Is Your Institution Structurally Inefficient?

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

1. Townsley, Michael (2014) Financial Strategy for Higher Education: A Field Guide for Presidents, CFOs, and Boards of Trustees; Lulu Press; Indianapolis, Indiana; p. 15. ↑

2. Townsley, Michael (2014) Financial Strategy for Higher Education: A Field Guide for Presidents, CFOs, and Boards of Trustees; Lulu Press; Indianapolis, Indiana; p. 15. ↑