Higher ed costs | Grant Thornton

Rethinking higher education expenses: A focus on purpose

In this article, the second in our series of articles with insights from Robert Scott, President Emeritus of Adelphi University and senior advisor to Grant Thornton’s Higher Education practice, our focus will be on cost cutting. This article addresses the fact that increasing revenue also requires the mindful controlling, avoiding and reducing of expenses. Scott’s insights provide guideposts for your boardroom budget discussions.

Dennis Morrone

National Managing Partner

Not-for-Profit & Higher Education Practices

An already stressed higher education landscape is being pressured further by COVID-19, causing declining enrollments, budget deficits and job loss. Although institutions are seeking additional revenue, they must also turn to cost cutting for financial stability. It’s not as simple as slashing budgets; instead, it’s a matter of nuance in controlling expenses.

With 82% of college and university presidents in agreement that COVID-19 has created an opportunity for institutional changes that they already wanted to make, boardrooms are expected to host myriad budget discussions surrounding personnel and programs. Managing change, however, requires a thoughtful process that respects the institution’s mission and purpose, and does not vacate the core values of shared governance on campus.

Examine the cost structure

A good starting point in examining the cost structure is to conduct a ratio analysis. By comparing the ratio of revenues and expenditures over time, and in comparison to both peer and aspirational institutions, campus leaders and board members can gain a better understanding of the university or college’s financial condition. These ratios include:

Revenue diversity Including not only tuition and fees but also investment, intellectual property and real estate income
Expense and financial aid ratios Separating out instruction, research and public service, academic support, student services, institutional support (administration), auxiliary operations such as housing and dining, and institutional financial aid from invested funds or tuition discounting
Debt ratios Including debt service burden and average age of plant in years
Liquidity ratios Especially in relation to operations and institutional debt
Full-time equivalent Student ratios to revenue and expenses by category

Examine alignment

Get 10 strategies for increasing revenues and preserving resources.

Rethinking revenues, preserving resources in higher education.

Learn more about managing expenses by controlling — not just cutting — staff and program costs; read “Staff and program reviews inform expense decisions.”

When making operational changes, care should be taken to ensure that the resource allocation aligns with the institution’s mission and goals. Alignment analysis will evaluate how the results obtained from these changes relate to the approved mission, articulated purpose, one-year and multiyear goals, and how well these goals are aligned with strategies and plans, resource allocations and the reward structure.

For example, sometimes institutions express a commitment to student satisfaction and success by assuring the availability of full-time faculty. However, that commitment must be aligned with the fact that one of the most common forms of reward for faculty, beyond compensation, is released time from teaching to pursue individual research interests. Released time from teaching is also used as compensation for faculty members who take on administrative duties such as department head or program director.

On the downside, the full-time faculty member is at times replaced by a part-timer who often lacks private office space and the time for advising students and campus clubs. This is not to say that released time for research is a bad thing — but it should be related to the institutional mission and goals. Far too many institutions engage in what is called “mission creep.” Some leaders think that increasing faculty publications, research grants and doctoral programs will add to prestige and public visibility, when in reality, strategies that might gain positive public relations may in fact be more form over substance and a less-than-optimal use of resources.

In some cases, it might make more sense to pay a stipend and keep a full-time faculty member in the classroom.

Alignment analysis helps explore the degree of coordination in strategic and integrated planning, e.g., enrollment, academics, facilities, student life and diversity. The analysis prompts questioning assumptions, ensuring that funding is aligned with mission and priorities, and engaging in strategic thinking as well as planning. It helps in modeling different futures based on differing assumptions.

A review of the cost structure can be organized around five Ps — Purpose (Mission), People, Programs (and Services), Processes and Place (or Plant). While the analysis differs between a single-campus private college and a multicampus public university system, the variables to be examined are the same.

Revisit and confirm your Purpose

Each public and private college and university in the U.S. operates under a charter granted by the state in which the institution is located. The charter incorporates the mission statement, which defines the institution’s purpose, goals and approach to fulfilling the mission and achieving the goals.

The statement of mission and goals guides the governing body, faculty, administration and staff in making decisions related to strategic and integrated planning; resource allocation; and the definition of institutional outcomes. Goals should be realistic, appropriate to higher education and consistent with the mission.

Proposed plans should include:

An articulation of the mission or purpose, as well as the values, of the institution
Identification of the principles for decision making, including honoring the heritage and the mission of the institution
A manageable set of priorities for action, developed with consensus
A statement of assumptions about the internal and external forces at work, including strengths, weaknesses, opportunities and risks or threats
Analysis of alternative courses of action
Identification of the results desired and the resources needed
An articulation of the strategies for achieving goals
Notes on the milestones and metrics for monitoring progress
Specifications of the periods of time for reflection and community reviews of goals and progress

As with any analysis of revenues, an analysis of expenses must start with the mission. What is the purpose of the institution? Institutions should periodically assess their mission statement and goals to ensure that they continue to be relevant, achievable and sustainable.

In this series, Robert Scott mobilizes his expertise and insider understanding of higher education to help boards be better equipped to face new challenges. In his next article, Scott will focus on higher education expenses with particular attention paid to people and programs and will provide answers to important questions such as “How can our institution remain mission-based, student-focused, market-smart and data-savvy in controlling, avoiding and reducing expenses?”

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Dennis Morrone

National Managing Partner

Not-for-Profit and Higher Education Practices