Extending the Role of Finance in Universities and Colleges the... · Extending the Role of Finance in Universities and Colleges HIGHER ... Two Priorities that Are Consistent with

Extending the Role of Financein Universities and Colleges

HIGHER EDUCATION

By Charles Kim, Jason H. Sussman, David Woodward, Nick Long, and Tony Ard

PROJECT TEAM:Charles Kim, Managing Director, and Director of the Higher Education division, Kaufman, Hall & Associates, LLC

Jason H. Sussman, Managing Director, Kaufman, Hall & Associates, LLC

David Woodward, Vice President of Financial and Capital Planning with the Higher Education division, Kaufman, Hall & Associates, LLC

Nick Long, Vice President of Financial and Capital Planning with the Higher Education division, Kaufman, Hall & Associates, LLC

Tony Ard, Vice President of Software with the Higher Education division, Kaufman, Hall & Associates, LLC

© Copyright 2017 by Kaufman, Hall & Associates, LLCAll rights reserved. Reproduction or reuse in whole or in part is prohibited except by permission.

Contact Kaufman, Hall & Associates at 5202 Old Orchard Road, Suite N700, Skokie, IL 60077. Phone 847-441-8780. www.kaufmanhall.com

http://www.kaufmanhall.com

Extending the Role of Finance in Universities and Colleges 3© Copyright 2017 by Kaufman, Hall & Associates, LLC

Financial stressors in the higher education sector include:

• Challenges to the business model and core revenue sources

• The need for continued investment in fixed-asset infrastructure and emerging technologies

• Competition that is increasingly value-based and non-traditional

The Business Environment for the Nation’s Colleges and Universities Is Increasingly Complex and Demanding

Key Risksin HigherEducation

Revenue andExpense

Pressures

IncreasingPressure on

Invested Assets

New Disruptive Competition and Business

Model

Capital Funding Needs

Getting and Keeping the Best Talent

Extending the Role of Finance in Universities and Colleges4 © Copyright 2017 by Kaufman, Hall & Associates, LLC

Similar to what is occurring in many industries nationwide, the financial underpinnings of higher education’s business model are vulnerable.

• Students and their families are increasingly price sensitive

• New market entrants are competing to provide education in innovative and less costly ways

• Funding for research and teaching is slowing due to more competition for increasingly constrained state and federal dollars

• Allocation of limited resources for academic and administrative needs is more challenging

Disruptive Change Puts the Status Quo At Risk

Reflecting this reality, of the Chief Financial and Business Officers of colleges and universities nationwide1:

• 61 percent agree that new spending at their institution will come from reallocated dollars rather than increased net revenue

• Yet only 39 percent agree that their institution uses an analytical framework to make spending decisions

• 58 percent lack confidence in the sustainability of their institution’s financial model over the next 10 years; 36 percent lack confidence in the model over the next five years

1 Jaschik, S., Lederman, D. (Eds.): The 2015 Inside Higher Ed Survey of College & University Business Officers. Conducted by Gallup®, July 15, 2015.


Given the Magnitude of the Industry’s Challenges, a Response of Equal Magnitude by Higher Education’s Leadership Is RequiredThe most obvious solution for university and college leaders is to look to a management model used by companies that survive and thrive in challenging environments.

America’s highest-performing organizations use corporate finance principles to manage the strategic and financial risk of their organizations.

Healthcare provides a meaningful example.


Many Not-for-Profit Organizations Have Successfully Adopted Corporate Finance PrinciplesIn the 1990s and early 2000s, the healthcare environment was characterized by declining profitability and liquidity, pent-up capital demand, staff shortages that created considerable wage inflation, and the threat of lower reimbursement from payers.

• The Balanced Budget Act of 1997 restricted payments to hospitals between 2000 and 2004, with little relief on the horizon thereafter

• In 1999, the median operating margin of the 500 not-for-profit hospitals rated by Moody’s Investors Service fell below 1 percent; 43 percent of Moody’s credits suffered operating deficits that year

During that era, the hospital industry crossed over from a “public” operating model to a corporate finance model.

