by Michael K. Townsley | Jun 17, 2023 | Economics and Higher Education
First Published on Stevens Strategy Blog
Michael K. Townsley, Ph.D., Senior Associate Stevens Strategy
Prefatory Remarks
Notices of private colleges closing or merging have become regular items in the press. However, this sudden spate of bad news may not be entirely due to new problems or to the effects of COVID. Rather, long-term financial issues may have been masked by massive doses of Covid aid; and now that COVID aid (i.e., HEERF Funding) has ended, the long-term problems have resurfaced.
The most vulnerable colleges in the current economic environment are private non-profit colleges with a tuition-dependency rate greater than 80% (a 60% tuition-dependency rate typically signifies that a college is mainly dependent on tuition for revenue. An 80% tuition-dependency rate suggests that a college has a very small endowment and donations represent a small portion of total revenue.). Before the pandemic. 22% of private non-profit colleges had a tuition-dependency rate greater than 80%, according to data from IPEDS (Integrated Postsecondary Education Data System).
The survival of private colleges and universities with high rates of tuition-dependency is subject to how well they manage the basic economic duality of supply and demand in relation to the market price for tuition. When an institution gets crossways with market forces like supply, demand, and price, it may not generate sufficient cash to cover its everyday expenses.
As Richard Garrett, Chief Research Officer at Eduventures, recently said,
“The problem is that all these [basic economic] trends (demographics, lost revenue, higher costs) aren’t going to get any better anytime soon. [For instance], the demographics are only going to get worse over the long-term.”
Basic Economics
Demand
For tuition-dependent private colleges, the key threat is the falling birth rates since the year 2000. Falling birth rates have led to a smaller pool of prospective student pools, and the pool is projected to continue to contract for the remainder of this decade. A shrinking prospective-student pool means tougher price completion and greater threats to tuition-dependent colleges.
Table I
Degree Seeking Students at 4-year Private Non-profit Institutions
|
|
Total (thousands)
|
Change
|
% Change
|
|
2017
|
2,554
|
|
|
|
2018
|
2,548
|
-6.0
|
-0.2%
|
|
2019
|
2,524
|
-24.0
|
-0.9%
|
|
2020
|
2,494
|
-30.0
|
-1.2%
|
|
2021
|
2,465
|
-29.0
|
-1.2%
|
|
2022
|
2,448
|
-17.0
|
-0.7%
|
|
Total Change
|
-106.0
|
-4.2%
|
| |
|
|
Table I from the National Student Clearinghouse shows that enrollments steadily declined for undergraduate degree-seeking students between 2017 and 2022. From 2017 to 2022, 106,000 fewer students enrolled resulting in a loss of a sizeable amount of revenue and cash from tuition.
National Student Clearinghouse data (SEE Table II) also shows that no region of the country was spared from declining enrollments. Post-COVID in 2021, enrollment declines continued except for the West where enrollments increased. The pace of the fall in enrollments improved in 2022 except for the South, which reported a small increase, and the West, where enrollments abruptly decreased by its highest level in the past five years. Projected enrollment trends suggest improving conditions for enrollment; but based upon market factors (such as cost, perceived need for a college degree, and demographic shifts), it appears that enrollment increases will only be temporary before returning to a pattern of fewer students.
Table II
Changes in Total Enrollment (000) for Private Institutions 2017 to 2022
|
|
2018
|
2019
|
2020
|
2021
|
2022
|
Total
|
|
Midwest
|
(147)
|
(60)
|
(182)
|
(81)
|
(38)
|
(508)
|
|
Northeast
|
(82)
|
(53)
|
(122)
|
(92)
|
(16)
|
(365)
|
|
South
|
(99)
|
(19)
|
(131)
|
(144)
|
10
|
(383)
|
|
West
|
(93)
|
(17)
|
(152)
|
478
|
(624)
|
(408)
|
|
Nation
|
(421)
|
(149)
|
(587)
|
161
|
(668)
|
(1,664)
|
For tuition-dependent colleges, demand has been weakened by a nearly twenty-year- long drought in new births; and supply has been upset by students no longer selecting traditional liberal arts majors.
