Challenges to the viability of the US higher education model have grown significantly during the last 5 years. Demographic change especially in the Northeast and the upper Midwest has resulted in enrollment declines that pose serious challenges to the viability of many small private and regional state-supported institutions. The price of obtaining a college degree along with mounting educational debt has caused many potential students and their parents to question the value of an undergraduate degree. And then came COVID with its disruption of institutional business and pedagogical models. While institutions appeared to weather these challenges (albeit with a gigantic influx of short-term federal monies), we are now witnessing a dramatic decline in the proportion of eligible students choosing to pursue a post-secondary degree as financial pressures on higher ed institutions are increasing.
These challenges have forced institutions to examine their operations more closely than has ever been the case. Fortunately, we are at a point in time where data and analytical tools for such examinations are more powerful and available. We at Optimal Campus are pleased to announce a series of webinars for the fall semester that focuses on the use of data analysis to improve the efficiency and effectiveness of colleges and universities. The series of four webinars entitled “Data-Based Program Analysis” will feature higher education experts with extensive experience in the development of data-based techniques for program analysis and improvement. The topics that we will cover are:
- Evaluating the financial viability of programs in your portfolio
- Evaluating the potential of new programs
- Leveraging technology to differentiate your institution
- Dramatically improving your budget by being more efficient
The first webinar in the series is described in more detail below.
Evaluating the Financial Viability of Your Program Portfolio
Assessing the financial viability of your program portfolio does not begin with the numbers. Before looking at the numbers, it is critical that the institution understand its value proposition:
- What differentiates it from key competitors?
- What causes students to apply and to attend?
- What attracts faculty members and staff members to the institution?
- What causes alumni and friends of the institution to participate in and to fund various programs and initiatives?
As the Cheshire Cat said to Alice, if you don’t know where you’re going, then it doesn’t matter which way you go. For many institutions, there is not a common understanding of the institutional value proposition; and if there is, they have not lived by it in creating and eliminating programs. We were painfully reminded of this in a recent conversation with the president of a moderate sized private college. We noted to him that he had too many graduate programs for the number of graduate students matriculating at the university (the average size of a graduate program was less than 20 students before you adjusted for the fact that 2 graduate programs accounted for 50 percent of graduate enrollment). He responded, however, that each of these programs was the “baby” of a particular faculty member and that he did not want to eliminate a program while that faculty member was still at the university. Of course, few such programs are ever eliminated, even when the faculty member retires. Facing the challenges of the 2020s, there is little room for colleges and universities to manage in such a lax fashion.
How does one go about evaluating the program portfolio? The key is to focus on data and, more specifically, data about programs. At some point, data can be summarized for departments and colleges/schools. It is important, however, to begin at the program level. Summarizing at the departmental/college/school level results in masking of program performance. A department whose overall performance is poor may well have high performing programs housed in it. Likewise, it is likely that performance across the programs in even the best performing departments exhibits considerable variance. Only by starting with program-level data can you develop the perspective—and the evidence—that will allow you to make difficult decisions. There are three key questions that should be posed about each program:
- Does the program fit the institutional value proposition?
- Is the program strategically important to the institution?
- Is the program financially viable?
As you can see, this is not just a “live by the numbers” exercise. Some programs are so critical to the value proposition or so strategically important to the institution that they should be maintained regardless of their financial performance. This was true of the English major at one of our previous institutions. Few students graduated with English majors, but English was one of the top proposed majors for entering freshmen. Thus, even though the major had poor financial performance, the major was significantly important to freshman recruiting and to the financial viability of other majors within the institution.
It might be worth noting briefly that the English major and others like it can be improved financially by using multiple tools, including online partnerships, etc. Our point is that institutions do not have to just accept such losses; rather, there are steps to mitigate the losses and, at the same time, provide students with additional learning opportunities.
Evaluating a program’s financial viability is not the same as evaluating its budget impact. University administrators – including department heads and deans – are used to preparing budgets and monitoring program (or unit) performance versus those budgets. Budgets and budget performance reports, however, are reporting tools, not decision making tools. The analytic tool used should be adapted to reflect the reason for the evaluation. Budgets and reports of performance versus a budget are appropriate tools for assessing overall unit performance or comparing performance across units. They are not, however, the appropriate tools for making decisions about which programs to keep, invest in, or eliminate. Budgets typically include many cost items which are assigned to a program, often on fairly arbitrary bases. These costs typically will not change—i.e., the institution will still incur the costs—regardless of changes to the program. For example, the portion of the department head’s salary (or of other allocated costs) that is allocated to a program will not disappear if the program is eliminated; that cost will just be borne by the remaining programs.
The appropriate analytic tool for assessing a program’s financial performance is the program’s contribution margin. Contribution margin is the difference between attributable program revenues and attributable program costs. Only those revenue and cost items that can be directly attributable to the program and that would be eliminated (not reallocated) if the program were discontinued are considered in this calculation. A program’s contribution margin will almost always be higher (more favorable) than its net income (budget performance), since calculation of net income will include various allocated cost items (e.g., overhead). A program that is “losing money” according to its net income calculation may very well have a positive contribution margin. Eliminating that program would not necessarily improve the institution’s financial position.
Our upcoming webinar will explore these issues in greater detail as well as provide an example of the application of these concepts to the programmatic financial data of a hypothetical institution. As we mentioned earlier, analysis of the program portfolio is not just a numbers exercise. The financial performance of programs in the portfolio must be considered in the context of the overall mission and value proposition of the institution. On the other hand, it is impossible to assess the program portfolio effectively without detailed and appropriate financial data. This webinar will illustrate the combination of these two perspectives.
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