Thomas H. Jackson's report on decentralization
Presented to the Faculty Senate of the University of Rochester
September 17, 2002

Outline

I’d now like to turn to a discussion of decentralization and an ongoing examination of governance structures at the University. We routinely talk about ourselves as a decentralized institution. Of course, like with any phrase, that is incomplete by itself. A slightly more accurate version would be to suggest that we look to a principle of decentralization to the lowest coherent—and responsible—unit. This is not always the same thing across all of the various aspects of the University’s business.

Let me provide you with a simple example. Although there is increasingly interdisciplinary work, it is nonetheless still the case that a great deal of the business of a University such as this is carried out through the vehicle of the departmental structure. And putting aside for a moment the trickier business of interdisciplinary work, it is the basic case that the department is a very coherent and sensible “structure” for the delivery of graduate education and for the organization of research. The departments, better than anyone else, know the areas within their fields in which to invest for the future, and—within a certain budget—how to allocate between graduate education and research. In both cases, the costs and the benefits of such decisions are largely “internalized” within the department, which makes it a sensible unit for making those kind of allocation decisions.

At the same time, the department is not necessarily a particularly coherent and responsible structure for the delivery of undergraduate education. If a single department invests limited resources in research or graduate education it—by and large—captures the reputational and other advantages of doing this. If a single department instead invests in undergraduate education, the benefits of doing so are not captured primarily by the department because of the reality that undergraduate education, much more than graduate education or research, is a joint product of more than 20 departments.

Thus, we need a structure different than the department that has some kind of say about undergraduate education. And because of the enormous “inflow” of resources—primarily tuition—associated with undergraduate education, that other structure needs to have significant say in terms of how those resources are allocated to the 20-some production units, called departments. So, there is already a complex set of interconnections between the kinds of decisions that we feel very comfortable in having departments make, and the kinds of decisions that we want some other unit—in this case, a “college” or a “school”—to make.

When one looks at the issue primarily of undergraduate education, moreover, one can get closer to one of the major structural innovations that have occurred here under Provost Phelps and my watch. I refer to the merger of the College of Arts and Science and the College of Engineering and Applied Science into the College. Now, of course, this didn’t just spring from our heads. Rather, it was presented to us as a recommendation of a faculty committee, “details to be resolved by the new administration.” But it struck us as a sensible recommendation, and I now believe it to be—with the advantage of hindsight—one of the important structural decisions we have made. In doing this, it provided a single point of contact—the Dean of the Faculty of Arts, Sciences, and Engineering—to deal with the resource allocation questions arising out of undergraduate tuition as well as endowment generally intended for undergraduate programs or purposes. Thus, while the consolidation into the College in some ways could be viewed as a step away from decentralization—after all, two Colleges were consolidated into one—in major effect has allowed us to pursued a fairly aggressive decentralization of services previously provided by the central administration into the hands of the College leadership. Alumni affairs and development, student services, and—increasingly—admissions, are being handed off, in terms of basic responsibility, from Wallis Hall to Lattimore Hall. It has allowed the College to be, much more than before, in charge of its own destiny—and the developments I have seen in this direction have struck me as both welcome and salutary.

There may be other cases, however, in which we do not decentralize, because the right “locus” of decision is the center. For example, in terms of endowment investment, there are a number of reasons why it makes sense to have the various endowments managed collectively. Among other things, the ability to diversify and enter a wide variety of funds such as hedge funds, alternative investments, and the like, is a great deal easier to do with an endowment pool of $1 billion than it would be with an endowment pool of a $200 million. Similarly, although we are highly-decentralized in development, it is the case that “planned giving” is a central resource. Here’s an area that is highly-specialized, and it is much more effective to have one person in the center deeply knowledgeable about this area than it would be to figure out ways to develop that same kind of expertise in six separate, school-based development arms.

Even in places that are decentralized, there is a role for the center. To continue with development for a moment. While we are, as an institution, highly decentralized in terms of development—so that each development office is responsive to the needs and priorities of its particular school and academic leaders—it is also the case that there can be conflicts among schools. Which school gets to make a presentation to a particular foundation, for example, that will accept one (but only one) proposal from the University this year? Conflicts such as this naturally fall to the center to decide. So, even in an area of rather extraordinary decentralization, there is a part of it that naturally does not fit particularly well into that decentralized model, and where we need to see whether some “power” over those areas from the center make good sense and are workable.