Ten years ago, evidence began to accumulate that college graduates were choosing careers that were not related to their majors. The Wall Street Journal reported “that colleges are separating into winners and losers because students are rejecting colleges which consistently ranked low in preparing students for work.” The majors with the highest levels of underemployment is when the average wage for a graduate is less than the average wage for all college graduates). The underemployed majors were: psychology, visual and performing arts, and the social sciences. The federal government is well aware of this deficit and is likely to mandate that all schools provide to prospective students a program-level report of employability for their graduates, likely in an effort to reduce student loan debt moving forward.
Net Price
Usually, the relative balance of demand and supply among competitors determines price. The current state of demand in higher education has unbalanced the demand and supply relationship, especially for tuition-dependent institutions that have seemingly lost control of pricing. Therefore, we will discuss price or tuition before we consider the supply part of the basic economic duality.
Price in higher education, in particular among tuition-dependent colleges and universities, consists of two components – posted tuition and net price. The posted tuition is the amount that institutions typically present as the full-cost for enrollment. Net Price, on the other hand, is the amount paid by the student after deducting unfunded institutional and other financial aid (loans are not a form of financial aid because they must be repaid). Net price is the amount of tuition remaining after unfunded institutional aid (tuition discount) is deducted.
Unfortunately for tuition-dependent colleges, as the prospective student market erodes, there is ever-greater pressure by competitors to increase tuition discounts leading to ever-smaller levels of net tuition (See Chart I). Today, some colleges are already offering tuition discounts of 70% or more of the posted tuition. High tuition discount rates barely leave enough cash to make payroll and cover their outstanding bills.
Chart I
NACUBO Chart on Tuition Discounts
As Kenneth Redd, Director of Research and Policy Analysis at NACUBO, has stated,
“There are two reasons for the [current and future] escalation [in tuition discounting.] ‘One is that the competition for students now has become extremely fierce,’ he says. ‘[And with] birthrates steadily falling, fewer young people are applying to college. The second reason: more families are financially strapped.’
Supply
Supply is the product or service offered by an organization to prospective buyers. For tuition-dependent private colleges, the product typically is an academic degree. The decision for the board of trustees and president is how much supply to offer and the net price (net tuition) to offer students in the marketplace.
It is all too obvious that larger tuition (price) discounts are not yielding larger enrollments. Tuition discounting has become a losing strategy. As William Hall, President of Applied Policy Research, has noted,
“If you want to grow [and survive], you’re going to have to do something [distinctive] to induce additional yield.”
A survey in 2019 indicated that 27% of college graduates regretted choosing a humanities major (i.e., liberal arts major). By 2022 the percentage of graduates with regrets about choosing a humanities degree had increased to 48%. Buyer’s remorse of nearly 50% can have a spillover effect to prospective students, who are also looking for majors more directly connected to future employment. When graduates in the liberal arts disciplines express this level of dissatisfaction, it will further depress the market for liberal arts programs. Dissatisfaction among current students is also evidenced by attrition. Attritted students are not returning to college as they once did, regardless of the blandishments offered (Examples of blandishments include: large discounts, on-line courses, counseling, payment alternatives, loan restructuring, and other offers that admission and marketing officers have devised.)
Of considerable concern to private colleges chiefly offering liberal arts or humanities degrees is that high school graduates are moving away from those majors and seeking more practical job-oriented degrees or even opting for certificates or other non-degree options to improve their value in the work force. None of these bode well for the future of private liberal arts colleges.
With fewer prospective students choosing liberal arts or humanities majors, tuition-driven liberal arts college are bearing the burden of over-investment in fixed capital assets (buildings and furnishings) and faculty assigned and tenured in these programs. Moreover, the liberal arts faculty, especially tenured faculty, are not easily moved into new programs such as offering degrees in business or technology. Additionally, when students do not attain a liberal arts degree, it causes a second-level problem. In the past, 40% of liberal arts graduates went on for an advanced degree (e.g., philosophy bachelor’s degree graduates would earn a master’s in philosophy), which generated more tuition revenue.
Transforming a liberal arts college into a more career-oriented institution can have profound challenges because the institution is overly invested in degrees that prospective students no longer want. However, an article from Inside Higher Education in 2012 pointed out that some liberal arts colleges, though keeping liberal arts in their mission, were moving their curriculum toward more practical workplace applications.