• The time between disruptive periods was decreasing

• Gone were the days of pursuing strategic missions centered around the improvement of health in local communities without financially sound business plans that generated profitable bottom lines

• Gone was narrow focus on spending and budgets — replaced instead by regular assessment of organizational performance using many financial measures


Higher Education Faces a Similar Situation and Need• Revenues are squeezed, resources are challenged

• The “arms race” for the best faculty, students, and facilities continues

• Funding for future initiatives will need to come largely through reallocation of the institution’s current funding resources, both from operations and the balance sheet, or targeted/expanded funding opportunities

• The key question is: How do we bring academic, finance, budget, and treasury leaders together to make better decisions around allocating those resources?

• Finance leaders in higher education might wish to consider aligning their role and approach with the principles of corporate finance


Leaders with a Commitment to Corporate Finance Focus on Five Core Activities1

1. Visioning of the leadership team in partnership with the board

• Boards are partners, but the board also must hold management accountable

2. Building and sustaining a strong and accountable team

• Given the complexity of the organization and environment, no one person can possibly possess the requisite insight, intellect, or knowledge base to position the organization for success

• Top-performing executive teams assure that the right people are in the top spots, and let them manage their areas of accountability, with interdependent goals and aligned incentives

3. Developing a high-quality and integrated long-range plan

• Driven by the board and executive team, disciplined and data-based long-range planning assures appropriate analysis, integration, and coordination of strategic endeavors that are securely linked to financial capability during the plan period

4. Skillfully executing the plan over the plan period

• The executive team manages the fundamentals with attention to performance indicators and use of peer benchmarking and best practices

5. Building and maintaining credibility with key constituents

• Leaders spend much of their day communicating with their constituents, offering organization-wide transparency

1 Kaufman, K., Goldstein, L.: “Leadership and Successful Financial Performance in Healthcare.” Bulletin of the National Center for Healthcare Leadership, Nov. 2008.


To Contribute to Ongoing Success, Finance Can Assume a Strategic Leadership Role

Analyst3

• Measuring• Planning• Calculating• Modeling• Past and Future

Strategic Partner4

Scorekeeper1 Controller2

• Reporting• Accuracy• Retrospective• Disconnected

Efficiency and Control

AnalyticCapability

Quadrant 4Embodies positive

characteristics of the other three quadrants

plus leadership and other soft skills

• Gatekeeper• Expense focused• Governance• Retrospective

• Advising• Growth focused• Risk aware• Present and future• Connected

In this complex business environment, finance will need to add a strategic role to its existing operating relationships.

• The operating role as scorekeeper, analyst, and controller allows finance leadership to see risks across various business units and understand how those risks, singly or in combination, might impact the institution; finance leadership also is well versed in the risk/return equation

• A broader strategic role additionally will enable finance leadership to apply such knowledge as part of the senior leadership team. By guiding strategic decisions going forward, finance leadership becomes a strategic partner


Principles and Practices of Corporate Finance Are Applied Consistently Organization-wideManaging using corporate finance techniques involves a change in approach and attitude for leadership. Eight managerial issues assume prime importance, with behavior that supports their practical application:

Managerial Issue Behavior

Strategy and Capital The powerful link between resources and strategy is actively managed

Cost Constant cost management, not cost control

Goals and Objectives Board sets quantitative goals and objectives

Accountability Direct and unambiguous executive accountability for results

Measurement Operating results are constantly measured against articulated goals and objectives

Calendar Management Rigorous attention to calendar and process management

Allocation of Resources Capital and other scarce resources are allocated carefully and scientifically

Protect the Balance Sheet When things get difficult, the first instinct is to protect the balance sheet


Silos of financial responsibility often exist across functions, making planning and decision making about resource allocation more challenging.

The finance functions, including general accounting, investments, treasury, capital planning, fundraising, budgeting, and financial planning are organized differently across colleges and universities.

A team approach that integrates finance functions is critical going forward.

