Posts Tagged “operating model”

Will Higher Education Heed Bond Rating Agency Warnings?

Moody’s and Standard & Poor’s recently released their updated outlooks for American higher education. The news is not good.

Moody’s revised its 2018 outlook for higher education from stable to negative “as aggregate operating revenue moderates while expense growth increases.” Moody’s vice president, Susan E. Shaffer, elaborated: “the annual change in aggregate operating revenue for four-year colleges and universities will soften to about 3.5% and not keep pace with expense growth, which we expect to be almost 4%.”

Private Colleges May Outperform Publics, But Cost-Cutting is Needed

Moody’s expects private institutions to outperform their public sector counterparts. But about 15% of universities will be forced to cut costs in response to stagnant or weak revenue growth next year. The ratings agency believes that support from tuition and related fees, research funding, and state appropriations will remain weak. Further, net tuition will be depressed over affordability concerns and slow enrollment growth.

While private universities will have revenue growth of about 3% – 3.5%, these numbers will be considerably less robust in small- and mid-sized colleges and universities. This is especially dangerous since so many of them serve low- and moderate-income students. They draw from the same regions in which the students and their families live.

Moody’s notes that the recruitment demographics are horrible and that higher education is subject additionally to changes in its relationship with the federal government.

Moody’s speculates that federal tax reforms, the levels of research support, and changes to the Pell Grant and subsidized federal loans in the future could profoundly impact affordability and access.

Higher Education Flexibility is Limited in Face of Fiscal Challenges

Standard & Poor’s makes a similar finding. Presented as grim, the S&P outlook finds that higher education’s flexibility “in programming, financial operations, enrollment, resources or student draw” is limited. Like Moody’s, S&P cited the recent federal tax on colleges with large endowments, together with growing consumer skepticism and demands for lower sticker prices and more effective services.

Significantly, Standard and Poor’s also warned of lasting damage to college and university reputations in the current political climate.

S&P offered some encouragement, however, finding that higher education institutions could improve their standing if they established new partnerships, peeled back their reputation for cultural inertia, and increased their efforts to recruit non-traditional students.

Writing on these subjects for EducationDive, Jeremy House summarized that “all parties seem to agree that a myriad of issues haunt higher education.” He noted that the American Association of State Colleges and Universities (AASCU) “called 2018 one of the most uncertain years for higher education.”

Future of US Higher Education Depends on Ability to Innovate

Mr. House reported that the common agenda driving the future of higher education in the S&P and AASCU positions is a call for innovation. He further suggested that colleges could grow their student body by serving more post-traditional students, enhancing strengths and partnerships, embracing data analytics, technology, and online learning.

For those of us who work at imagining ways to strengthen American higher education, these are good and necessary tactics. But by themselves they are insufficient, roughly equivalent to the proverbial Dutch boy plugging the holes in the dike. Further, it’s not so much that the dam threatens to break but more that consumers will find new, alternative ways to find and use the water effectively.

The success of American higher education will depend heavily on innovation. That’s why the warnings from Moody’s and Standard & Poor have special urgency.

Those institutions that are the most adept and nimble will likely craft the best path to sustainability. It starts with these colleges and universities developing a clear value proposition and sense of self. That’s quite different from remembering their history, although working their history and traditions into their value proposition is unmistakably necessary.

Future Strategy Must Combine Principle and Practicality

What’s most needed is a sharper strategy that combines principle and practicality. American higher education must anchor a seamless pathway to a lifelong education that prepares Americans for rapid change in a global economy. It must bridge the chasm between formal education and employment by preparing its graduates with a worldview that is able to imagine their contributions to society.

But strategy alone is insufficient.

The plain hard fact is that higher education operates on a mid-20th century business model that is unable to anticipate 21st century changes. Many colleges and universities run like the “Mom and Pop” corner variety stores that ultimately failed because they could not compete and adapt as the world changed. For them, it was more about a failure in process and delivery than in the quality of the product.

Indeed, the biggest obstacle facing American higher education is the cultural inertia that permeates many campuses to reinforce an antiquated, incremental business model.

Can the business side of higher education keep up with the educational innovation that now energizes its research and teaching?

In Face of Failing Operating Model, Thinking Creatively About College Finances

There is a basic, fundamental truth about the American college or university operating model: It doesn’t work.