One of the primary strategies for a supplier operating in an intensely price-competitive marketplace, is to differentiate themselves from their competitors. Colleges and universities have introduced multiple strategies over the years to differentiate themselves from their competitors. Here are several examples of differentiation strategies used by tuition-dependent colleges: block scheduling, new academic programs, schedules that accommodated working students, easing transfer credit rules, opening off-site instructional programs, contracting special discounts to groups of students (e.g., a cohort of law enforcement officers), online programs, and offering college credit courses to high school students. The most recent and almost universally example of colleges responding to changes in the marketplace is when the pandemic forced colleges without online courses to quickly install the online technology or lose their students. What will tuition-dependent colleges do in the future to expand revenue flows? That will depend on how quickly a president can see new opportunities, which are dependent on location, flexibility of the institution, and access to financial resources.
Besides the differentiation of products and services, there is one other significant option — cut the cost of producing the product. Cutting cost reduces upward pressure on pricing. Most colleges find this option the most difficult to implement because of internal (faculty, students, athletic programs, etc.) and external (alumni, government regulations, donors, etc.) constraints. Yet, college presidents and boards of trustees must understand that when costs per student rise faster than the income from prospective student, they will never get control of an institutional pricing strategy or of its long-term financial viability.
The Chronos Option
For tuition-dependent institutions looking to respond effectively to the demands of the market, Stevens Strategy has developed Chronos UniversityTM., a revolutionary design for the university of the future. It meets the needs of tuition-dependent institutions: It lower their costs of operation by maximizing faculty effectiveness, responds to the expectations of the new generation of students by creating opportunities for a consistent, personalized experience, applies technology to enhance instruction, and places the university in a distinctive position in its market by taking a unique, student-focused approach to higher education.
The Chronos concept integrates technology-based instruction with on-site or remote small group projects and daily face-to-face interaction with learning coaches to promote student learning and success. Chronos UniversityTM is designed to revolutionize the delivery of high-quality liberal arts and pre-professional undergraduate education. Interested readers can learn more about Chronos here.
Summary
Tuition-dependent colleges need to be keenly aware of their competitors and the goals and abilities of their prospective students. In the past, private colleges could offer a new way of differentiating themselves from the competitive herd, and it would take several years for the competition to react and to offer the same thing. During this period, a college could design new products or services and generate positive cash flow that strengthened its financial base. In today’s higher education marketplace, competitors will quickly react when another institution offers a program that enrolls a large number of new students spawning more revenue. Competitors will quickly replicate those programs because they are also desperate for new revenue sources.
When an institution is out-of-balance with market forces, it must act promptly to rebalance its relationship with the market. The college will need to speedily innovate or lose its capacity to survive. Presidents and boards of trustees of tuition-dependent colleges need to recognize that survival and success in their market depends on the interaction of demand and supply on the price of tuition, on their competitors and their goals and plans, on the income of prospective students and their capacity to pay the tuition bill, and on the students and/or families to see a payoff from tuition debt.
As is evident to anyone working or knowledgeable of higher education, declining enrollments combined with the other fundamentals (such as student preferences for an academic degree, net price, inflation, and unexpected expenses or situations like COVID) are pushing many private colleges to the precipice of failure.
As noted at the very start of this article, economic conditions are forcing some non-profit private colleges to merge or to close. (This is what happens in the business sector when a sector of the business market can no longer sustain revenues to cover expenses. For example, online catalogue stores and monster big box stores destabilized traditional retail operations.) Presidents can be continually on the lookout for strategic partnerships, like articulation agreements, or merger opportunities since one might emerge that makes sense. Merger partners should be considered before the school spirals too far down and has no value to a potential partner. Finally, trustees may determine that they do not want to modify the institutional mission to meet the market or that the institution has no long-term financial viability and decide that closing the school is the best option. A school closing should be considered early so students, employees and vendors are not left in a lurch.
Boards and presidents need to seriously evaluate a school’s financial position and review strategies — realistic increased revenue opportunities, expense reductions, merger partners, and closing plans. A fiscally-prudent board of trustees at a tuition-dependent private college must get a grip on the condition of the institution that they are charged with overseeing. Otherwise, the future of the college and its responsibilities to its students may slip out of their hands.
