Cuts to university and college budgets are coming. While the magnitude of these cuts will become clearer in the weeks and months ahead, what is certain is that institutions must now prepare for sharp declines in public funding and tuition revenue.
State revenues were projected to drop 10 percent for the 2020 fiscal year (which ended June 30), and as much as 25 percent again in 2021. Institutions are uncertain about fall enrollment numbers and face increased cost in operations due to the need to address immediate COVID-19 impacts and invest in alternative ways to deliver instruction. And, unlike the years following the 2008 recession, institutions cannot expect to fill budget holes by raising tuition, owing to concerns over the already high cost of tuition and student debt burden.
This leaves college and university leaders with what feels like an impossible task: cutting institutional budgets while maintaining or even strengthening core capacity to achieve their strategic priorities.
Higher education’s initial response to this challenge has not been encouraging. Instead of using this moment to move toward needed transformation, the industry has reverted to an old playbook, where cuts are neither strategic nor grounded in important goals of creating a sustainable business model that is aligned with the institution’s strategic vision. Rather, we largely see systems and institutions:
- Adopting arbitrary “across-the-board” cuts to spending and salaries
- Forgetting to discover and protect their economic engines -- those programs and services that generate net revenue
- Failing to fully engage a broad group of stakeholders in the budget-cutting and reallocation process
As a result, systems and institutions across the country are focused on simply trying to balance budgets rather than being focused on strategic priorities for change. In doing so, the emphasis is on preserving how higher education currently does business rather than moving systems and institutions forward. This marriage of short-term solutions with long-term challenges cannot address the underlying systemic and structural challenges that existed before COVID-19 arrived.
It is time to recognize that past practices for allocating resources and balancing budgets no longer fit with contemporary reality. A new strategic finance framework is needed to guide decisions about both how to cut and invest in higher education. This orientation departs from existing budget modeling exercises, where the emphasis is on raising the necessary revenues to continue business as usual, and shifts the focus from:
- Internal institutional demands to external student needs
- Budget balancing (“Do I have enough?”) to return on investment (“What do I get from what I have?”)
- Legacy and internally defined academic program offerings to externally focused and data-informed academic and service portfolios
- Giving a little bit of resource to lots of things to making larger, strategic investments in initiatives that can drive mission and student success
This shift to a strategic finance framework is both necessary and possible in our current moment of crisis. It supports needed change and capacity building at institutional, divisional and program levels to create alignment between strategy and resources.
Of course, implementing this framework will require fundamental changes in institutional culture, data systems and decision-making processes. And the context for applying the framework will be different for leadership at each level of an organization. That said, best practices are now emerging around applying a strategic finance framework, allowing leaders at all levels to:
- Answer strategic questions about the organization’s future. Leaders must build a vision for the future: What do our students need and want? What are we good at? Where do those student needs and institutional strengths overlap? And are those offerings grounded in our current capacity and resources? This process will likely result in systemic changes to how the organization currently does its work. But in clearly capturing the vision, leadership can support systems and institutions in changing toward something, rather than just keeping their heads above water in this crisis.
- Develop a strategic platform to guide resource allocation decisions. Leaders need to focus their organizations on executing the right strategies to achieve the shared future vision. Strategic platforms represent a fundamental shift from planning to doing and ask: How we will achieve the shared future vision? What are the small number of investments needed? What will they cost, and how might we reallocate resources toward those investments? What metrics should we use to track our progress toward implementing these strategies? Unlike strategic planning documents, a strategic platform becomes the framework for making decisions about: What are we going to grow? What are we going to hold? What do we have to let go or stop doing?
- Determine the cost and net revenues of existing academic portfolios and services. This effort will likely require reorganizing existing data and collecting new data. Be transparent with information: How does the organization generate its revenue? What are the returns on organizational investments? And where do cross-subsidies exist? Apply the strategic platform to (re-)consider how resources are being invested, recognizing that some level of subvention among academic units is both necessary and desirable. Look for opportunities to repackage existing resources in ways that promote resource sharing and flexibility.
- Prioritize long-term solutions over short-term fixes. One-time cuts, such as fixed-percentage salary reductions, limits on retirement contributions, hiring freezes, carry-forward sweeps and benefit rollbacks are short-term cash management strategies that provide some measure of fiscal flexibility in the near term. However, these strategies do not put organizations on the path to a sustainable financial future. Recognize that the organization may need to simultaneously make cuts in some areas and investments that build capacity in other areas. Resources should be targeted and aligned with the institution’s strategic platform. This is particularly true for personnel. While this will involve difficult choices, it is unlikely that many organizations will be able to, or should, maintain their existing staffing models.
- Establish clear lines of authority. People need to know who will make final decisions about strategic priorities and how resources will be aligned with these priorities. Good leaders will establish who the deciders are and how stakeholders can provide input.
- Develop a robust plan for communicating, and soliciting feedback, from stakeholders. Change management requires a robust communication plan to address multiple stakeholders through multiple channels. In the current moment, there is no such thing as overcommunication. Focus on the two-thirds: in any moment of transformation about one-third of the community will get on board, one-third might get on board if a case is made, and the remaining one-third will never buy in. Leaders frequently spend too much time trying to convince the one-third who comprise the never group and not enough time on the one-third who might. Provide appropriate data to address the “why” questions for change and build support for a new strategic vision.
Insiders and casual observers alike widely recognize that the current higher education business model is not sustainable. Changes on the horizon will either occur by force or choice, and the COVID-19 pandemic is simply an accelerant. Now is the time for higher education leaders to approach budgeting using a new playbook, one that is grounded in a strategic finance framework.