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Your independent source for Harvard news since 1898

John Harvard's Journal

Cutting Costs

May-June 2003

With budgets tightening around Harvard (see the profile of new financial vice president Ann E. Berman), President Lawrence H. Summers has put increasingly visible priority on what he calls "a central responsibility of the University...for its students, faculty, and alumni who support it, to use resources wisely." A McKinsey & Company review of budgeting, human resources, fundraising, and procurement functions launched early in his administration has begun to yield additional purchasing programs intended to harness Harvard's buying power to capture savings.

For several years, Harvard has directed purchases to preferred vendors of office supplies and furniture, laboratory materials, travel, temporary employment services, express shipping, and other goods and services, producing $20 million or more of annual savings compared to list prices. Now that strategy is being applied to desktop computers, for which IBM has been designated the prime vendor, in the hope of realizing further savings of $3 million per year. On deck, says Summers, are programs for printing services (see "Stop the Presses," September-October 2002, page 65); construction, building supplies, and facility management (on which McKinsey consultants figure Harvard spends $350 million annually); and further steps to save on travel (by shifting to expedia.com). In all, the University's nonpersonnel expenses are about $1.2 billion annually. (Details on purchasing initiatives can be found at http://vpf-web.harvard.edu/procurement/.)

Summers spelled out Harvard's financial imperative in a talk to University administrators on February 20 (www.president.harvard.edu/speeches/2003/administrators.html). He amplified the drive "to steward resources carefully" in a late-March interview. In the 1990s, he said, as very strong endowment growth made resources readily available, pressure for savings may have moderated. Now, the need for economy is very evident. Given annual spending from the endowment of 5 percent — and higher education inflation currently running at about 3 percent — each year that the investment return on the endowment is nil, its purchasing power effectively declines 8 percent. Three consecutive years of such results (now considered likely) would reduce purchasing power by one-quarter. That outcome, he said, is "serious" given that the Faculty of Arts and Sciences, for example, derives half its revenue from the endowment (see "Iron and Silk," March-April, page 59). Under the 5 percent payout rule, "small changes in efficiency are the equivalent of large changes in resource mobilization" — $1 million in expense savings has the same financial effect as a $20-million capital gift. Hence the appeal of the procurement measures, where Harvard can "realize significant economies with very little if any adverse consequence."

Beyond procurement, Summers deferred comment on other aspects of the McKinsey recommendations, but said "any organization does well to continually examine overhead staffing issues." The University is looking at the "scope for information technology functions." For example, a consolidated development system now being built to encompass each school's donor and gift recordkeeping systems will satisfy fundraising and efficiency goals at the same time.

Budget reviews for each school, led by the provost, now include "an unprecedented level of central involvement and oversight," Summers said. A University-wide analysis of staffing levels and personnel is also under way. The schools, Ann Berman added, "are feeling the pain in their own resource limitations" as endowment payouts are restrained, and so are embracing efficiency measures. "They are looking in careful ways at activities that don't involve faculty or students," Summers said — all the activities he describes as "noncore academic functions."

Even so, he was hopeful that tighter times for higher education generally can be "a good opportunity for Harvard" to hire outstanding faculty members who may have fewer opportunities elsewhere. Realizing that ambition, Summers said, depends on attaining "in the University's business functions...the same standards of excellence that we have traditionally achieved in our academic programs."