PUBLICATION NOTES
N.B.; these notes are from the original paper. The original location of the endnote numbers in the body of the paper were removed due to issues with publication on the Blog Site. If you desire an original copy of the paper; contact mtown@dca.net
Moore, Keller (September 8, 2022); (Retrieved May 12, 2023); “Did you know? College closures are on the rise”; The James G. Martin Center for Academic Renewal; Did You Know? College Closures Are On the Rise — The James G. Martin Center for Academic Renewal (jamesgmartin.center).
Integrated Postsecondary Education Data Systems (Retrieved April 2023); “Robust SS Stress Test”; The Integrated Postsecondary Education Data System.
Burns, Hilary (April 28, 2023); (Retrieved May 12, 2023); “Why the business of small colleges no longer adds up”; Boston Globe; Why the business of small colleges no longer adds up (msn.com).
National Student Clearinghouse Research Center (February 2, 2023); (Retrieved May 12, 2023); “Table 1: Enrollment by Credential Level and Sector 2017-2022”; Current Term Enrollment Estimates | National Student Clearinghouse Research Center (nscresearchcenter.org).
Ibid; Current Term Enrollment Estimates | National Student Clearinghouse Research Center (nscresearchcenter.org).
Grawe, Nathan (January 4, 2020); “Demographics, demands, and destiny: Implications for the health of independent institutions”; 2020 Annual Meeting of the Council of Independent Colleges; slide 14.
National Student Clearinghouse Research Center (February 2, 2023); (Retrieved May 12, 2023); “Table 2: Total Region Enrollment 2017-2022”; Current Term Enrollment Estimates | National Student Clearinghouse Research Center (nscresearchcenter.org).
Schwartz, Natalie (May 23, 2023); (Retrieved May 23, 2023); “Bain warns of ‘perilous environment’ for colleges as COVID 19 relief dries up”; Bain warns of ‘perilous environment’ for colleges as COVID-19 relief dries up | Higher Ed Dive.
Hill, Cary (June 27, 2019); (Retrieved May 24, 2023); “This the most regrettable college major in America”; Market Watch; This is the most regrettable college major in America – MarketWatch. Plumer, Brad (May 20, 2013); (Retrieved May 15, 2023); “Only 27% of college graduates have a job related to their major; The Washington Post; https://www.washingtonpost.com/news/wonk/wp/2013/05/20/only-27-percent-of-college-grads-have-a-job-related-to-their-major/?utm_term=.bb8684d901e4. Belkin, Douglas (February 21, 2018); (Retrieved April 28, 2023); “U.S. colleges are separating into winners and losers”; The Wall Street Journal.
Cooper, Preston (June 8, 2018); Retrieved May 15, 2023); Underemployment persists throughout college graduates’ careers”; Forbes; https://www.forbes.com/sites/prestoncooper2/2018/06/08/underemployment-persists-throughout-college-graduates-careers/#547d9a087490.
Adams, Susan (May 20, 2021); (Retrieved May 12, 2023); “Colleges are discounting tuition more than ever”; Forbes; Private Colleges Are Discounting Tuition More Than Ever (forbes.com).
Ibid; Forbes; Private Colleges Are Discounting Tuition More Than Ever (forbes.com).
Moody, Josh (April 25, 2023); (Retrieved May 12, 2023); “Tuition discount rates hit new high”; Inside Higher Education; NACUBO study finds tuition discount rates at all-time high (insidehighered.com).
Hill, Cary (June 27, 2019); (Retrieved May 24, 2023); “This the most regrettable college major in America”; Market Watch; This is the most regrettable college major in America – MarketWatch.
Drozdowski, Mark (September 29, 2022); (Retrieved May 24, 2023); “College grads regret majoring in humanities fields”; Best Colleges.com; College Grads Regret Majoring in Humanities Fields | Best Colleges.
National Student Clearinghouse Research Center (April 25, 2023); (Retrieved May 14, 2023); “Some college, no credential”; Some College, No Credential | National Student Clearinghouse Research Center (nscresearchcenter.org).
Ezarik, Melissa (March 20, 2022); (Retrieved May 14, 2023); “Students approach admissions strategically and practically”; National Student Clearinghouse Research Center; Survey: Student college choices both practical and strategic (insidehighered.com).