In the second half of the 20th century, America’s colleges and universities moved toward a similar operating model, depending upon their size, purpose, and funding source. Some scaled up to the research powerhouses that we know today. A few have even become something resembling complex real estate holding companies and investment banks. Most also serve as the “eds and meds” economic engines that power the state and regional economies in which they are located.

On the public side, local jurisdictions and state governments played historic roles in offering subsidies matched by federal student grants and loans. These colleges became the first choice institutions selected by first generation college students, although the selective flagships blurred the family income line as they established programs like honors colleges. Their large, well-connected alumni networks also presented new reasons for wealthy students to attend them.

“Comprehensive Fee” is Staple of Financial Model

But most colleges and universities built their funding off the “comprehensive fee” – tuition, fees, room and board — that remained the staple of the college financial model. States cut back on institutional and student subsidies, demographics shifted, and growing economic inequality fed the fears of American consumers in the Great Recession. Many families chose alternatives like community colleges.

Tuition-driven four-year colleges faced an uphill climb to meet their expenses.

Desperate Search for Stable Revenue Sources

For a while, it was possible to move around the chess pieces in an increasingly desperate search for stable revenue. To do so, colleges and universities turned to graduate and continuing education programs as well as online education to shore up tuition numbers when their net tuition revenue flat-lined. Additionally, they used revenue from fully depreciated college housing to support academic programs. It worked well for a time, but the fix was temporary at best.

The level at which boards of trustees set the annual comprehensive fee became a potentially explosive trigger by the end of the Great Recession as politicians and consumers began to protest high tuition sticker prices.

This year, the sticker price at some well-respected non-Ivy institutions, for example, has reached $70,000 annually. It is an unsustainable number on college and university campuses where deep tuition discounting has become the norm.

Further, fixed labor costs, including retirement and health care, and growing technology and facilities demands severely limit remaining discretionary dollars.

What options are available to shore up a college’s operating model? There are few left that can have any real impact on a college’s bottom line.

Revenue from Auxiliary Services & Fundraising Not Sustainable

Auxiliary revenues — bookstores, residence halls, conference centers, parking lots, and technology – are essentially flat and can only marginally affect college revenue. Further, at all but a few dozen places, capital campaigns allow institutions targeted relief, but capital campaigns generally are not the comprehensive solution that they are misunderstood to be.

Even more ominously, quick improvements in facilities and technology enhancements undertaken by increasing college borrowing only force institutions to reach their debt capacity with no viable alternatives as debt repayments constrain their operating budgets. Boards can hide the problem by relying on credit lines over rough periods and quasi-endowment draw-downs, if possible, but eventually these options also dry up.

Absent substantial new program revenue, a number of colleges have looked at efficiencies internally and through shared services.

It’s hard, of course, to create internal efficiencies in a conservative campus climate where needs have typically been met by setting the tuition price to whatever revenue number matched expenditures that year.

Cutting Labor Costs is “Third Rail” of Higher Ed Budgets

But most colleges have taken a number of important steps to control costs. It’s hard to spread the pain around when discretionary cutting does not affect the fixed costs in a budget, especially labor. Cutting labor costs is a kind of “third rail” option that requires slow and deliberate community discourse.

Redefinition and Re-imagination of Solutions Needed

It may be that the best solution is one that mixes equal parts of redefinition and re-imagination. Some of the recent reporting by Lawrence Biemiller in the Chronicle of Higher Education last week, for example, suggests that colleges redefine themselves more as a kind of community asset – a learning community for the region. It suggests the need to forge new relationships with the local community as Antioch College has done in Ohio, offering memberships at its Wellness Center, for example.

A second opportunity is to re-imagine underutilized assets, especially non-core, non-academic real estate. The larger question is whether a college can continue to make capital expenditures on residence halls and conference and athletic facilities. Institutions can set up attractive lease-back arrangements or even sell or lease depreciated residence halls to developers with private investment capital to improve and even manage them.

Colleges and universities do not need to own the building to run a meaningful, strategic, college-directed student life program.

Debt should be reserved to improve the academic program, utilizing financial partnerships to address other non-academic needs wherever possible. Most colleges cannot maintain their current footprint and meet their future anticipated facilities needs.

The solution may be to recast how these institutions think about the assets they already have. In this fiscal, consumer, and political climate, it’s clear that something will need to change soon.