The Integration of Finance Functions in Higher Education Institutions Is More Important than Ever


• Improve reporting and analysis to support decision-making options

• Improve long-range planning to support better strategic decisions

To Advance Their Strategic Role, Finance Leaders Can Address Two Priorities that Are Consistent with Corporate Finance

0%

10%

20%

30%

40%

50%

60%

70%

80%

Providing more insightful reporting and analysis to support decision making

Improving long-range planning processes

Improving operational budgeting process

Cost containment and efficiency

Implementing scenario modeling to analyze the impact of changing conditions

Improving capital planning and tracking processes

Improving student aid planning and tracking, and aligning them with the operational budget

70%

59%

48%43% 41%

27%25%

The consensus about these priorities is clear. A survey with responses from more than 400 finance leaders indicated the following:

Source: Axiom EPM Research: Performance Management Survey 2015.


Priority 1: Improve Reporting and Analysis to Support Decision Making Less than 20 percent of finance leaders are satisfied with management reporting at their institution. When asked, “What are your biggest reporting and analytics challenges?” results indicated:

• Accessing clean, consistent, and trusted data

• Ability to pull data from multiple sources

• Not enough time for data analytics to uncover trends and drive decision making

27%

19%

16%

14%

8%

7%6% 3%

Ability to pull data from multiple data sources

Accessing clean, consistent, and trusted data

Ability to "drill" into reports and understand details

Need for better dashboards and visualizations

Ability to deliver meaningful ad hoc analysis

Ease of report creation

Ability to integrate with MS Office Etc.

Other

Source: Axiom EPM Research: Performance Management Survey 2015.


Priority 1: Improve Reporting and Analysis to Support Decision Making (continued)

When asked, “What pain points is your institution experiencing in this regard?” survey respondents said:

• The time line for development of budgets is not in sync and/or takes too long

• Management reporting is challenging; you can’t get the information you need from the operating units, and much of the information supplied by the academic units doesn’t meet the needs of central finance’s constituents

• Conversely, resources are not available to meet the different set of finance-focused needs of academic units

To reduce these challenges, finance leadership should:

• Ensure consistent data: Data quality is a prerequisite for trusted decision making

• Obtain agreement on data definitions and terms

• Put tools and processes in place to capture high-quality data at the source and cleanse the data, as necessary

• Understand key drivers and share plans and insights across the organization

• Add intelligence to the reporting


Integrated long-term planning deserves increased attention in colleges and universities. Long-range planning includes and integrates strategic planning, financial planning, capital budgeting, operational budgeting, and the forecasting and analytics required to measure, monitor, report, and improve results.

Priority 2: Improve Long-Range Planning to Support Better Strategic Decisions

Periodic VarianceReporting

Capital Requisition and Spending

PERFORMANCE REVIEW

BOARD APPROVAL

StrategyFormulation

Long-RangeFinancial Planning

Short-TermMargin Targets

STRATEGIC PLANNING

Capital Constraint/Available Capital

Capital Requests

Review and Evaluation

Allocation andRecommendation

RESOURCE ALLOCATION

Operating BudgetDevelopment

Review

OPERATING BUDGETING

Capital BudgetIntegration

Finalization

CoordinatedCapital Budget

CAPITAL BUDGET

Academic ProgramAnalytics

Labor and ProductivityReporting


A Long-Range Plan Quantifies the Ability to Achieve Competitive Performance

SURVIVAL PERFORMANCE

2016 2017 2018 2019 2020 2021

Excesscashflow

•• Strategic capital investmentStrategic capital investment

•• Increased debtcapacity Increased debtcapacity

•• Increased liquidityIncreased liquidity

• Annual capitalAnnual capital

•• PrincipalPrincipal

•• Working capitalWorking capital

Strategic postitioning depends on effective short- and long-range planning (Source: Moody’s Investors Service: Global Higher Education. Nov. 23, 2015.)


Priority 2: Improve Long-Range Planning to Support Better Strategic Decisions (continued)

Scenario analysis is a critical component. This type of analysis tests the impact on strategic financial performance of alternative outcomes and proposed initiatives.