Barshay, Jill (November 22, 2021); (Retrieved May 14, 2023); “The number of college graduates drop for the eight straight year”; Hechinger Report; The number of college graduates in the humanities drops for the eighth consecutive year | American Academy of Arts and Sciences (amacad.org).
Ibid; Hechinger Report; The number of college graduates in the humanities drops for the eighth consecutive year | American Academy of Arts and Sciences (amacad.org).
Jaschik, Scott (October 10, 2012); (Retrieved May 24, 2023); “Disappearing liberal arts colleges; Inside Higher Education; Study finds that liberal arts colleges are disappearing (insidehighered.com).
Moore, Keller (September 8, 2022); (Retrieved May 12, 2023); “Did you know? College closures are on the rise”; The James G. Martin Center for Academic Renewal; Did You Know? College Closures Are on the Rise — The James G. Martin Center for Academic Renewal (James martin. center).
Integrated Postsecondary Education Data Systems (Retrieved April 2023); “Robust SS Stress Test”; The Integrated Postsecondary Education Data System.
Burns, Hilary (April 28, 2023); (Retrieved May 12, 2023); “Why the business of small colleges no longer adds up”; Boston Globe; Why the business of small colleges no longer adds up (msn.com).
National Student Clearinghouse Research Center (February 2, 2023); (Retrieved May 12, 2023); “Table 1: Enrollment by Credential Level and Sector 2017-2022”; Current Term Enrollment Estimates | National Student Clearinghouse Research Center (nscresearchcenter.org).
Ibid; Current Term Enrollment Estimates | National Student Clearinghouse Research Center (nscresearchcenter.org).
Grawe, Nathan (January 4, 2020); “Demographics, demands, and destiny: Implications for the health of independent institutions”; 2020 Annual Meeting of the Council of Independent Colleges; slide 14.
National Student Clearinghouse Research Center (February 2, 2023); (Retrieved May 12, 2023); “Table 2: Total Region Enrollment 2017-2022”; Current Term Enrollment Estimates | National Student Clearinghouse Research Center (nscresearchcenter.org).
Schwartz, Natalie (May 23, 2023); (Retrieved May 23, 2023); “Bain warns of ‘perilous environment’ for colleges as COVID 19 relief dries up”; Bain warns of ‘perilous environment’ for colleges as COVID-19 relief dries up | Higher Ed Dive.
Hill, Cary (June 27, 2019); (Retrieved May 24, 2023); “This the most regrettable college major in America”; Market Watch; This is the most regrettable college major in America – MarketWatch.
Plumer, Brad (May 20, 2013); (Retrieved May 15, 2023); “Only 27% of college graduates have a job related to their major; The Washington Post; https://www.washingtonpost.com/news/wonk/wp/2013/05/20/only-27-percent-of-college-grads-have-a-job-related-to-their-major/?utm_term=.bb8684d901e4.
Belkin, Douglas (February 21, 2018); (Retrieved April 28, 2023); “U.S. colleges are separating into winners and losers”; The Wall Street Journal.
Cooper, Preston (June 8, 2018); Retrieved May 15, 2023); Underemployment persists throughout college graduates’ careers”; Forbes; https://www.forbes.com/sites/prestoncooper2/2018/06/08/underemployment-persists-throughout-college-graduates-careers/#547d9a087490.
Adams, Susan (May 20, 2021); (Retrieved May 12, 2023); “Colleges are discounting tuition more than ever”; Forbes; Private Colleges Are Discounting Tuition More Than Ever (forbes.com).
Ibid; Forbes; Private Colleges Are Discounting Tuition More Than Ever (forbes.com).
Moody, Josh (April 25, 2023); (Retrieved May 12, 2023); “Tuition discount rates hit new high”; Inside Higher Education; NACUBO study finds tuition discount rates at all-time high (insidehighered.com).
Hill, Cary (June 27, 2019); (Retrieved May 24, 2023); “This the most regrettable college major in America”; Market Watch; This is the most regrettable college major in America – MarketWatch.
Drozdowski, Mark (September 29, 2022); (Retrieved May 24, 2023); “College grads regret majoring in humanities fields”; Best Colleges.com; College Grads Regret Majoring in Humanities Fields | Best Colleges.
National Student Clearinghouse Research Center (April 25, 2023); (Retrieved May 14, 2023); “Some college, no credential”; Some College, No Credential | National Student Clearinghouse Research Center (nscresearchcenter.org).
