Higher education institutions and systems must change to respond to the demands of a more complex era. Increased demand for education, continuing decreases in available funds to support institutions, rising costs, and questions about the quality of higher education suggest that the current system is inadequate. Much of the shape of higher education evolved in response to past needs of the nation's higher education sector. The current era places more complex demands on higher education and yet resources remained fixed or are decreasing. These changes define a new environment that requires resource reallocation. Yet the governance system appears incapable of reallocating funds due to the complexity of the sector, inadequate information, unclear priorities, and dispersed power. A new system must be a more participatory process and must be iterative: central administrators must reallocate resources, but departments must be centrally involved. Matching resources to goals requires criteria such as: quality, centrality, demand and workload, cost effectiveness, comparative advantage. The process of making allocation decisions is central and should not involve closed groups of administrators or faculty task forces which set priorities, should require public preliminary recommendations, and academic units should put forward ambitious plans while identifying their low priorities. (JB)