ANALYSIS CONTAINS:

• Income and expenditure statement• Balance sheet• Cash flow• Key ra�os

Consolidated ResultsConsolidated Results

Base Case Given current trends, what is ourfinancial outlook in 3-10 years?

Initiatives What are the impacts of various growth

and cost containment initiatives?

Scenarios To evaluate go-forward plans, what are the

financial impacts of different strategies?

• New graduate program• New residen�al hall• Giving campaign• Alternate public funding scenarios

Initiative #1

Initiative #3

Initiative #2

Initiative #4

EXAMPLES INCLUDE:

• Student mix and demographics• Exis�ng programs• Labor and cost rates

Base CaseBase Case (Conserva�ve)

MODEL DRIVERS:


The Discipline of Corporate Finance Will Better Position the Nation’s Colleges and Universities for Ongoing SuccessCorporate finance activities, including long-range planning that ties to an annual budget, capital structure optimization, and quantitative allocation of resources, can create the platform for financial success, even in trying market conditions.

The benefits of integrated decision making include:

How much can/should we be spending?Where are the capital dollars best deployed?

Feedback and

Control

Can the strategies be implemented within anacceptable credit context?

How much debt?Under what structure?At what cost?Under what terms?

Mission-BasedStrategies

Operating Budget

Completely integrated withstrategic plan, financial plan,and capital budget

Capital Budget

• System-based approach• Quantitative rigor, NPV• Monitoring of results

Capital Structure

• Support strategic implementation within single credit profile• Optimize flexibility and cost

Financial Planning

• Balance financial abilities and strategy over five years• Build or restore cash and debt capacity• Identify and manage risk

Accountability, credibility, and results are key

Traditional finance techniques will not adequately handle the high level of financial stress of the free-market economic conditions in today’s higher education sector.

• Creates a line of sight from the mission of the organization, through the strategic and financial plans, to annual operating and capital decisions

• Aligns processes through data, calendar management, standardization of tools and templates, and known (objective) evaluative criteria

• Enhances organizational discipline

• Expands organizational capacity to support analytics-based decisions

• Increases transparency around decision making and actual performance


Is Your Institution Ready to Extend the Performance of Finance Through a Corporate Finance Approach?Additional information is available in our developing e-Book series. The series describes four corporate finance-based activities for accelerating the performance of finance in universities and colleges nationwide:

1. Financial Planning: 4 Best Practices in Financial Planning for Higher Education

2. Corporate Risk Management: Managing Financial Health and Risk in Universities and Colleges

3. Capital Allocation: kaufmanhall.com/highereducation

4. Budgeting: kaufmanhall.com/highereducation

We would welcome the opportunity to discuss with you how to transition effectively to the proven corporate finance approach. Please contact Charles Kim ([email protected]) or Jason Sussman ([email protected]) at 847.441.8780.

Thank you for your interest and we look forward to hearing from you.

http://www.kaufmanhall.com/assets/eb/he/4-best-practices-in-financial-planning-for-higher-education

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Team ProfilesCharles Kim is a Managing Director of Kaufman Hall, and Director of the firm’s Higher Education division of the Financial Planning and Capital practice. Mr. Kim consults on a national basis with healthcare systems, academic medical centers, and institutions of higher education.

Mr. Kim’s expertise includes preparing financial and capital plans, acting as financial advisor for bond issues, advising on merger, acquisition, and divestiture transactions, and providing training and support on the Kaufman Hall Axiom Higher Education Suite.

Mr. Kim has more than 25 years of financial advisory experience.

Mr. Kim has an M.B.A. in Finance and Accounting and a B.A. in Economics, both from the University of Chicago. [email protected]

Jason H. Sussman, a Managing Director of Kaufman Hall, directs the firm’s Strategic Financial and Capital Planning practice. He also is a member of Kaufman Hall’s Software Committee, responsible for oversight of the Kaufman Hall Software division.

