The Mistakes to Avoid

When confronting economic turmoil, the demands of short-term crisis control can overwhelm colleges and universities. In a higher education version of Maslow’s hierarchy that prioritizes survival above other needs, the institution neglects vision, strategic thinking, and sound management as it struggles to reach enrollment targets or make payroll. Such practices may meet immediate needs at the expense of long-term sustainability. What classic mistakes do colleges and universities make in economic downturns?

Mistake #1: Forgetting danger signs. Many presidents and boards use a “dashboard” of strategic indicators to monitor academic and financial health. They help separate facts from fears. Yet, a common problem is that the dashboards do not have targets (when will we be satisfied?) or, related to current circumstances, minimums (when should we be worried?). Using Guilford College as an example, fiscal danger signs that would get our attention include fewer than 380 traditional first-year students (when 400 or more has been the norm since 2004), student fees above the average of our competitors, financial aid discount much above the 39 percent rate of recent years, an increase in expenditures higher than increases in revenue or enrollment, graduation rates below 6-year averages, and an alumni giving rate less than 20 percent. We would also be concerned if operating net assets decrease or endowment spending exceeds 5 percent of its lagging average market value.

Mistake #2: Not considering all budget options. When a budget deficit looms, the easiest cuts in spending and personnel are across-the-board. They are also wrong to the extent that they ignore differences in centrality to mission, size, and efficiency. Few budgets can be fixed without attending to personnel numbers and compensation.

• Consider making some positions part-time, offering early retirement, using vacancy savings to pay more for added responsibilities, and using student labor paid with credits and not cash.
• My own bias is to reduce positions before reducing salaries because employees ought to be fairly compensated. Institutions can often lose positions, at least at the start of the crisis, with less stress and effect than anticipated. When I was the new CFO at Bowdoin College, we cut 70 positions — not a catastrophe when you consider that we had 1350 students and 630 faculty and staff — while budgeting raises of 19 percent for faculty over two years and lesser amounts for administrative and support staff.
• With growing enrollment, significant savings are possible by increasing average class size and the student-to-faculty ratio rather than new hiring. An increase in average class size from 20 to 22 gains 10 percent in productivity that would not turn seminars into large lectures. Sometimes tightening up on course reductions for faculty with administrative duties has the same effect.

“Growth by substitution” may allow you to take some budget savings to invest in “signature” programs or other programs with great market interest. Pay attention to effects on cash inflows and outflows when major construction or renovation projects are planned or deferred. A $1 million renovation may have minimal effects on the budget and financial statements because the cost is spread out or depreciated over the years of useful life. On the other hand, payment of the $1 million to construction companies and other vendors occurs now and depletes cash. In any case, develop multiple scenarios of revenues and expenses. Budget as conservatively as possible based on the least optimistic but still plausible scenario. Make the hard choices early; for example, waiting until the middle of the fiscal year to cut the budget means that any reductions in positions or spending have only half the year to take effect. If you get good surprises later on, you can restore some of the reductions.

Mistake #3: Thinking that bigger is always better. If student fees, fund-raising, and endowment are not supplying sufficient resources, institutions often turn to enrollment growth. As a short-term measure, more students can boost revenue if financial aid is controlled and related increases in faculty and staff are contained. When Guilford increased our enrollment by 45 percent in five years, the good news was administrative and support staff increased only 20 percent. The bad news was that the faculty grew by 60 percent, which undoubtedly reduced average class size and improved course discussions but mitigated the financial benefit of enrollment growth. Students transfer more often these days — sometimes starting at less expensive community colleges and then transferring to four-year institutions — so actively recruiting upperclass students can supplement intake of first-years. Just be sure that the transfers get the same kind of welcome and orientation. Pay attention to student retention and persistence. What factors at your college or university prompt students to stay or leave? Many institutions, including Bowdoin when I was there and Guilford today, have targeted programs for sophomores, who can feel neglected and unguided in comparison to the special attention that they got as first-years. It is usually more cost-effective to keep a current student than to recruit a new one.

