INNOVATION SPOTLIGHT – Interview with University of Missouri System on Funding Threats, Revenue Growth & the Onus of Innovation
BKD sat down with University of Missouri System (UM System) CFO Ryan Rapp to discuss challenges in higher education, as well as their strategies to address these challenges through financial performance management and by creating a culture of innovation within the faculty.
BKD: First, how do you see the financial model for higher education, and specifically public higher education, changing in the foreseeable future?
Rapp: I think it’s a model that’s changing significantly. It’s a change that has been underway since the early 2000s. Currently, public higher education institutions are faced with major funding model challenges. If higher education institutions keep trying to run the same way under a changing financial model, they’re going to become a lesser version of what they are. This can be applied from a comprehensive research university like our four universities (MU, UMKC, UMSL & S&T) to a local community college.
BKD: How do you plan to face your funding challenges?
Rapp: I don’t disagree with people who say, “We cannot cut our way to greatness,” or, “We cannot afford any more cuts.” While the problem is clearly greater than a simple operational play, I do believe operational efficiency can solve 10 to 20 percent of the problem. However, if operating efficiency and cutting costs become your only play, you’re going to miss the mark on how to truly get out from under the aforementioned challenges. I think to face our current funding challenges, one has to focus on margin (net revenue) like a traditional business model, even though technically the system is not a business. We need net revenue to make investments in research and student success. This net revenue must be generated through a combination of operational efficiencies, new revenue growth opportunities and increased productivity.
The most lucrative and most challenging of those three is new revenue growth. We want more people in the organization to understand that revenue is the primary challenge, and it is a challenge we all must own. We [the industry] will know we’ve gotten to where we need to be when deans stop arguing with CFOs about what we gave them in terms of allocation to spend, and instead they start to argue with us about who’s getting credit for revenue growth.
BKD: How do you see your accounting and finance departments playing a role in this shift of mindset?
Rapp: How we manage the finances can have a really big impact on driving that shift—if we can help get a mindset of financial performance by building the financial infrastructure to clearly measure, define and track net revenue and operating revenue growth. Right now, if I asked a dean, “What’s the revenue you generated last year?” I’d probably get a lot of different answers. Now, I think it’s up to our accounting and finance department to answer that question and give the deans the ability to answer that question. For financial performance within higher education to work, one will have to hold departments accountable to performance metrics; for accountability to be respected and fair, one needs real-time and accurate measurements of their “score” available throughout the year. When you know where you stand and you see what different strategies affect your financial metrics, then you can think how to innovate in terms of revenue.
BKD: How do you think your system’s universities, colleges, departments and deans can grow real revenue?
Rapp: I know we will have made progress when people stop asking the finance department, “How are we going to grow revenue?” Higher education needs to continue to do a better job of understanding our students’ needs and where opportunities are within those needs. I think we can grow revenue by becoming more student- and citizen-focused. We need revenue streams that come with net revenues. Higher education can’t be a zero-sum game. I think the challenge on campus is that you need people with academic backgrounds, but the academics also need to be innovators and really challenge themselves to think outside the traditional sources of revenue generation for their specific universities, colleges and departments.
“I think we can grow revenue by becoming more student- and citizen-focused.”
BKD: What measures have you taken in terms of helping your system’s faculty understand revenue growth and margin?
Rapp: Education on revenue growth is so important; I don’t think we can talk about that enough. It’s critical that our team engages departments and educates them on real revenue growth and what net revenue actually is. The importance of communicating with faculty about where we’re trying to go and our performance management is an area we’ve learned about more than anything else. We’ve learned to lay out the facts, outline the trajectory of where things are going and try to move the 60 percent of people in the middle to see our vision. And when I refer to the 60 percent, I mean 20 percent of the people will always agree with our new approach and 20 percent will always disagree. That means through our education, we’re trying to get the 60 percent in the middle to appreciate our message. Finance has to play a key role in helping create strong academic leaders who see action before inaction. That’s a key organizational shift.
In addition, we’re trying to identify key metrics that are easy to understand and relatively easy to track and then build a performance management system around tracking those metrics. That would put reliable, accurate and real-time information in the hands of finance and the departments to inform decision making where necessary. The key metrics we’ve identified for our performance management system have been revenue growth, net revenue (operational margin) and cash on-hand. In addition to the financial metrics, we’re working with chancellors and provosts on building mission-centric metrics into our performance management model that will be just as important, if not more important than the financial metrics. And the message we’re sending is when the results start to be analyzed, it’s okay to have some courses or departments that have to be subsidized or have negative numbers. We know everything is not going to be positive. Our message is pretty simple—if you’re losing money, lose less, and if you’re making money, make more. Simply put, we’re in the process of building an infrastructure for our universities that can let departments know if they’re losing or making money and how their decisions impact financial performance.
BKD: In your opinion, what are some avenues or strategies to achieve real revenue growth?
Rapp: Online competency-based learning seems to be an area that has shown a real opportunity for scale. I believe credits can be stackable and marketing to nontraditional demographics, including adult learners in addition to lifelong learners, has great opportunity in the online or distance learning space. And, there’s an added benefit in enhancing access to higher education for this underutilized demographic to enhance workforce development outputs with a more educated citizenry. This further emphasizes the value of public higher education, which could reap future revenue benefits as well.
BKD: How does one balance the mission of a higher education institution and financial performance management?
Rapp: Mission is a critical aspect of performance management. I think how you actually make the margin matters—it matters from a mission standpoint. And I feel like the better we free our universities up to focus on increasing revenue and margin, the more our universities will focus on expanding our student base and increase the value of our education, which lends itself to the traditional mission of higher education. And so if you grow revenue and manage the margin with growth, it allows you to put money back into the research mission, student success and access and scholarships. We’re not trying to generate margin so we can hoard cash or pay dividends. We’re trying to increase margin to make investments in growing our university and our mission at the same time.
“I think how you actually make the margin matters— it matters from a mission standpoint.”
Read more about how colleges and universities are innovating in expense management by downloading our 2019 Higher Education Outlook.