Better cheaper faster board-ceo partnership for change

Association of Governing Boards of Universities and Colleges. All Rights Reserved.

Better, Cheaper, Faster

Board-CEO Partnership for Change

Ellen Chaffee, AGB Fellow and President Emerita, Valley City State University (slides 1-38)

Rick Staisloff, Vice President for Finance And Administration, College of Notre Dame of Maryland (slides 39-60)

ASSOCIATION OF GOVERNING BOARDS NATIONAL CONFERENCE, ORLANDO, 2010


State-Level Relative Hardship

2

CA NJ IL UT AK IA KS MI MO VA MA MD OH WA DE RI AR0

1

2

3

4

5

6

7

8

9

10

Gap as % GF

Change in GF Spending

% HE from Stimulus

Total


Goals for the Workshop

1. Understand strategic finance as a context for achieving long-term institutional sustainability

2. Learn new strategies and tools for dealing with current challenges


Agenda

Changing Landscape in Higher Education

A Strategic Finance Approach

Reducing Cost and Increasing Productivity

Break

Strategic Finance: CFO Perspective

New Tools for New Decisions

Wrap Up


CHANGING LANDSCAPE OF HIGHER EDUCATION


The Changing Landscape of Higher Education

We CANNOT do

What we MUST do

If we KEEP doing

What we USUALLY do


What we MUST do

“By 2020, America will once again have the highest proportion of

college graduates in the world”

- President Obama, 2/24/09


And there’s consensus on that

To increase the percentage of Americans with high-quality

degrees and credentials to 60 percent by the year 2025

Currently: 39%

Lumina Foundation for Education


College Degree

Knowledge-Economy Work Force


Can we go on this way?


• State funding: 3%

• Tuition: 3% above CPI

• Student aid: 4%

• Expenditure per student : 1-2% above CPI

Recent Revenue/Expense Trends


TuitionExpend/FTEState Approp

CPI

Our Business Model is Not Sustainable

Start Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10 Y11 Y12 Y13 Y14 Y15 Y16 Y17 Y18 Y19 Y200

0.5

1

1.5

2

2.5

3 20 Years of Trends

AFFORDABILITY GAP

STATE FUNDS GAP


State Financials: Gaps could approach 7% of spending - “The Lost Decade” of state funding

Source: Don Boyd (Rockefeller Institute of Government), 2009

*


We

cann

ot g

o on

this

way

HITTING HOME: Quality, Cost, and Access Challenges Confronting Higher Education Today, Travis Reindl, www.makingopportunityaffordable.org

http://www.makingopportunityaffordable.org/


The Change Process

• Expert• Secure

Status Quo

•Disruption

•Turmoil

Transition •Vagu

e•Scary

New State


Board-President Relations in Times of Change

• Find common ground on how much/what kind of change. Trust AND verify, both ways. Early and often.

• Keep roles clear and support each other.

• Define the North Star and navigate by it.


Brainstorm

• Is your university feeling these pressures?

• What are some of the barriers to dealing with them?


STRATEGIC FINANCE


Strategic finance is aligning financial decisions

—regarding revenues, creating and maintaining institutional assets, and using those assets—

with the institution's mission and strategic plan.

What is Strategic Finance?


In graphic terms…

Mission

Strategic Plan

Financial Decisions


The New Bottom Lines

Core IssueBalanced ScorecardKaplan and Norton/et al

Good to GreatCollins/Staisloff/et al

Is the organization doing the right things and doing them well?

Quality, effectiveness, customer satisfaction

Mission

Does the environment want/need what the organization does?

Financial stability and strength

Market

Is the organization ensuring that revenues exceed costs?

Operating efficiency, internal processes

Margin

Is the organization investing in its own future?

Learning and growth Momentum

YES

What’s the cost/benefit of improvement in this?




Importance of ALIGNMENT and Tracking Progress

Strategic Finance (Momentum,

Margin)

Actions

Strategic Indicators

CommunicationInformation

AnalysisCourse Correction

Strategic Goals

(Mission, Market)


Strategic Indicators (North Star Proxies)(examples)

• More students– Enrollment growth by in/out of state

• Affordability– Net tuition/median household income

– Total financial aid/Total tuition revenue

• Accessibility– Enrollment growth by race, income, transfer status

• Efficiency– Cost per SCH by program, by site, by delivery

• Effectiveness– Retention and graduation rates


Removing the brick wall

College DegreeMore

graduates

AffordableEffective

Efficient

Accessible


Current Institutional Responses

• Increase efficiency

• Increase administrative productivity

• Leverage stimulus money

• APLU survey just out: “The survey results indicate that "universities are striving to protect the core education mission of their institutions.”What’s missing from this picture?