Ezarik, Melissa (March 20, 2022); (Retrieved May 14, 2023); “Students approach admissions strategically and practically”; National Student Clearinghouse Research Center; Survey: Student college choices both practical and strategic (insidehighered.com).
Barshay, Jill (November 22, 2021); (Retrieved May 14, 2023); “The number of college graduates drop for the eight straight year”; Hechinger Report; The number of college graduates in the humanities drops for the eighth consecutive year | American Academy of Arts and Sciences (amacad.org).
Ibid; Hechinger Report; The number of college graduates in the humanities drops for the eighth consecutive year | American Academy of Arts and Sciences (amacad.org).
Jaschik, Scott (October 10, 2012); (Retrieved May 24, 2023); “Disappearing liberal arts colleges; Inside Higher Education; Study finds that liberal arts colleges are disappearing (insidehighered.com).
by Michael K. Townsley | Jun 1, 2022 | Governance
By Michael K Townsley & Robert DeColfmacker
Executive Summary
Efficiency in higher education is an amusing topic that is best left to economists. The reality is that all constituents of a college or university know that the institution in inherently inefficient due to poorly designed operational policies, procedures, decision rubrics, resource allocations, and production of its main product – the education of students. Boards, administrators, and even regulators have either ignored operational inefficiencies or found them too intractable to change. Nevertheless, colleges and universities do graduate students and produce credible research, despite their awkward approach to delivering on their mission. However, the days of traipsing down the ivy-bedecked walls of alma mater are swiftly coming to an end. Efficiency will necessarily rise to a level of action due to complex combination of conditions like the Covid pandemic, inflation, shrinking new student markets, and students rejecting colleges charging high tuition prices to earn a degree with a low return on income. This blog will deal with the concept and framing of efficiency, managing efficiency in colleges and universities, bottlenecked operating chains, efficiency notes for presidents, and a brief comment on the relationship between financial equilibrium and efficiency.
Introduction to Efficiency
Nearly every college and university in the United States has the same operational structure and decision-governance process regardless of size, mission, or method of instructional delivery. The structure of higher education in this country has deep historical roots going back to Oxford and Cambridge in England with the design carried into this country with the founding of the early colleges such as Harvard. However, In America, the people of the state authorized the creation and to operation of colleges and universities through charters that provided ultimate responsibility and authority to a disinterested board. There has always been an assumption in the American system that the faculty’s domain is the curriculum and certification of successful completion of study. In the nineteenth century, presidents were much stronger than today. At that time, they were members of the faculty, with a primus inter-pares role. That system began to change during the twentieth century as presidents were less likely to be of and from the faculty and a dual organization system developed with a professional class led by the president and a faculty class with a counterbalancing role described most cogently by the AAUP. This dual organization structure has a significant flaw; it is resistant to change. Therefore, by extension, it is very expensive to operate because programs become embedded in the decision-governance process that often acted as a veto on change. This flaw became most evident when the nature of colleges changed from a rite of passage for only about 20% of the population (typically the traditional socially privileged and academically prepared student) to a pathway for social mobility and professional success for an additional 40% of less academically prepared and socially privileged post World War II students. This was accentuated especially as government sponsored financial aid programs expanded significantly, creating an environment of competition between colleges for an abundant market of students and the tuition they provide to support operations. The dual organization model worked reasonably well until that market began to decline and colleges had to act more strategically to adapt and compete. This created pressure to move from a dual organization governance system to a shared governance system that recognized more clearly the board’s role and authority. But that transition is not complete and many colleges are still ill equipped for change.
Due to the accelerating decline in enrollments that is combined with pressure to lower prices by way of tuition discounts and students insisting on degrees that lead to jobs in which their pay covers their debt payments and the cost of living, most private colleges and some private universities must now confront the impact of these conditions on the cost of operations. Solutions to these confounding problems of declining revenue (plus shrinking cash flows from tuition) and the cost of operations is the principal subject of this discourse.
