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The Case for Unfair Competition

Captive operations like in-plants support their parent organizations’ missions, bringing better flexibility and control. For this reason, insists one university administrator, the competition should be unfair.

September 2011 By Burr Millsap
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THIS IS an argument for unfair competition. In the end, it will conclude that service departments and auxiliary enterprises (SDAEs) should have an unfair advantage. It will suggest that institutional customers (i.e., departments) should be made to do business with the SDAEs and should be asked to pay a higher-than-market price for the related products or services.

Sound crazy? It did to me, too…but I think the case is a pretty good one. Read on.

SDAEs are a problem, but they are indispensable on every campus. Service departments, such as the in-plant print shop, are those organizational units whose mission it is to serve the needs of other departments on a business-type basis. The key feature of a service department is that it charges for its services, rather than being mission-funded as are, say, academic and administrative departments.

Under mission funding (sometimes called direct funding), a department is granted its budget. It doesn't have to do anything to earn that budget other than to accomplish its mission. An academic department's mission is to teach, and so it teaches. The mission funding pays for that.

Mission funding works well when the service offered by the department is not subject to abuse if it were offered free. The accounting office is an excellent example. People don't fall all over themselves to take advantage of free accounting.

But mission funding won't work for service departments. If printing services were free to other departments, they would be abused. The same with photography, painting, woodworking, television services, and the like. The giving away of these types of services encourages the human tendency to overuse and abuse.

Accordingly, the service department charge-back model works well, and the service department acts like an internal business. The obvious question is, "Since these types of services are commercially available, why do we duplicate them with a department inside the institution?" The answer to that question is a little more complex than you'd think, and I'll discuss it a little later.

Auxiliary enterprises are those organizational units whose mission it is to serve the students, faculty, and staff. The products and services offered by auxiliary enterprises could be said to be personal in nature. Book stores, dining halls, copy shops, athletics…these are excellent examples of auxiliary enterprises.

If mission-funding is inappropriate for service departments, it is really inappropriate for auxiliary enterprises. The tendency for overuse and abuse would be much greater for these types of operations. The chargeback or sales model is the only one that will allow this type of unit to operate effectively.

About the Author

Burr Millsap is the associate vice president for Administrative Affairs at the University of Oklahoma, and serves as adjunct faculty for Oklahoma City University and the Francis Tuttle Technology Center. Mr. Millsap, who is a CPA, teaches courses in accounting and financial management. He has written three texts: Accounting Lite, Accounting and Finance for Nonprofit Organizations, and Accounting and Finance Fundamentals. He is the 2002 recipient of the NAEP Neil D. Markee Communicator Award and the 2004 recipient of the NAEP Professional Perspective Award. He has contributed several articles to the NAEP Journal, and serves as associate editor.

Reprinted by permission of the National Association of Educational Procurement. Article first appeared in the September 2005 issue of the NAEP Journal, pages 10-13.

 

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