I recently had the opportunity to attend the annual JP Morgan Higher Education Summit and share insights with attendees over lunch. Over the past 18 months, our work has been shifting very heavily toward metrics. We use this data to help understand how much it costs to educate, house, and feed each student and what that looks like over time. Historically, I spent much of my time with CFOs. These days, the presidents and provosts are calling me. They understand the imperative to right size each higher ed institution to prepare for the demographic cliff, but not enough to make strategic cost-cutting choices.
I liken these issues with the challenges a chef has when creating a menu that enables the restaurant to thrive. I’ve devised several steps you can take to help you understand the challenges specific to your institution.
What if I told you that the last time you went out to eat, the restaurant was losing money? Food and labor costs have increased dramatically, but the managers worry about raising prices for fear of losing customers. Sound familiar? I have a challenge for you. I need you to help me solve this problem for the restaurant. What would you do differently to make the restaurant profitable? If you ponder this question, you will come up with incremental changes that may or may not move the needle. When I do this exercise live, we find that even financially savvy people do not feel knowledgeable enough to solve these problems. This is exactly how our provosts, presidents, deans, and other leaders feel when we ask them to cut costs, especially across the board cuts. They know what each person in their area does, but they do not understand whether the cost of that work adds worthwhile value to students.
Our metrics help shed light on these dynamics and provide clarity for making strategic decisions. Here are some tips I learned from my days as a sous chef to help you think differently about higher ed. As you read this, I want you to draw parallels to your campus.
Speak a common language.
We all know partnership is critical to effecting change. We also know that we in finance do not have the expertise to make these changes alone. However, we do have the ability to enable and influence the academic side, the president, and our leadership team. But it requires us to translate our message into the language others speak. Let me give you an example. If I manage a restaurant that is losing money and customers, and I share this information with my chef, what response will I get? I am likely to hear suggestions like “We need to do more marketing” or “Offer more specials and discounts”. In other words, “I’m making a great meal, and that is my role, you need to bring more customers in”. What if I analyzed the menu over the past few years? I see that on average, beef Bourguignon orders have decreased to about 6 orders a week. And yet, the dish remains on the menu.
I can even go one step further and show that the cost of producing 60% of our entrees is more than we charge for them. At this point I can ask the chef to examine the ingredients and look for opportunities to save money.
What if I supply the cost for producing each item on the menu, broken out by the underlying ingredients? I’d then ask them to make each dish based on a $10 gross margin.
The point is the chef can speak the language of food and ingredients. By converting total dollars into units they understand, like the cost of a menu item, an ingredient, and number of weekly sales, I bring them into the profit conversation.
I hope you are drawing parallels to higher ed and your campus. The menu items are the degree, and the underlying sections are the ingredients. When I’ve shared the average cost per section and the break-even number of students, I have heard faculty, deans, and provosts express gratitude for “finally helping them understand the cost structure of their programs”. So, find a common language and speak it.
Understand the cost of each menu item.
Each menu item should generate a profit but not necessarily the same profit. Remember, expenditures encompass not only the cost of ingredients, but also the cost of restaurant utilities, table linens, staff salaries, etc. Each menu item will have a different margin and the menu needs to reflect the chef’s talent and specialties. When the food arrives at the table will the customer think the experience was worth the price?
Do you understand the margin of each program?
In restaurants, we change the menu each season to take advantage of fresh, seasonal ingredients and to keep our customers coming back for more. That doesn’t mean we have to spend frivolously. The chef I worked under explained the trick to delivering meals quickly and profitably was using the smallest number of ingredients. He mixed and matched those ingredients in different menu items to create delicious and varied meals. Fewer ingredients meant lower inventory cost, less food waste, and shorter wait times.
The entire menu had to be priced out in advance. Each menu item needed to generate a target profit. Of course, the food had to be appealing and show off the talent of the chef. As you can imagine, the cost of ingredients can vary. When developing the menu, we consider the cost of each ingredient and choose brand name, vendor, and portion size. We bought whole chickens, rather than parts, and used legs, thighs, and breasts differently. We also used the remaining parts to make broth for soups and glazes. Many ingredients did double duty. Can you see how this relates to higher ed?
What’s the break-even point?
Our analysis often shows that we have some menu items that are not ordered enough to support their cost. We also find that too many outliers result in waste. Think about the number of students per class. How many sections run with numbers way below the break-even point? Is that because we offer too wide a variety of courses? Do we keep adding them without removing any? Are we carrying ingredients not required for any item on the menu or are these classes required for a major? Should we continue to offer this major if so few seek it out?
While we in higher ed can’t exactly change the menu each season, we can examine our menu each year and determine whether we need to change the menu or the underlying ingredients.
Stay tuned for the next article in our Chef series, Is the Star of the Show the Main Dish or the Side Dishes?
If you are interested in the common metrics we use to analyze the cost and revenue drivers for educational institutions, click here to download.