This blog post was originally published on Econsult Solution, Inc.’s website. Econsult Solutions, Inc. has positioned itself as a preferred provider of economic and social impact studies and related advisory services for institutions of higher education of all sizes and types. Learn more about their capabilities.
Recently, while visiting with friends, we spoke of their son’s alma mater, one of the many small liberal arts colleges teetering on the brink of closure. They loved the experience that their son had while attending and he has landed a series of dream jobs with his dual majors. During their son’s tenure, they also had a chance to get to know the college president—someone from their own field of applied research. They were disappointed that the unique experience that the school offered their son is in jeopardy of disappearing. They were also disappointed when they learned about the conflict between the college’s administration and board with the institution’s faculty and alumni. As has been the case at many other schools, the conflict between administrations and boards with faculty and alumni (and often, students as well) has focused on the issue of change: Will the college try to continue in its current model or will it shift to a new one, preserving some of the classic while seeking a modern and sustainable business model?
This conflict has been repeated multiple times in the past several years as economic, demographic, and social changes have challenged the viability of small liberal arts colleges. This conflict finds its roots in several underlying realities.
First, like it or not, higher education is a business. This is particularly true for small private colleges. These institutions are tuition-driven; and with the exception of the most heavily endowed colleges, they are only one or two years of subpar freshman classes away from insolvency. Ignoring this reality is a luxury that boards and administrators cannot afford. The financial challenges that are facing higher education institutions today are monumental. In large parts of the country, demographic changes are substantially reducing the pool of students from which they have typically drawn their freshman classes. The rising cost of a private college education is challenging private colleges everywhere. Costs of operation – from technology to student services – are rapidly increasing. Many of these expenses are fixed and do not decrease as enrollments decrease—becoming smaller is not necessarily a financially sustainable strategy. As Mount Ida College in Boston discovered two years ago, if you cannot pay the bills including “making payroll”, you cannot continue to operate.
Second, you cannot “fundraise” your way out of a failed business model. Institutions in danger of closing have severe cash flow problems—they cannot pay their short-term financial obligations. This is not a sudden occurrence. Most of the institutions that have closed in recent years had received multiple failing grades from various financial rating agencies. Insolvency is the failure of a business model, not a unique or unanticipated event. Enrollments have been declining, discount rates have been rising, and cost-cutting has not been able to improve the financial situation. In fact, what a colleague of mine calls “convenience cost cuts” (just slicing away 5 or 10 percent from every department’s budget) may actually make the situation worse.
Fundraising cannot solve these basic problems of an operating budget. Endowment spending rates are so low that it would take huge contributions to an endowment to generate sufficient funds to make an institution solvent. The typical spending rate on endowment funds is approximately five percent per year. Thus, a $1 million addition to the endowment will generate only $50,000 to the operating budget. A college facing an operating budget shortfall of as little as $2 million would need to raise $40 million to be able to cover the budget shortfall. Additionally, the college’s current budget model likely projects increasing deficits with each upcoming year. This presents an impossible fundraising requirement of duplicating emergency fundraising annually. Thus, fundraising can perpetuate the problems of a failed business model.
Third, transparency is a double-edged sword. On one hand, it is very appealing to say that boards and administrators should communicate the details of their institution’s financial situation with all constituents. There is no question they should be in complete compliance with all state, federal, and accreditation requirements; and the recent proposal from the New England accrediting organization for the development of a financial “dashboard” for its institutions is definitely a step in the right direction. On the other hand, announcing to the public that the institution is in severe financial difficulty could become a self-fulfilling prophecy, in and of itself, decreasing enrollments and making profitable operations even more challenging. In many recent cases, institutions have erred on the side of obfuscation to the detriment of the institution’s credibility and the best interests of constituent groups–especially students. But disclosure of the institution’s financial status must be managed carefully. This imperfect information situation contributes to the difficulties between stakeholders.
Fourth, there are inherent conflicts between the perspectives of administrations and boards with faculty members and alumni. Boards and administrators spend huge amounts of time analyzing financial performance, enrollment trends, and the higher education environment. I spent the last 25 years as a business school dean and was recently appointed to the board of a university. These issues have dominated my attention and strategizing in all of these roles. That was not the case when I was a faculty member. Faculty members are focused on programs, research, and students—as they should be. These differences can make it difficult to find common ground when financial difficulties arise. This is particularly true if there has not been an ongoing collaboration between these groups prior to the financial crisis.
This inherent conflict and the noted problems with transparency are what led to my friends’ shock and disappointment with the current developments taking shape. The president of this institution took a stand recognizing that the institution’s business model was not sustainable and that the college would have to adopt a new model. The outcome will likely be to find an institution with which to merge or to close. The ensuing fight led to the president’s and several board members’ resignations.
While this conflict is inherent to campus dynamics, there are strategies that can lead to less draconian outcomes. From the perspective of my experience as a faculty member and a dean, much of the difficulty that I have been describing is a function of the separation of roles within the academic community. In many institutions, the detailed data needed to understand the trajectory of the institution, whether positive or negative, is not universally shared. Information is power, and those that have it like to hoard it. Furthermore, seldom are there wide-ranging discussions of the strategic assumptions underlying top-level planning at the university. Unfortunately, detailed analyses of strategic assumptions related to the economic, demographic, governmental, or the competitive environment often do not even occur at the board level. Without such discussions and without including all constituents from board members to students in these discussions, it is impossible to conduct an effective strategic planning process or to avoid these types of problems. Curiously, then, the solution is to embrace the double-edged sword of transparency. Strategic planning around detailed data on both the institution and the environment needs to engage large portions of the campus community. This should be happening at all institutions whether or not they are facing financial difficulties. Strategic planning is now mandated by all collegiate accrediting bodies—both regional and discipline-specific accreditation. What is not mandated is the kind of data analysis and universal involvement that I am suggesting.
A second strategy for addressing the conflict is to try to promote a more systemic understanding of the university. Universities are possibly the most siloed institutions in the world. Not only is there huge separation between academic units and areas such as finance, admissions, and operations, but academic units themselves often do not talk to each other or consider each other’s function in the overall university system. Just as deferred maintenance can thwart the ability of admissions to attract new students and the physics department to teach electromagnetism effectively, elimination of the English major can have severe consequences to the viability of the majors in the business school. Unless university problems (and opportunities, for that matter) are viewed from a systems perspective understanding how all of the pieces of the institution fit together, it is impossible to find changes that will yield a truly sustainable business model. Systems-focused planning must engage all constituents from students to faculty members to administrators in collaborative discussions that recognize the value, importance, and interdependence of each group.
I cannot say that more inclusive and systems-oriented strategic planning would have solved the problem at my friends’ sons’ alma mater. It may be that there was just not a viable business model that could meet the needs of all of the constituent groups. On the other hand, I am convinced that finding long-term viable strategies for academic institutions will not be accomplished without an inclusive and comprehensive strategic planning process. The process has to recognize the interdependence of both academic and operational units. Doing more of the same things is unlikely to make a difference. Likewise, responding to crises by cutting everyone’s budget by some fixed percentage dodges the critical and difficult decisions and makes the situation worse and conceivably fatal.
 In reality, the challenges of financial models are not limited to small endowment colleges. After years of hearing from the administrations of the universities where I had worked that “we need to become less tuition-dependent,” I was shocked when I arrived at Johns Hopkins University as a dean that the JHU refrain was “we need to become less endowment-dependent.” Even a multi-billion-dollar endowment does not insulate an institution from the fact that higher education is a business.
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