Missing in Action?

• Progress to strategic goals

• Growth

• Quality improvement

• Academic productivity

• Innovation

• Development of a sustainable business model

David Wiley, BYU, http://davidwiley.org/


What do institutions need?

• Growth by substitution

• Greater cost containment

• Greater productivity

• Clear expectations

• Innovation

• LEADERSHIP$


Roaring Out of Recession

Companies that recovered well from past recessions:

• Used multi-faceted strategies that were highly customized to their own circumstances

• Focused on operating efficiency, market development, and asset development

• Reduced employee numbers as little as possible

• Continued to invest in asset development, marketing, and new product/ market development

Ranjay Gulati, Nitin Noharia, and Franz Wohlgezogin, “Roaring out of Recession,” Harvard Business Review, March 2010.28


Reducing Cost and Increasing Productivity

*


Cost Effective: Cost Reductions + Productivity

Cost reductions =

Permanent structural reductions in spending

Productivity improvements =Increase in output

(learning, research, jobs), without changing

admissions or spending

*

X

From paying $1 for XTo paying $1 for X + 2

From paying $1 for XTo paying $0.75 for X


Examples of Cost Reductions

• Reduce high cost/low demand programs

• Address retirement eligibility

• Reduce growth in health care cost

• Consolidate administrative functions

• Reduce spending on non-revenue producing athletics

• Restructure debt

• Restructure faculty compensation and rewards (use turnover to substitute teaching faculty for research faculty)

Strategies for Tough Times, Dennis Jones and Jane Wellman, November 19, 2009


Examples of Productivity Improvements

• Increase in student retention and graduation

• Reduce excess credits for the degree

• Increase credit-by-exam

• Increase distance-based learning programs

• Increase proportion of graduates who meet goals for critical learning

• Increase proportion of students who remain – and are employed – in state



Building Cost-Effective Institutions

• Reduce administrative costs

• Tackle ‘automatic’ cost increases

• Reengineer curricula

• Reengineer course delivery

• Eliminate, innovate, or consolidate high cost/low demand programs



Learning Productivity

• Students come to college fully prepared (no remediation)

• Accelerated learning

• Minimize “rework” and reduce credits to degree

• Improve rates of course completion

• Encourage use of assessment/”test out” options

• Learning in the workplace/credit for experience



Improving Affordability & Choices

• Commit to average undergraduate tuition growth no more than CPI, with increased need-based aid

• Allow differential tuitions for high cost/demand

programs

• Experiment with low priced options

• Greater on-campus employment opportunities for students

• Reduce time to degree



Implications for Leaders

• Re-imagine your business model to create long-term sustainability

• Support change in approach to budget building – Examine old habits and conventional wisdom about costs

– Focus on big picture, and progress on achieving strategic goals

– Commit to institutional innovation

– Examine long-term implications of current decisions



From Steve Jobs to YOUR Job

• 20th Century was one of technological innovation

• 21st Century must be one of institutional innovation

David Wiley, BYU, http://davidwiley.org/


Speed Dating – Strategic Finance

Around the table, 1 minute each:

• Give an example of an effective change (at your institution or another) that represents a strategic finance perspective


Strategic Finance?


Magic Formula

Mission + Market + Margin = Success


“Tried and True” Reporting

• Budget to Actual– Quarterly– Year over Year Comparison– Projections– Multi Year Rolling Budgets

• Financial Statements– Quarterly

• Audit– Annual

• Focus must be on what the numbers mean, more than on the numbers themselves


Financial Ratios

• Build off of the audit

• What are the numbers telling us?

• Debt Rating

• Central Question – Are we financially healthier this year than last?