New academic programs are not an economical way to attract more students, especially if the lack of resources diminishes course quality, advising, programming, and placement in graduate schools or jobs. Enrollment growth in an institution with excess capacity is far more beneficial to the budget than growth that necessitates new construction of academic and social spaces. Finally, among the most significant indicators of financial health is endowment per student — a study I conducted a decade ago as Bowdoin College’s CFO showed a high correlation between endowment per student and rankings of national liberal arts colleges in U.S. News — which is diminished when enrollment grows more rapidly than endowment.

Mistake #4: Not managing the crisis. No matter how severe the crisis, campus leaders cannot act like passengers on a whitewater raft who have little control over their situation. Never panic. It helps to have a strategic plan or at least strategic thinking to guide actions. Increase visibility and communications. Use a variety of media and methods, including web-based, to discuss problems and proposed solutions. These might include community meetings, open office hours, letters to alumni and parents, and articles in the student newspaper and staff newsletter. It is better to have periodic updates rather than one large and often impenetrable “state of the campus” address. Be sure that the institution has a spokesperson with a clear message that is truthful and instills confidence without underplaying the danger. Community members may not support major budget reductions that upset the status quo but at least they will get the process and parameters.

Do not let economic crises hide longer-term strengths or weaknesses, and the need to act on them. For example, an institution may try to explain to its accrediting agency that a financial predicament is due to the economy when, in fact, they have been running budget deficits and overspending from endowment for years. Find the money to invest in marketing, recruiting and fund-raising because a steady enrollment and gift flow help maintain revenue. Solicit donors to replenish endowed funds with special attention to financial aid funds essential for student access and affordability. Respond to greater needs in counseling and career services caused by anxious students and families. Do not let others use the crisis to further their own agendas to challenge the administration or push “pet” programs.

Mistake #5: Not properly involving the board. Given their ultimate fiduciary responsibility, the governing board has to be informed and involved. Use the executive committee or other leadership team to work with the president or chancellor. The CEO and board should speak with one voice to ensure clarity of message and calm the community. Show that you appreciate their anxieties. Design special messages for the board that provide data and recommendations not necessarily shared with the wider community. In the spirit of “give, get, or get off,” board members should be expected to donate money themselves, encourage others to give, and to lobby with legislators and others whose support is essential.

Mistake #6: Confusing strategy and tactics. Strategy is about the basic direction of the institution and its mission, priorities, and role in the world. Tactics are the means we use to achieve the strategy. Tactics deal with “how to” questions; strategy is about “why.” A strategic response to unfavorable economic circumstances might involve, for example, adding a new student population like working adults; transforming the business model from low tuition/low financial aid to high tuition/high financial aid, as many public universities are now considering to cope with plunging state aid; and dropping major programs in liberal arts to focus on pre-professional programs. Students will be attracted to majors with excellent job prospects. If the strategy is embedded in a formal plan that is aimed at long-term competitive advantage, protect the plan’s financial resources even while cutting the budget or the crisis will get worse or reoccur sooner. We made this mistake at Guilford during two years of tight budgets when the strategic plan was among the first items cut, and should have been among the last. Depending on the strategy that the institution selects, tactics often involve improving efficiency and work processes, better ways to recruit new students, and more profitable bookstores, summer programs, and other auxiliary enterprises.

Mistake #7: Not asking the right questions. It is hard during an economic crisis to ask fundamental questions about the institution. Yet answers to these questions can position the college or university more effectively to deal with whatever develops. Some of the best questions are:

• How does the economy affect our strategic plan and priorities?
• How much of our revenue is at risk?
• What would we do if the budget had to be reduced by 20 percent?
• Do we know which of our programs and activities are mission-critical, and what each costs?
• Who are the people most critical to our success?
• How do we differentiate ourselves from the competition? What is our competitive advantage?
• What are we communicating to major donors?
• What does our community know and when/how do they know it?

“This too shall pass” was a warning to King Solomon, and it should be a comfort to college and university leaders. The current crisis will subside as the economy inevitably swings between boom and bust and the financial markets fluctuate between bull and bear. It would be tragic if higher education did not learn from our mistakes and apply these lessons both now and the next time that the economy falters. History can be a great teacher if we pay attention.