FuturED Finance

finance transformation

What Can Higher Ed Learn from a Chef? (part 3)

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The picture shows a nearly empty restaurant to represent the value of analyzing course offerings to adapt to enrollment declines.

Understand and project demand (enrollment).

What if I have 15 entrees and customers rarely order a couple of them? Also, one of the main ingredients is not used for any another entrée. Would you discontinue the item?

Why is it that in higher education, we continue to add to our menu without retiring offerings or majors despite changes in enrollment?

This is critical because we expect a 10-20 percent drop in the number of traditional age students over the next 12 years. It is time to examine our menu while considering what our enrollment will be 4-10 years from now. After all, it is easier to scale up than scale down. 

Remember, finance is a lagging indicator. It tallies what has already happened. By using that information to show trends and predict the future, we provide real value.

In higher education, our biggest challenge is that it takes us 2-4 years to remove a menu item. When my class size goes from 22 to 18 students, I can’t just order less. I can try to create specials and promote the offering to customers. Knowing that my margin is lower on some offerings but balances out across the menu allows me the flexibility to make more informed decisions.

As our class sizes get smaller, the cost of our support structure is not declining, thus the cost per student is rising. All of this makes it more critical than ever to understand and project demand. This is a conversation that expands well beyond the realm of finance.

Many of us have increased our menu offerings over time to meet customer demand, but we have not removed items from our menu, or changed the recipe for a dish that is not as popular as it once was.

Understand the total cost of the experience and set expectations for metrics related to enrollment and each role.

Let’s move out of the kitchen, to the front of house. Have you ever been to a restaurant where the food is amazing, but the service is terrible? It takes forever for them to take your order. Your drinks arrive wrong, and it is so loud you can’t hear. The food is the draw but without a positive experience the customer will not come back.

But that experience is different for each of us. My daughter loves Chipotle, and I love seafood and waterfront dining. Each type of experience has a different cost structure. 

Customer support is less labor intensive for Chipotle because they are not going to each table multiple times and do not have dishes to wash. What if Chipotle tried to compete with fine waterfront dining and offered white linen tablecloths and custom cocktails? Would their cost structure change? Would customers be willing to pay more for this experience?

Many institutions have tried to compete by offering a competitive campus experience. The problem is pricing. Small institutions can’t take advantage of volume and offer variety, so decide what you are known for and double down on strategy. 

Restaurants generally have a higher margin on the add-ons, like wine and cocktails, like auxiliaries in higher education. We know that the food is why customers come, and while they are having dinner, they will probably order a drink.

It’s important to understand the difference in margin between the food and the bar. How many of you know the margin of each? How many of you make a profit on room & board, but lose money on the instruction? We cannot have one without the other, but how do we reconcile this?

Each part of the restaurant has its role. The chef and kitchen staff should know what is expected of them in terms of quality, and margin metrics. If we don’t tell the kitchen (chair/deans) our expectations for margin, our market research data, or our predictions, the chef will continue to provide excellent meals (classes), no matter the cost. So be sure to understand each role, how they fit together and what expectations are for each role.  

Give the customer what they want, not what we think they should have.

I’ve worked with over 40 institutions during the past 25 years and have served as an adjunct faculty member as well. It always puzzles me that we rarely talk about what the customer wants and what the data tells us about what the customer wants. Instead, we talk about what the customer should get because the chef knows best. The reality needs to be somewhere in between. The institution should understand clearly what type of experience they provide, and what their customers expect. Then, they should set expectations and metrics for the kitchen (academics) and front of house (auxiliary and student services). They should monitor metrics to see how customers are responding (enrollment) and adjust the offerings accordingly.

While on the topic of what the customer wants, some people love sports bars. I like to sit at the bar of any restaurant and have an appetizer and wine. I may go back again with friends and stay for a full dinner. Why do we not consider this option in higher education? Credentials, like certificates, with a clear path to convert to a degree are like trying an appetizer and coming back for more. Sixty percent of Americans do not attend college. Would this be a more accessible pathway?

I leave you to ponder what your customer wants. Is it a fine dining experience at a higher price tag, a sports bar with lots of action and simple food, or perhaps a highly specialized experience like an extensive raw bar selection. There is room for all. Decide which one you are and double down on that to give each customer what they want, not what you think they should have.

If you are interested in the common metrics that we use to analyze the cost and revenue drivers for educational institutions, click here to download.

Did you miss the other articles in our chef series, here are parts one and two.

Photo by shawnanggg on Unsplash

What Can Higher Ed Learn from a Chef? (part 2)

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Is the star of the show the main dish or side dishes?