Financial Ratios

MarylandPrivate Colleges

Threshold 2005 20042006 2005 2004 Value Trend Median Median

Composite Financial Index 6.0 4.7 5.5 3.0+ F 4.0 5.2

Sufficiency of Net Assets Ratio:

Primary Reserve 96% 86% 87% 40%+ F 78% 83%

Debt Management and Physical Plant Ratios:

Viability 2.6 2.1 1.7 1.25+ F 1.1 1.0

Leverage 5.9 5.2 5.0 2.0+ F 2.0 2.0

Debt Burden 4.4% 8.7% 5.1% 7%- F 5.0% 5.0%

Age of Facilities (years) 14.3 13.3 12.3 U 10.6 11.2

Operating Measures Ratios:

Net Income 9% 5% 10% 3%+ N 7% 12%

Return on Net Assets 5% 3% 10% 4%+ N 7% 9%

Net Tuition Dependency 83% 76% 77% 60%- N 81% 66%

Notes: Legend:(1) Maryland Private Colleges are Goucher College, Hood College, F= Favorable Loyola College, McDaniel College, Maryland Institute College of Art, N= Neutral Mount Saint Mary's College, and Villa Julie College. U= Unfavorable

College of Notre Dame


Strategic Indicators

Strategic Indicators - Measures institutional performance in key areas • How do you know if you have the right ones?

– Focus on important issues– Impact decision making– Understandable– Come from available data– Must have trend, benchmark, and target– Few in number

• Peer Group vs. Competitors

• Importance of Telling the Story


Dashboard Indicators – Notre Dame

Student Faculty/Student Staff Ratio

Rev. and Exp. by Source

Cost per FTE

Age of Facility/Deferred Main.

Participation in Annual Fund

Endowment per FTE

Enrollment by Program – HC and FTE

Matriculation

Graduation Rate

Diversity

Tuition Discount


Is This a Strategic Finance View?

• Importance of the “Reality Check” – Where are we right now?

• However, these tools are backward looking

• New tools are needed for us to look forward and to act strategically

• Shift from input focus to output focus


Top 12 programs account for89% of credit hours

Activity Drivers

Nursing

Biology

Religious Studies

Pharmacy

Education

Business

Communication Arts

English

Modern Foreign Language

Philosophy

Psychology

Math

1,903

904

786

813

1,227

1,330

873

6,991

861

799

798

667

4%

35%

4%

4%

4%

3%

9%

4%

4%

7%

6%

4%

CHM

HIS CST

ARTPHY

MUS POL HSV

PED

Anchor4 Programs = 57%

Core8 Programs = 32%

Other9 Programs = 11%Each 2% or <

47

48

90% of prospects originate from the top 12 majors

10,681

6,374

5,895

5,377

4,476

4,316

4,093

3,627

2,786

2,267

1,805

1,217

0 2000 4000 6000 8000 10000 12000

Bio

Bus

Chem

Nurs

Psy

Educ

Pl.Sc

Com

Art

Crim

Engl

Engin

Total prospects by major

Median 1,169

48

Demand – What Do People Want?

Yield

Eng

His

ComS

Educ

Art

Chem

Crim

Bus

Engl

Com

Rel Stud

Pysch

Bio

Math

Pol Sci

Nur

Int'l Studies

Radiology

MFL

Econ

0% 10% 20% 30% 40% 50% 60%

49

Median33%


# of Prospects vs. Yield (accepted to enrolled)High # Prospects/Low Yield High # Prospects/High Yield

Low # Prospects/Low Yield Low # Prospects/High Yield

Median Yield33%

Median #Prospects

1,169

Bio

High10,681

Low162

Bus

EDU

Nursing

PsychPol Sci

Comm Art

Chem

CriminEnglish

Engin

Comp SciInternat

History

High55%

Mod ForLang

Math

RadiolPhysics

Rel StudyPhilos

Econ

Elevate Yield

Maximize

50

Low 0%


Net Revenue Modeling

Net Revenue Modeling - By Division

UG PT UG Accelerated Graduate Eng Lang Inst Total

Revenue 15,686,486 2,481,446 3,999,994 10,266,637 464,207 32,898,770

Tuition Discounting 5,656,577 40,026 0 876,158 0 6,572,761

Discounted Revenue 10,029,909 2,441,420 3,999,994 9,390,479 464,207 26,326,009

Total Discount % 36.06% 1.61% 0.00% 8.53% 0.00% 19.98%



Direct Costs 8,284,316 1,277,669 1,554,435 2,874,851 347,933 14,339,204

Net Revenue 1,745,593 1,163,751 2,445,559 6,515,628 116,274 11,986,805

Net Revenue % 17% 48% 61% 69% 25% 46%

Percentage of Total Revenue Base



Total Direct and Allocated Cost 9,954,583 2,366,828 3,149,668 7,858,580 347,933 23,677,592

