Small College Problems

Speakers suggest areas to examine as small colleges try to change their business models.

September 23, 2016
Bob Shea

PHILADELPHIA -- Bob Shea told a story about preparing to lead a general planning board retreat at an elite liberal arts college, only to hear that the board chair and president didn’t want to use the word “change.”

“It was too much of a hot-button topic on their campus,” said Shea, senior fellow for finance and campus management at the National Association of College and University Business Officers. Shea spoke Wednesday in Philadelphia at a NACUBO session for small institutions, presenting on updating business models.

Resistance to change -- or even using the word “change” -- could be a big problem for small colleges, particularly as many institutions report being squeezed by rising tuition discount rates and other financial pressures. But Shea and other presenters tried to walk more than 60 small-college representatives through related issues to help them find ways to update their business models. In doing so, they talked about a two-year NACUBO effort called the Economic Models Project, which is designed to explore the current state of higher education economic models and envision what alternative approaches might look like.

Presenters repeatedly said that no single answer will solve institutions’ problems. But Jacalyn Askin, manager of the Economic Models Project, at least offered an easy solution for leaders not wanting to use the word “change.”

“Fortunately there are lots of synonyms for ‘change,’” Askin said. “We just got the thesaurus out.”

Askin listed six broad issues small institutions have trouble with on their campus. Chief among them were faculty issues and revenue and expenses.

Under the issue of revenue and expenses, college representatives talked about demographic challenges -- like the shrinking supply of traditional-age students -- high discount rates and expensive employee benefits, as well as the cost of athletics and regulatory compliance. Colleges discussed issues of shared governance and tenure under faculty issues.

Other broad issues were public trust, internal and external communication, higher education’s value proposition and institutional survival. Askin found it particularly interesting that colleges were worried about survival, because data informing the issues was gathered before much-discussed stories broke about institutions closing.

“This particular exercise was done in September 2014, which preceded Sweet Briar,” Askin said, referencing the high-profile 2015 attempt to close the all-female college in rural Virginia, which was eventually reversed by alumnae.

Many colleges expressed a sense of losing their historic past, Askin said. Or they talked about a reluctance to dream big about the future.

Shea identified five more broad issues to examine. One was resource allocation. Another was that colleges and universities are labor-intensive organizations, typically with between 60 percent and 80 percent of their expenditures tied up in personnel costs. Another theme was capital, or the amount of reserves a college had on hand. Other themes were the external environmental factors affecting colleges -- the things they don’t control -- and the issue of leadership.

The idea of the Stockdale paradox is important for leaders in times of change, according to Shea. That idea is that leaders need to have faith they can succeed while still acknowledging the most brutal facts of reality.

NACUBO is working to find a set of metrics institutions can use to determine whether they are on a sustainable path. Right now it has a list of about 90 metrics. But that isn’t a realistic number of indicators to monitor, Askin said, so the association is working with chief business officers to narrow them to a more manageable list.

Top-ranked metrics so far include the tuition discount rate and how it is changing. Student-to-faculty ratio is also a top metric, along with the cost of acquiring grants and gifts, debt service costs, and deferred maintenance. Leadership churn was also listed.

The Economic Models Project isn’t about finding one model that will work for all institutions, Askin said. It’s about finding a framework to help institutions create new models for themselves. To that end, institutions need to think about their missions -- who they serve and whether they are a specific type of institution like a liberal arts college, historically black college or religiously affiliated institution. They also need to consider their structure, their core strengths and their strategies for using resources.

“Our emphasis in this is [that] the business model is not your financial statements,” Askin said. “Your financial statements are after-the-fact reflections.”

Larry Ladd, national director for Grant Thornton’s higher education practice, said he has seen the slice of colleges facing significant financial difficulties grow since he started at the firm in the late 1990s. Although there are no simple solutions to the problems such colleges face, institutions involved often share similar characteristics, he said.

“Usually by the time the college is calling us in, they’re worried about meeting payroll,” Ladd said. “Not necessarily in two weeks, but in six months. One of the first questions is, ‘How long do we have?’”

Common institutional characteristics often include boards loyal to their colleges but uncertain how to provide oversight, Ladd said. Presidents are extreme in their optimism. The chief financial officer position is either vacant or filled by someone new -- or by someone who is in no position to exercise power.

That’s important because financial leaders are key to pushing for new strategies and change.

“The chief financial officer is the pessimist,” Ladd said. “You should be actually driving the sense of urgency.”

Other characteristics of institutions facing difficulties include liquidity and cash management issues. Additional red flags can include violations of debt covenants and management that doesn’t effectively use data.

Universities also often feel they are special, Ladd said. They can be isolated from larger higher education associations and also draw students from a limited geographic area.

Against that backdrop, leadership is one of the most critical factors, Ladd said. The thinking at troubled institutions often centers on beliefs, he said. Leaders hold to the belief that they have a great institution, one that gives students a wonderful experience and allows them to go out and make a difference in the world. Leaders believe they will increase their enrollment. But the reality is different.

“People should come -- indeed they should,” Ladd said. “People should pay -- indeed they should. But they are not.”

Colleges have generally resisted mergers, Ladd said. In essence, they resist giving up their identities. He sees improving student retention as the most effective way to raise money for a college. It’s easier to keep students than it is to find new ones, Ladd said.

Ladd also acknowledged that it’s difficult to overcome that hot-button issue -- the fear of change. Financial officers can make the case for change without making it sound too intimidating, he said.

“You can’t make the change,” Ladd said. “But you can keep raising the questions.”


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