Think back to your recent restaurant experience. Did you choose a dish based on the main course (chicken, fish) or the sides (rice, potato, salad)? I’ll bet it was the main dish. Some colleges and universities have added so many student activities, sports, and electives to their lists of ingredients that the side dishes cost as much or more than the cost of the main dish. When I examine the change in our cost structure over time, I wonder if the stars of the show on our campuses have become the side dishes. 

What do the customers want?

Think of your favorite restaurant, why do you go there? Is it proximity to home, your love of seafood, the view of the water, or the prices? Now think about your institution, why does the customer (student/parent) come to your institution? For most students, it is a particular offering, combined with an atmosphere they want (small campus, large campus), in a location they want (in a city, near mountains, far from home). More and more, pricing, and future employment are becoming factors. I have 3 college age children and I have seen a dramatic shift in the level of concern they and their friends express about the cost of education and the impact it has on their decision. I am sure we have all heard more from parents and the public about the importance of a career upon graduation.  

Understand what you are, and why your students choose your institution (and stay) and be true to that. Engage more in the consideration of what other customers (like parents and employers) want from you and consider investing in that, even if means you need to give up another item on the menu. 

Set the menu based on seating capacity.

Let’s think about physical space and its connection to the menu. Ideally, the restaurant would be busy during peak hours with full tables and quick turnover. Much like our institutions, restaurants have significant off-peak hours and days when the tables are empty. Some restaurants supplement their businesses with private events the way some institutions do. Partnering with employers or local organizations can provide additional income and local engagement. The question is can we repackage our offerings to generate interest during off-peak times, without impacting our brand?  

If the restaurant seats 40 customers and tables turn over 2.5 times at dinner, they’ll serve 500 meals a week. If the menu includes 50 entrees, I will make an average of 10 orders of each item per week. We all know some items will be more or less popular than that. This is where we run into problems. We order ingredients for entrees (courses) that are not as popular, and we then throw the ingredients away (think of low enrolled classes).    

How many entrees are generally on the menu of your favorite restaurant? Most restaurants have 15 entrees or less on their menu. The goal is to offer enough variety to attract customers but ensure items are ordered with enough frequency that ingredients do not go to waste. At 500 meals per week, across 15 entrée choices, that is an average of 33 orders of each item per week. If you take the total number of students, divide by the number of required courses, then divide by the section break-even number, you’ll know how many majors you can support.

This is not an exact science but will help to make those strategic decisions about whether to sunset degree programs.   

We may have a significant amount of physical capacity, but our customer demand may be lower than our physical capacity. Based on your demand and capacity, how many menu items are ideal?

Did you miss part one of our Chef series? Read it now.

Stay tuned for the next article in our Chef series, Understanding and Projecting Demand.

Interested in the metrics we use to analyze cost and revenue drivers for educational institutions? Click here to download.

Why do turnaround plans take so long?

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The picture is of a road sign signaling a u-turn to represent a financial turnaround.

My colleagues and I are often asked by board members, “Why does it take so long to turnaround the financial health of the institution?” In corporate America, we make decisions to close stores, discontinue product lines, and lay people off each quarter to manage shareholder expectations. While there are many cultural considerations in this answer, I will not focus on that.

Focus on the turnaround process

  • Understand the current situation:
    • Examine assets, liabilities, revenue trends and cost structure trends. 
    • Anticipate short-term challenges, while identifying short-term solutions
    • Focus on long term sustainability. 
  • We will answer the questions:
  • What is your current financial picture?
  • What resources do we have and how long will they last?
  • How did we get here?

Identify trends and relationships

This is an important examination of the underlying data to identify trends and relationships relating to revenue, cost structure, profitability, and liquidity. It seeks to identify the relationship among the data.

  • How has the employee FTE (full time equivalent) changed in relation to the student FTE over time?
  • How has the square footage of facilities changed in relation to the student FTE over time?
  • What is the normalized profit or loss per student over time?

Set expectations

I like to set the expectation that we need at least two years of cash flow under the current deficit model as a “runway” for a turnaround plan. This is because it will take two years before we start to see bottom line impact and 3-5 years before we can achieve financial stability. Without this, there is little point of moving on to the next step.   

Enrollment trends

Once we understand our situation, we need to understand and predict the enrollment trend for the next 3-5 years. Let’s be honest with ourselves as we are looking over the current demographic cliff.  It is easier to scale up than to scale down, so scale down to your realistic levels now!  We also need to define the resources necessary to support that level of enrollment in terms of classrooms, dorms, faculty, and supporting services.  