Net Revenue 75,326 74,592 850,326 1,531,899 116,274 2,648,417

Net Revenue % - FY 2008 0.8% 3.1% 21.3% 16.3% 10.1%

Net Revenue % - FY 2007 2.1% 18.8% 28.8% 25.0% 16.5%

Net Revenue % - FY 2006 5.5% 23.0% 20.0% 25.0% 16.0%


Student Credit Hours per FTE Faculty FY 2008

NationalNorm

FY 2008

+ 45

+30

+15

-20

-50

-80

-110

-140

-170

Bio

Bus

Edu

Nursing

Psych

Comm

Chem English

Music

Comp Sci

History

ForeignLang

MathRel

Study

Philos

Arts

HealthPhy Ed

Source: CND Delaware Instructional Cost Study52

More efficient than market standard

Less efficient than market standard


Direct Instructional Expenditure per FTE Student FY 2008

NationalNorm

FY 2008

+$12,000

+$10,000

+ $8,000

+$6,000

+$4,000

+$2,000

-$2,000

-$4,000

-$6,000

-$8,000

-$10,000

-$12,000

Bio

Bus

EDU

Nursing

Psych

Comm

Chem

English

Music

History

ForeignLang

Rel Study

Philos

Computer

HealthPhy Ed

More efficient than market standard

Less efficient than market standard

Math

Source: CND Delaware Instructional Cost Study53


Sample Financial Decision Matrix

Grow

We willevaluate, dialogue

then organize decisions intofour buckets

Sunset Redesign

Maintain/Manage Cost

54

Mission Demand Conversion Contribution Efficiency

Program Mission # Prospects Yield Credit Hours Student Cr Hr/FTE Faculty

A Yes > 5,000 >33% > 1,000 Above

Benchmark

B Yes < 1,000 < 33% > 500 At

Benchmark

C Yes > 1,000 < 33% > 500 Below Benchmark

D No < 1,000 < 33% < 500 Below Benchmark


Reallocating To Areas Of Strength

Focus on what you will stop doing

Reallocation allows institutions to:

• Create new areas of growth

• Strengthen core programs

• Invest strategically without new funding stream

• Reinvent themselves

Budget shortfall as opportunity


Business Plan Pro Forma

– Develop a model• Relation to mission

• Market analysis

• Competition

– Test Externally


Business Plan – Cost Analysis

• Enrollment Projections - 3 years– cannibalization– working backwards

• Revenue– Adjusting gross for discounts and financial aid– Grants, Fees, etc.

• Expense Projections – 3 years– new and reallocated– divesting– existing faculty costs– Use of Debt

• Breakeven – How long until we get there?• Mark-up – How much above cost do we want to achieve


Business Plan - Advantages

– Sets the bar

– Creates Milestones – Go/No Go

– Resources identified up front

– Builds accountability


How Will We Know When We Have Arrived?

• Feedback Loops

• Go back to:

– Business Plans

– Strategic Indicators

However beautiful the strategy, you should occasionally look at the results. Sir Winston Churchill


Speed Dating #2 – Strategic Finance

Each member of your table has 1 minute to share the following:

• How would your role or your president-board relationship need to change in order to support a strategic finance approach?


AGB Support


Now What Do I Do?

• Be an advocate for mission/market/margin opportunities

• Insist on seeing the data behind the decisions

• Focus on what the numbers are saying

• Have the courage to ask the hard questions

• Regularly review the mission and market return from new initiatives

• Develop joint board committee meetings and activities – Example Finance and Academic

• Support rotation between board committees

• Consider having a Board-Executive Strategic Finance workshop on campus (more info: 3:00 this afternoon)


Evaluations, Please


To continue the dialogue . . .

• Dr. Ellen Chaffee, Senior Fellow

Association of Governing Boards of Universities and Colleges

[email protected]

701-840-1780 or 202-296-8400

• Rick Staisloff, Vice President for Finance and Administration

College of Notre Dame of Maryland

[email protected]

410-532-5340

64

mailto:[email protected]

mailto:[email protected]