Industry Insights

Watching the Higher Ed Vital Signs – Where Do I Start?

January 2018
Author:  Makayla Matheson

Makayla Matheson

Senior Manager

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Even the casual follower of higher education news knows about the “giant death spiral” being predicted for higher education as we know it. That prediction is especially applicable to the thousands of smaller rural private colleges and seminaries in the United States.

“Soaring student debt, competition from online programs and poor job prospects for graduates are shrinking [many small private colleges’] applicant pools,” Michael McDonald writes in an April 2014 Bloomberg article. The article notes Harvard professor Clayton Christensen, a writer on disruptive innovation in academia, has predicted up to half of U.S. colleges and universities could fail in the next 15 years. The article also quotes Moody’s Investors Service analyst Susan Fitzgerald as saying, “What we’re concerned about is the death spiral—this continuing downward momentum for some institutions. … We will see more closures than in the past.”

The Bloomberg article reports that in 2014 “Moody’s found that expenses are outpacing revenue at 60 percent of the schools it tracks even as many try to slash their way to balanced budgets.” Moody’s Investors Service’s June 2017 sector in-depth report includes the following chart:

While the naysayers seem ubiquitous, there are some cooler heads. Among them is the president of one of Indiana’s largest private universities, Dr. David Wright of Indiana Wesleyan University. This is an institution that, over the last 20 years, has morphed from a nearly bankrupt small school in a run-down Rust Belt town to a successful multistate, multisite private university. Dr. Wright points out the counter-narratives in a thoughtful blog post, which includes the following:

You’ve heard that most college students don’t graduate. But “59% of graduates of smaller private colleges finish within four years.”

You’ve heard there’s no future in a liberal arts education. But “20% of PhDs in science, technology, engineering and math (STEM) fields graduated from smaller private [liberal arts] colleges.”

You’ve heard that diverse students aren’t well served at private colleges? You might be surprised to know that “Private colleges enroll a similar proportion of minority students as public universities—about one third of the student population. And they graduate at higher rates from private colleges and in a shorter average period of time.”

You’ve heard that low-income students are better served at community colleges. But “Low-income students are more likely to graduate from a private four-year college than a public university—a 68% graduation rate compared with 61% at public universities.”

You’ve heard that most college graduates stagger under crushing debt. Some of us are, indeed, slowly pricing ourselves out of our students’ reach. We MUST reduce our costs. But, the national picture may surprise you. “One quarter of students who graduated with a bachelor’s degree from an independent four-year college or university did not have any educational debt and nearly half had less than $20,000 in debt.”

Are we truly at the threshold of a giant death spiral? Or do we need to be watchful and diligent about the danger signs and ready to begin work on the future of higher education?

The answer may rest in how schools decide to view their missions as institutions as well as taking a deeper dive into the institutions’ strategy to achieve sustainability.

Best Practices to Help Avoid the Giant Death Spiral

Continual commitment to a set of coherent, mutually reinforcing policies or behaviors aimed at achieving a specific competitive goal, such as financial sustainability. A company without an innovative strategy won’t be able to make trade-off decisions and choose all the elements needed for financial sustainability. There’s no one system that fits all institutions equally or works under all circumstances. There’s nothing wrong, of course, with learning from others, but it’s a mistake to believe that what works for University of California, Berkeley (Berkeley), for example, will work for your institution. An explicit innovative strategy helps you design a system to match your specific competitive needs. In early 2016, Berkeley was facing a $150 million budget deficit, amounting to about 6 percent of its annual operating budget. Without a plan of action, that shortfall was likely to continue, according to campus sources. They took a deep dive into their strategy for sustainability and created a three-year financial sustainability plan.

Put strategies and plans into action. One best practice that should be considered is an academic program review that evaluates the performance of curricula, departments, faculty and/or students at a degree-granting institution. While there’s no universally accepted model or methodology for conducting such a review, both academic and financial data should be used to evaluate performance. The information derived from this review should be used to make better informed decisions that align with your financial sustainability plan.

Been there, done that without the kind of positive results you hoped for? Understood—we’ve seen plenty of those examples. You might then consider a review of just the financial metrics that could serve as a starting point for further focused discussions, rather than a full-blown program review. We’re seeing schools get some benefit from this, without the downturn in morale that sometimes comes with full defense of academic programs in a universitywide program review.

Don’t just look at historical or current data, but plan for the future as well. Look toward projected data related to program purpose, resources required for effective functioning and student/course/department/faculty performance.

Where to Start

The challenge of maintaining and improving program quality in an environment of tight fiscal resources has become a key factor in financial sustainability. In terms of cost savings, many institutions have found strategic resource reallocation effective in lieu of simply cutting programs. For instance, a university may reduce the number of sections for a particular course suffering from under-enrollment, creating substantial savings while still meeting student need. Turning a major into a minor, combining two programs into one or merging academic departments also are viable strategies for balancing costs and academic quality. The ability to model the financial effect of those and other key decisions, like changing tuition rate and discount philosophy, becomes extremely important when margins are narrow and there’s little room for error.

For more information about a review of costs and margins and modeling decisions going forward, please see our service offerings.

Evaluating Program Profitability

As you consider the viability of your academic programs and seek data to make informed decisions, BKD’s higher education team can help. BKD’s Interactive Margin Analysis Tool provides a visual analysis of the financial contribution and margin at various levels of detail for your institution—school, department, major, class, faculty member, etc. Request a complimentary demo here or contact your trusted BKD advisor.

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