these drivers are, at this stage,
defined in fairly broad terms, and it is intended that
work will begin on developing more sophisticated
measures next year. The total volume of funds being
provided for in this way for 2001–2 is
approximately £57m.

32 . A summary of all the steps described in
paragraphs 13--31 above is provided in the flow-chart.

[Note: not reproduced.]

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Transitional arrangements

33 . Final details of the precise financial
implications of the new method for individual
divisions and services for 2001–2 will be
considered by Council shortly. However, it is almost
certain that the level of funding provided to certain
divisions/departments by the application of the new
method will differ significantly from the historic
position. The reasons for such variations will
obviously need very careful consideration both by
divisions, and by Council and PRAC, next year, but for
the present it will clearly be unacceptable for
divisions to experience sudden large decreases or
increases in their income compared with their current
position. As a result, transitional arrangements
involving the adjustment of the initial outcome of the
new RAM will be introduced in 2001–2, in order to
moderate the impact of the new arrangements, and to
make changes on a manageable and well-planned basis.
Details of these transitional arrangements are now
being considered.

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Further development work

34 . As indicated above, while Council believes
that the successful introduction of the new resource
allocation method is an important achievement, it also
considers that significant further development work
and analysis is required. One important area is the
further development of the University's planning
cycle, and the establishment of policy priorities both
at a university-wide level, and within individual
divisions and services. These priorities can then be
reflected within the RAM insofar as they are not
already taken into account.

35 . In addition, the following factors will also
be reviewed:

—The extent to which funds should be held back
centrally to provide for contingency, development
initiatives which are beyond the capacity of
individual divisions, etc.;

—the detailed weightings and drivers involved in
the formulaic allocation of resources, and in
particular the extent to which the University should
continue to rely on externally derived factors;

—further development of the capital charge;

—infrastructure charging, and in particular the
development of a more sophisticated method for
allocating charges, with a detailed review of the
existing cost drivers.

36 . PRAC will be beginning work on these matters
early in Michaelmas Term, in consultation with
divisions/OUDCE, and with service units.

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