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?
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.
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.
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.