Framing Efficiency
Efficiency or Productive Efficiency is the minimum cost for a particular level of output produced by a firm. Determining the relationship between cost input and output requires precise data. In higher education, precise data detailing costs and output is problematical on several levels. First, colleges do not clearly define the costs that drive a particular output. Moreover, they are often not clear about what the outputs are. Outputs can be classified as: credits, graduates, students enrolled in a program, full-time-equivalents, specific degrees, or credentials. As is evident from this imprecise list, several of the outputs may in fact be inputs; e.g., credits, students enrolled in a program, or full-time-equivalents. The confusion between inputs and outputs in higher education makes the problem of estimating productive efficiency very costly, difficult, and time-consuming. Nevertheless, given the declining demand for education and aggressive competition for new students, colleges and universities cannot ignore the problem of minimizing costs. While this discussion does not offer a mathematical solution to estimating minimal costs, we will suggest what can be done to improve the management of costs.
Managing Efficiency in Colleges and Universities
- Governance: Most colleges and universities operate within a dual governance structure in which the faculty has advisory authority over the academic program, the administration has authority over the rest of the college, and the Board of Trustees has authority over both. Conflict usually occurs at the edge between administrative authority and academic authority. There are two problems with dual governance that lead to cost inefficiencies. First, ultimate responsibility for survival of the institution is often not defined. Second, policies are often written in an ambiguous fashion regarding assignment of responsibility and expected outcomes. The literature suggests that ambiguous policies result from attempts to minimize conflicts of the dual governance divide. Eliminating existing and future policy ambiguities requires that the Board of Trustees fully understand which level is granted ultimate responsibility by law for the survival and integrity of the institution. If the Board does not understand this responsibility, they need training in their legal responsibilities, and they need legal counsel to review all policies and recommend changes to eliminate diminution of Board authority.
- Charter and Mission: The charter is the heart of the corporate entity and defines what it is allowed to do. The mission delineates what an institution can or cannot do. If the institution goes beyond its mission, it departs from its authority as granted by its charter. Therefore, significant changes in the activities of the college must be brought into conformity to its mission and charter or else both need to be amended.
- Academic Efficiency: This concept boils down to who controls the productive structure of the college; i.e., who has the authority to reorient academic operations in order to better serve students versus serving the status quo. Academic efficiency depends on 1) a leader skilled in revising the academic program in the face of intractable opposition and 2) an able lawyer in higher education labor law who briefs legal constraints for academic and personnel changes.
- Operational Efficiency: This concept depends on the proficiency of the president to a) identify if the college is responding to the demands of the student and job markets, b) restructure academic programs to attract students and prepare them for the job market, and c) allocate personnel and assets to best serve students at the lowest cost per student ratio. In addition, the president, in consort with the faculty, must have academic technical skills to revise or design the following: new curriculum; class schedules; information technology to deliver and administer academic operations; and the legal constraints on changes in programs. Moreover, the president must see how to efficiently utilize the physical space.
- Financial Efficiency is subject to these standards:
- Cash is essential for survival.
- Short-term assets need to be readily convertible to cash.
- For most private colleges, cash flows from enrollment and gift/donations.
- Operations must generate strong and positive cash flows.
- Monitor factors that deplete cash: rising tuition discounts; excess number of administrators and staff (too many administrators and staff doing the job that one person could); small enrollments in majors; small classes; capital and operational costs of buildings with low usage rates; and ineffective marketing strategies.
- Use dashboards and critical period performance reports to identify financial imbalances that cover: enrollment, class size, tuition discount, net tuition revenue, donations, cash balances, staff compensation, variable expenses, and unbudgeted expenditures
- Set-up and track these efficiency ratios:
- Net-tuition per student
- Receivable and bad debt ratios
- Net Donation/Advancement Officer
- Assets Efficiency Ratio – measure square feet being used against the space available in a twenty-four-hour time span.
- Market Efficiency: requires a) data by: student markets, yield rates, campaign target effectiveness, and enrollment by programs; b) best practices in reaching and drawing students from market segments; and c) continuous monitoring of marketing performance.
Bottlenecked Operating Chains
A bottleneck chain is a set of offices that are connected in carrying out a common set of processes. If these chains are not carefully designed, the result can be a process stream that becomes bottlenecked. A process stream is often bottlenecked at the interchange between offices. These bottlenecks can occur when process streams are not designed to carry from one office to another or when administrators do not work together in harmony.
