During finals week, the University of Missouri announced its new budgeting mechanism to accomplish two goals: provide more meaningful incentives to divisional deans, and create complete transparency. As if expecting an adverse reaction, MU Chancellor Alexander Cartwright and his staff followed the decades-old tradition of announcing this major change at the busiest time of year. Nonetheless, about 600 faculty and staff attended presentations describing the forthcoming changes.

Few would disagree with the observation that the existing budget process is irrational and opaque. For the most part, budgets are set on the basis of the prior year. In a good year, all college deans would be given a new budget equal to last year’s budget plus, for example, 2 percent. In a bad year, the same deans would be given a new budget equal to the last budget minus, for example, 5 percent (or maybe 10 percent). Changes were across the board and driven by state allocations and anticipated tuition revenue. However, because the budgets changes were typically an incremental percentage and the same for all colleges within the university, the results were numbers that varied around a mysterious base-budget established long ago, for reasons not documented, and about which there is no institutional memory.

A dean with specific leverage, for example a dean candidate during the negotiation of an employment package, could avoid a year on the allocation merry-go-round and obtain a significant increase in a base budget depending on the amount of that leverage. However, these were one-time side deals with little shared information. They simply added another obscure element to the grand budget mystery.

For an institution with the inertia of a glacier, MU’s new budget plan is revolutionary and, in my judgment, quite positive and exciting. The plan is the result of 18 months of work by a dedicated faculty and staff task force created by former Interim Chancellor and Provost Garnett Stokes and continued by Cartwright, current Provost Latha Ramchand, and Vice-Chancellor Rhonda Gibler. It is a “responsibility center management” plan that will, to oversimplify a bit, provide deans with the revenue they generate but with the requirement that they assume the costs they incur. So, for example, deans will receive the majority of tuition paid by students enrolled in their courses, but they will be expected to pay “rent” for the space their college faculty and staff occupy. From the unit’s perspective, tuition no longer disappears into some centralized black hole, but at the same time office and lab space is no longer a free good.

This budget concept began at Harvard University in the early 1800s, when President John T. Kirkland declared that the School of Divinity should find its own location for its facility because “it is our rule here for every tub to stand on its own bottom.” Encouraging self-reliance, his budgetary philosophy was that each school within the university is a separate, independent entity, with an obligation and responsibility for its own management and funding. Continuing today, there are now 52 tubs at Harvard.

Such plans decentralize budgets and, as one higher education publication describes, they “unleash the deans … to give (them) and the professors under them a financial incentive to cut costs, find new sources of revenue, and think more strategically about where the college is headed.” They encourage innovation and entrepreneurship. Moreover, transparency replaces opaqueness as budgets, and the variables that produce them, become public information.

The plan is refreshing and appealing. However, it is not without pitfalls and difficult transition issues. For example, there was considerable griping at the introductory meetings when faculty were told that, at least initially, every unit would pay the same “rent” (cost per square foot) for the space they occupy. Those with crummy, crumbling space were claiming foul as they envied those with cushy and comfy spaces. The disadvantaged argued that they are stuck in a space that was centrally allocated to them and are not free to take their rent money to more desirable spaces or even to reduce their space to reduce costs. All valid points.

As every observer of management is also aware, any incentive plan will motivate some shameful — or, at least, mildly unseemly — behavior as some try to “game the system” to their particular benefit.

One of the largest problems with responsibility centered management is “course poaching” or “credit-hour hoarding.” This describes a college that tries to capture as many of its majors’ enrollment credits as possible. Jon Strauss, one of the pioneers of the RCM method, reports that its introduction at both the University of Pennsylvania and the University of Southern California was followed by “engineering schools finding compelling arguments for their students to need courses in mathematics and communications taught by engineering faculty rather than arts and sciences faculty … and management schools introducing special statistics and computing courses taught by their faculty rather than mathematics and computer science faculty.” Of course, this produces divisive internal competition and unnecessary duplication.

Even with the necessary tweaking to come during a transition period, problems will occur, some foreseeable and some not. What is assured is that managing will be more difficult, involve even greater uncertainties, and require unique leadership skills. With more transparency, decision-makers may find themselves under a more critical microscope. As a dean at the University of Minnesota noted: “The provost has to be a watchdog under (RCM). If the provost isn’t a watchdog for the bad incentives that (it) creates and doesn’t stop that, you’ve got a stock exchange without a Securities and Exchange Commission — it just doesn’t work.”

I will watch this truly transformational change with enthusiasm and hopeful optimism.

Art Jago is Professor Emeritus of Management, Trulaske College of Business, at the University of Missouri. He is a former chair of the Department of Management.