  • What is your enrollment projected to be, not just this year, but 3-5 years out? 
  • How does that differ by major?
  • Based on the enrollment, what size campus do you need?
    • In terms of classrooms?
    • In terms of room and board?
  • What average size class will this result in?
  • What subjects are most impacted? 
  • How does this inform resource allocation by major? 
  • How does this inform resource allocation for supporting services (i.e. Athletics, student services, etc.)?

Balance the need to provide a quality education in a financially sustainable way. 

We generally recommend creating working groups for several areas to examine opportunities and quantify them in terms of dollars and time. 

In these working groups we examine our cost structure assuming these new enrollment levels, using some of the clues we gleaned from earlier steps to answer the questions: 

For many of us this reflects the need to modify our curriculum through reducing majors, minors or offering fewer sections. For others it is about offering more distribution channels through online, and employer sponsored programs. 

This step is arguably the most difficult and most time-consuming part of the turnaround process. It requires significant resources from all areas of the institution. But once completed, we are still not finished. 

Seek approval

Our structure of shared governance and accreditation require us to go through a multistep process to get feedback before we can ultimately affect these changes, but the more people involved in the earlier work, the easier this approval will be, including:  

  • Receiving Provost and Dean examination and input
  • Gaining administration review and approval
  • Getting faculty approval. If we are considering closing programs, or cancelling courses, that may mean reducing the faculty involved in those programs. Faculty work on multi-year contracts and may be unionized. There are penalties for cancelling contracts. 
  • Seeking accreditor approval for significant changes. By the time we complete this step we are likely a year into our process, and we have not even started to make the changes. 
  • Making changes to our enrollment process and course catalog
  • Implementing teach outs, new programs, program changes

Ultimately, we have a written contract with our students whereby they enrolled and paid tuition with the promise of completing a 4-year degree. This contract was likely signed 6 months before that 4-year clock started, thus it is a 4 ½ year contract. The timing of these changes will depend on the nature of the change. If we plan to eliminate programs or make substantial changes to programs, it could take several years before we see the impact on the bottom line.  

Of course, there is an option that we like to consider our last resort, called financial exigency. This is a term we try to say only behind closed doors in a sound-proof room. It is akin to the reorganization provided under bankruptcy. I don’t specialize in this, but the American Association of University Professors discusses this in more detail and provides some worthy considerations.

Photo by Jim Wilson on Unsplash

Grief + Crisis Management = Transformational Change 

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When the pandemic began, I felt like a CBO (Chief Business Officer) without a university and a faculty member without a tenure track. On the faculty side, there was a sense of panic and loss. The challenges of teaching online, the inability to complete research projects, and the desire to see students learn weighed heavily. We were thrown into great confusion.   

There was an immediate need to learn how to teach online, something many never wanted. Could we find a way to integrate online learning seamlessly into our established processes? Many felt a sense of disconnectedness. Remember, this is a group of people who spent every day interacting with hundreds of students and colleagues. This group had not spent a great deal of time in virtual conferences. That all changed overnight.     

How grief and crisis management relate to post-COVID higher ed  

There is a connection between our reactions to the pandemic and the 5 stages of grief — denial, anger, depression, bargaining, and acceptance. In the early part of the pandemic, we had no time to go through the first three stages. Circumstances thrust us directly into the latter two stages. It’s no surprise that later, we saw and still see faculty members and my colleagues in the business world exhibiting the first three stages, along with confusion, and frustration, all at once. The good news is, we are also seeing signs of bargaining. People are reaching out, telling stories, and finding meaning and acceptance.   

CBOs did not have the luxury of grieving; they were thrust directly into crisis management mode bearing the huge responsibility to “save the institution”. Behind the scenes, their jobs and realities changed overnight. They found themselves making tough decisions about the health and safety of students and staff, knowing that some of those decisions could cause long-term financial hardship for the institution.  

As finance professionals, we are trained to examine the finances and immediately dive into protection mode. Most of us have managed our institutions through a tough recession and know the unpleasant drill. This feels different. There is significant change on the horizon.     

In this examination, it occurs to me that there is a relationship between grief and crisis management. When we experience grief, it is generally because we experienced a loss that was beyond our control — a loved one, a job or something else. Sometimes this can be coupled with a crisis. How will I manage financially? Can I do this alone? Like the CBO, we can feel alone in our need to manage the crisis and work toward a solution. Often in crisis management, the loss is less personal. The crisis centers more on a sense of personal responsibility. CBOs feel the responsibility to take care of their teams and save the institution. This is a heavy load to bear.    