To give you another example, while endowment investment is centralized, why don’t we allow the schools to set their endowment spending rates? The case for centralizing spending rates must be very different than the essentially economies of scale argument for centralizing investment. Here it goes to the reason for some “review” by “higher” layers across the institution. There is a natural tendency of current incumbents—and current faculty—to see spending more today as more important than worrying about the future. By having “review” layers, there is a conscious decision, not just here but at every academic institution, to try to find people who are a bit further removed from the passions of the daily decisions, and who can bring to bear a longer-term time horizon on the appropriateness of spending today versus having money to spend in the future. (And lest you think that I am arguing for the broader wisdom of the President and Provost, I should note that much of the reason for the existence of a Board of Trustees is to ensure that we are subject to the same kind of “higher review” as we impose on our deans and academic leaders.)

Thus, out of this very complex set of circumstances, comes what we broadly recognized in American higher education as a rather decentralized decisionmaking structure, much along the model of Harvard University. It is constantly in flux, and constantly under review. (The role of the Faculty Senate versus the faculty bodies of the individual schools, an issue that we have grappled with during most of my time here, is a part of that larger issue of decentralization and where appropriate decisionmaking is lodged.)

For several distinct reasons, the Board, together with the administration, has been looking at the implications of some of this for the general area of health affairs, and it is this inquiry that I would like to outline for you in my remaining time today. It starts from the observation that clinical medicine is a very different “business” than that of education, that it responds to a very different market, and that it has a complexity that is significantly different than that of higher education itself. It is also increasingly the case that successful clinical medicine probably requires a larger and larger network, of hospitals, of providers, and of support staff. For most of the Medical Center’s history, it had one hospital, Strong Memorial Hospital. It now has two hospitals (Strong and Highland), a nursing service (Visiting Nurse Service), two long-term care facilities, and a substantial dental practice (Eastman Dental Center). And if one peers off into the future, it is likely that this does not mark the end of the expansion of clinical medicine.

This raises important issues of governance for the University as a whole. And while the issue has been on the table to some extent or another for some time, there have been two recent “wake up” calls that made it more urgent to address some of the underlying issues. The first was the financial hemorrhaging that occurred in the clinical arms of a number of the nation’s most distinguished academic medical centers—places such as Pennsylvania and Stanford, perhaps most prominently. The University of Pennsylvania health care system, for example, lost $200 million in one year (following a loss of $85 million the year before) and negatively impacted the credit rating not just of the health care system but of the entire University—at a time when soaring endowments and the like were, in general, leading to (if anything) a strengthening of credit ratings of higher educational institutions that were not in the business of clinical health care.

The second—more local—was the overture made at the time of the closing of the Genesee Hospital, as to whether we wanted to “take over” the rest of the Via Health Care system (that is, Rochester General Hospital and a couple of more remote “local” hospitals). This overture made some significant sense to the leadership of the Medical Center, but it also caused significant concerns among the Trustees—about the nature of the institution, the ability to cabin the risk, the question of whether it would have a “community asset” overlay, and the like. In short, there was at least a plausible case to some that what may have been unambiguously beneficial to the Medical Center was viewed as negative from the perspective of the University as a whole.

These two factors, coupled with the reexamination of medical center structures that have been occurring elsewhere, have prompted the Trustees to ask the administration to look at various alternative governance structures, with the goals of (a) separating risks and (b) focusing management and governance to ensure that the respective managers and governors were able to be selected, and to focus, on the basis of identified core competencies. And we were tasked to do this in the context of academic reputation, excellence, and linkages.

One thing we have looked at, but tabled, is the separating of the clinical delivery system from the School of Medicine and Dentistry and the School of Nursing. There are a number of academic medical centers that do not “own” their own clinical delivery system. But there were at least three reasons why we have not actively explored this possibility. First, in looking at it, we reached the same conclusion as did the University of Pennsylvania, which has been considering the question over at least the past two or more years. In the case of the University of Pennsylvania, they hesitated to separate out a clinical system in a way that would not have it accountable to, or under the influence of, the academic mission. We have the same hesitation, which has been reinforced by the second factor. Over the past 18 months, we have watched, with close interest, the controversies and issues that have occurred at Case Western Reserve, which depended on a clinical delivery system that it did not control. In that case, sharp and contentious negotiations between the University and the University Hospitals led to the abrupt resignation of Case Western’s President (and, later, the resignation of the CEO of University Hospitals)—and, I believe, all of this had a great deal to do with the hiring of Ed Hundert as President by Case Western, as it viewed these issues of how to gain some sort of control over the clinical delivery system were at the top of their agenda. Third, more than almost any other place, the University of Rochester symbolizes an “all under one roof” philosophy, tying together clinical, educational, and research enterprises at the Medical Center. It was a founding principle, as reflected in the physical structures over there, and it is an idea, we think, worth preserving.