In addition to his management responsibilities, Mr. Sussman provides financial and capital planning and financial advisory

services for private, nonprofit, and public entities nationwide. His areas of expertise include strategic financial planning, capital allocation, mergers and acquisitions, financing transactions, and management software.

Mr. Sussman received an M.B.A. in Finance and Accounting from Northwestern University’s J.L. Kellogg Graduate School of Management and a B.A. from the Johns Hopkins University. He holds a CPA certificate in Illinois. [email protected]

David Woodward is a Vice President of Kaufman Hall in the Higher Education division. Mr. Woodward has more than 24 years of experience in higher education finance, working within universities and as a consultant nationwide.

Mr. Woodward’s particular areas of focus are financial planning, budget process and reporting, and financial system design. His recent experience includes directing the design and implementation of a consolidated Budget Center at Tufts University, and leading the development of Axiom Software as the University’s system for budgeting, forecasting, and grants planning.

Mr. Woodward has an M.B.A. from Dartmouth College’s Amos Tuck School of Business, an M.A. in Religion from Yale University’s Divinity School, and a B.A. from Colgate University. [email protected]

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Nick Long is a Vice President of Kaufman Hall in the Higher Education division of the Strategic Financial Planning and Capital practice. Mr. Long has more than 20 years of experience in financial management, information technology, and investment management. This includes more than a decade of higher education experience, consulting with public and private universities and academic medical centers nationwide.

Mr. Long’s expertise and areas of focus include financial management, cost reduction, information technology implementations, and interim management.

Mr. Long has an M.B.A in Finance and Information Technology from the University of California, Irvine and a B.A. in Economics from the University of California, San Diego. [email protected]

Tony Ard is Vice President for Higher Education for Kaufman Hall, Axiom Software. Mr. Ard works with the firm’s Higher Education clients to improve their financial performance.

Mr. Ard’s most recent experience centers on designing and delivering software solutions for enterprise performance management, including budgeting, strategic planning, capital planning, forecasting, and profitability management, and developing business intelligence and business analytic solutions.

Mr. Ard has 15 years in the Enterprise Performance Management industry and is widely recognized for delivering innovative solutions with a focus on client satisfaction.

Mr. Ard holds an M.B.A in Finance from the University of Minnesota Carlson School of Management and a B.A. in Economics from Carleton College. [email protected]

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About Kaufman Hall

Since 1985, Kaufman Hall has been a leading advisor to senior management teams and Boards of the nation’s most distinguished institutions, helping them to incorporate proven methods into their strategic planning and financial management, quantify the financial impact of their plans and actions, and consistently achieve their goals. Our services use a rigorous, disciplined, and structured approach that is based on the principles of corporate finance.

The breadth and integration of our advisory services is unparalleled. Services encompass strategy; financial and capital planning; debt and derivatives-related financial transactions; capital allocation and decision making; and mergers, acquisitions, real estate, and joint ventures. No other professional services firm operating in the non-profit education and healthcare sectors combines all of these services under a single corporate umbrella.

To complement our advisory services, for more than 20 years Kaufman Hall has provided software products that support decision-making processes and sustainable strategies and plans. In 2014, Kaufman Hall acquired Axiom Software, a leading provider of planning systems to higher education. The acquisition of Axiom has provided Kaufman Hall with a world-class software platform, creating a unified company with unmatched expertise and experience in data-driven analysis to transform financial, operational, and strategic planning.

Kaufman Hall’s Axiom Higher Education Suite offers the industry’s leading enterprise performance management platform for finance users. Configured for higher education solutions, the suite supports long-range planning, budgeting, and forecasting, and delivers rich analytics.

For more information, please contact Tony Ard ([email protected]) or Charles Kim ([email protected]) at 847.441.8780 or access www.kaufmanhall.com/highereducation.

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5202 Old Orchard Road, Suite N700 / Skokie, Illinois 60077 / 847.441.8780 phone / 847.965.3511 fax / kaufmanhall.com

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Extending the Role of Finance in Universities and Colleges the... · Extending the Role of Finance in Universities and Colleges HIGHER ... Two Priorities that Are Consistent with