The fallout from the pandemic and its ongoing nature creates a challenge for financial teams. Will enrollment numbers ever go back to their previous levels? Is hybrid learning a fact of life? What challenges does that present to faculty members, students, and the financial health of the university? What opportunities will it bring?   

Are we on the verge of a transformational change?   

Bob Tipton’s 9 Stages of Transformational Change represent a merger of the stages of grief and crisis management, with grief representing the first 6 stages and crisis management, the final 3. Perhaps this is why transformational change can be so difficult. We all move through these stages at different paces.  

Perhaps, at a time like this, we can spend more time listening. Having empathy for the despair and skepticism on both sides will help us move together towards tolerance, acceptance, and agreement. Our challenge is time. We will not have the luxury of time as we devise options for our institutions. We need to find a way to reach over the divide now so we can move forward as one institution and better serve our students. After all, our students have been through a lot, too. They will expect something different from us and it’s our job to deliver.  

How Can CBOs Prepare Finance Teams for the Future of Higher Education?

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The picture shows graduates throwing their hats to represent the future of higher ed and finance teams.

Are the declining enrollments, increase in online education, and general economic turmoil over the past two years the result of COVID or an accelerated timeline of the inevitable? In the past few months, I have spoken with CBOs (Chief Business Officers), presidents, and recruiters trying to fill senior level finance roles. They need people with experience in higher education and finance, who are prepared to navigate a technology-driven and uncertain future. To enable CBOs to hire the right people to fill those roles, they need a guide to provide insight into the priorities for the future. I call it the 5 ATES.

Transformation focuses on platforms, people, and processes. To improve the student experience, we need to make our operations leaner and more efficient. This will mean overcoming anxiety over new technology and proactively planning for the future of higher education.

Here are 5 actions CBOs (Chief Business Officers) can take now to navigate the future of higher education.

I call this the 5-ATES.

  1. Automate – data entry and link data across all platforms.
  • Search for repetitive and time-consuming tasks, ones we call high-volume, low-value, and train your software tools to complete them for you using AI (artificial intelligence). 
  • Rather than training a person to load the payroll journal entries, reconcile bank accounts, or enter accounts payable, train your finance team to train the AI. Your team will have more time to focus on more important and rewarding assignments and bots will finish the recurring tasks faster. 
  1. Activate – by focusing on actionable data across the institution beyond money and link data to understand:   
  • How much does delivering a degree or class cost per student? Does this vary by program?  
  • How does classroom utilization compare to classroom cost?  
  • How much does it cost to recruit a student? Is the amount rising or falling with shifts in enrollment?  
     
  1. Cultivate – your own talent to insure against the shrinking pool of finance professionals.  
  • The Great Resignation is starting. 
  • With lower enrollment and more degree choices in the finance arena (like Data Analytics and Entrepreneurship), fewer students are enrolling in accounting.    
  • This results in fewer potential employees, who will expect larger salaries and more flexibility.   

Finance teams of the future will need to be tech savvy and analytically astute. We will need to find them early, mentor them intentionally, and train them fully so they’re technically adept enough to support our institutions in tomorrow’s competitive landscape. 

  1. Delegate – by building a framework for decision making.   
    I constantly witness people who need to ask before making decisions — even small ones. When people need to ask permission before making decisions, they never learn to evaluate consequences and decide They don’t have the benefit of learning from their mistakes. To speed up decisions and your finance department, try this.    
  • Rather than allowing your team to come to you before making decisions, empower them to decide some matters for themselves.  
  • Enable finance teams to act in matters where consequences are at an acceptable level, and back them up if they make mistakes. They’ll learn to evaluate, decide, and deal with the results.  
  • For more impactful decisions, encourage them to present fully formed recommendations to you and to articulate the reasoning behind them for discussion.   
  1. Innovate – Create a culture that embraces change without fear of failure. 

This policy goes beyond decision making. It encourages people to look for opportunities to do things differently, and know they’ll have your support if things do not go as planned. If we want to keep pace with the changes necessary to support our institutions through this digital transformation, we need all the help we can get from each member of our team.    

Bonus idea: Consider partnering with your school of business to share your insights on the trends shaping the finance and accounting world. After all, they will be preparing the finance teams of the future. The timeline for deciding what changes to make, seeking and gaining approval for curriculum changes, and graduating students takes at least 6 years. In that time, how will your needs evolve?  

If you are curious about where your institution stands with the 5-ATE’s or would like a roadmap for getting there, reach out for a free consultation. 

Photo by Baim Hanif on Unsplash