At the same time, there is little dispute that the burgeoning size of the clinical delivery system, and its need for rapid change, and its ability to rapidly destabilize (in terms of financial health, if nothing else), all remained. (Moody’s, in particular, has stated that it views the University as “more” a health care delivery institution than an academic institution, and it does not tend to look favorably on health care delivery systems at this time.) So, we looked around at other ways to deal with this, as have other institutions.

Pennsylvania, for example, has recently set up a structure in which there is a Penn. Medicine Board which oversees all of the operations of the medical center at the University of Pennsylvania—clinical and academic alike.

We have been looking at a variety of similar structures—all involving, if you will, a principle of even greater decentralization, or operating autonomy, for the operations that occur “on the south side” of Elmwood Avenue, in which can generally be captured by the activities of the University of Rochester Medical Center. We think it critically important, for reasons noted above, to keep the academic and clinical linkages together, and to assure that decisions that are made over there are made with the realization that we are in the business of clinical medicine because we are in the business of medical education.

But we have also been looking at whether, by further decentralization, or operating autonomy, we could devise a structure that would significantly enhance (a) the risk isolation of the various enterprises at the University (so as to minimize, for example, an adverse credit rating on the University should the clinical medical system become unprofitable), (b) the ability to focus management and expertise, with the realization that the management skills required to have significant overall operating authority (even ultimately, in the world after Enron) over clinical medicine were perhaps quite different than the management skills required to run a university such as Princeton or Rice, places without medical centers, and (c) the ability to get Boards to focus their own attention and competence on separate spheres of inquiry. (Again, I note, these latter two issues are more urgent post-Enron. And I should also note that it is the case that most of the University of Rochester’s Board of Trustees are members of that Board because of the interest and involvement with, principally, the College, and have no special interest or expertise in medical affairs.)

In doing this, we have been tasked by the Board to look at three basic models. First, the creation of a separate operating subdivision, owned by the University, in which Medical Affairs would be placed, reporting—much as occurs at the University of Pennsylvania—to its own national Board. Second, the creation of two separate operating subdivisions, both owned by the University, one of which would be similar to that in the first model—that is, covering medical affairs—and one of which would contain the other academic units of the University, most particularly the College, Eastman, Simon, Warner (and MAG). Third, separating the University of Rochester into two distinct entities, with a formal “affiliation” agreement, if you will and some overlapping boards, but otherwise distinct. [Note that several of these were suggested in a 1989(?) report to the Board, but tabled at that time.]

In each of these cases, we have been asked to explore the degree to which they could advance the goals I previously identified (maximize risk isolation; focus management competence; select appropriate Boards). At the same time, we also have been asked to consider the possibility of adverse impacts from the adoption of any of these structures—most particularly, in terms of academic linkages across Elmwood Avenue, reputational issues, and gains from future innovations and the like.

We have had a number of “task groups” charged with examining these various issues over the summer. Many of the financial and structural issues have been looked at not only by our internal working groups, but also by Price Waterhouse and by Smith Barney.

It is clear that our work and our examination is far from finished, although I will be giving what I conceive to be an “update” report to the Board of Trustees at its October Board meeting. But while the work and examination is far from finished, there are some emerging outcomes. The most salient of these is that no one sees much merit in the third basic model, in which the University of Rochester would be split into two distinct entities. Indeed, this model has been effectively “tabled” as we have gone about our work over the course of the summer.

The second basic observation is that the more that one moves to achieve risk isolation and management and Board focus, from a governance sense, the more one has to truly decentralize Medical Center decisionmaking, and not have it subject to second-guessing by the institution as a whole. And the more one does that, the more one also has to make sure that the wonderful synergies that we observe occurring across Elmwood Avenue, in particular, can continue in the years to come.

But just as the courage of the institution to take the bold step of merging its two Colleges into the College has led, in my view, to many of the positive advances of the past eight years, so, too, it is incumbent on us to really explore these implications of believing in a decentralized decisionmaking model. There are lots of questions, but also lots of opportunities. We will, at least, understand ourselves a great deal better, even if none of these larger structural changes come to pass.