Only the president has the authority and the responsibility to sort out the process stream and to eliminate inter-office conflict. In order to resolve bottlenecks, a president will have to get down into the nitty-gritty of policies and processes. That is, the president will be involved in analysis of a chain and will lead the redesign of chain policies and processes. Listed below are several critical chains typically found in an institution of higher education.
- Admissions Chain: Admissions – Registrar – Student Affairs (athletics, residence, food services) Financial Office – Bookstore – IT
- Continuing Student Chain: Registrar – IT – Academic Office (class schedule) – Student Affairs (athletics, residence, food services) – Bookstore – Student Affairs (residence/dining plans)
- Class Scheduling Chain: Academic Office –- IT – Student Affairs (athletics, residence, food services) – Registrar – Bookstore – Security
- Billing Office: Registrar – IT– Billing Office – Academic – Student Affairs (financial problems) –
- Payables Office: Academic Affairs– President’s Office – Chief Administrative Offices – Student Affairs – Faculty – Vendors
- Grades and Transcript Chain: Registrar – Faculty – Academic Office -Registrar – IT – Student Affairs (athletics, residence, food services)
- Student Affairs: Academic Scheduling Office, Athletic Office, Residence Halls – Food Services – Student Organizations
- Graduation Chain: Registrar – Academic Affairs – Student Affairs – Security
- Budgeting Bottleneck Chain: Finance Office – Budget Office – President’s Office – Academic Offices – Building and Grounds – Security – Board
Efficiency Notes for the President
The efficiency notes provide common leadership standards for a president as they guide their institutions toward greater efficiency. These are also final notes for other chief administrative officers.
- Communications supporting major decisions must be precise and comprehensive, especially when they involve a delegation of authority.
- Presidents must work effectively with the board and all constituencies of the college.
- Before the president and board initiate change, they should prepare for conflict, in particular with the faculty when it involves changes in academic programs, faculty policies, and assignments.
- Presidents need to understand the dynamics of the college and its basic operational processes. For example:
- Basic management doctrine – mission, responsibility, and outcome defined action.
- Financial resource allocations to departments, capital expenses, and personnel.
- Operational procedures, staff training and the expectation that administrators, staff and faculty will use administrative and academic software.
- Effective/efficient allocation of personnel are essential to survival.
- Paying market rates for skilled positions in academics, finance, and human resources.
- Recognizing that today’s shrunken student pools require the best marketing enrollment managers.
- How pricing (including tuition discounts) shape prospective student decisions in consort with their expectations of the outcome from their degrees.
- Need access to the best higher education legal services because change is usually constrained by laws (especially labor) and regulations (state and federal).
- Small college presidents may have to act like the head of a small business by doing the work of: writing policy and procedural manuals, curriculum design, academic scheduling, contracts, financial reports, and faculty and staff evaluation. The president needs to know the budgets of each department, financial reports and the dynamics of cash flows.
- Senior staff must understand the dynamics and processes of their area of responsibilities and this area to other domains and to the college as a whole.
Summary
Efficiency in higher education may be construed as being subject to Cyert’s model of financial equilibrium.[1] His model posits that financial equilibrium occurs when there are sufficient resources to sustain an institution’s mission for current and future students.[2] It could be said that a college’s financial equilibrium would be dependent on its efficiency in using its financial resources to sustain its mission. Inefficient use of resources would either deplete financial reserves or fail to convert incoming financial resources into productive units to accomplish the mission of the intuition. As a result, students would be ill-served by an inefficient college.
The culture of the college that has presently emerged is what has shaped the current state of efficiency in most institutions. It will be the responsibility of the board, administration, faculty and accreditors to increase the efficiency of the college by working together to reform policies, processes, and decision-making. Changes in the operational structure of the college will mainly take place through its governance system, which is morphing from the traditional dual governance model into a shared-governance model. Sound board and presidential leadership can make certain positive steps to good management and to greater operational efficiency.
ENDNOTE
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Townsley, Michael (2014) Financial Strategy for Higher Education: A Field Guide for Presidents, CFOs, and Boards of Trustees; Lulu Press; Indianapolis, Indiana; p. 15. ↑
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Townsley, Michael (2014) Financial Strategy for Higher Education: A Field Guide for Presidents, CFOs, and Boards of Trustees; Lulu Press; Indianapolis, Indiana; p. 15. ↑
