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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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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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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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—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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(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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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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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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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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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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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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