Five business model changes that helped colleges weather the recession

One VP details successful funding methods

Colleges can survive cuts to revenue and other economic challenges by adjusting their business model, one university vice president argues in Business Officer.

Keith Houck, VP for operations and finance at Orlando's Valencia College, writes that the public generally doesn't understand why tuition is rising, and is increasingly questioning student debt and return on investment.

That's why Houck thinks institutions must better explain their value proposition to stakeholders and help students make the right fiscal and educational decisions—and they must do all this with limited resources.

Houck and Apryl Motley, a higher education reporter for Business Officer, rounded up tactics that institutions have used to deal with current financial pressures.

Tactic #1: Find small savings that add up

At Valencia, staff targeted energy savings through a three-step plan:

  • Move to efficient buildings, either LEED Hold or Green Globes certified;
  • Improve lighting, controls, and chiller plants; and
  • Implement behavioral change initiatives.

State funding paid for much of the construction and upgrades, although auxiliary funds and student fees were also used. The resulting operating savings are now used to offset reductions in state funding.

This past year, the behavioral program helped decrease energy usage by about 20%, saving the school approximately $1 million in energy costs this year.

Tactic #2: Focus on long-term financial plans to maintain future viability

At Berea College, about 90% of students receive financial aid—many via Pell grants—and all receive a full tuition scholarship.

The school's endowment funds 75% of the school's general operating and educational budget, a workable business model in healthy economic times. During the late '90s boom, the school's administration continued to approach financial strategy with a long-term view, banking returns for future use instead of expanding services in the moment.

In the recent downturn, Berea has had to make some cutbacks. But their past foresight allows the college "to temper the effect of the recent downturn in the market, while not deteriorating the student experience," says Jeff Amburgey, VP for finance.

Tactic #3: Seek partnerships or outsource when possible

Some services—like dining, grounds, maintenance, and custodial operations—might be better managed by contractors than by a school, freeing up administrators' time and funds for educational efforts.

"You can't be great at everything, so be sure to focus your efforts on your primary mission," writes Houck.

Related research brief: Managing contractor agreements

Directing funds toward private partnerships also can free up debt capacity for other important investments.

For example, the University of Kentucky partnered with Education Realty Trust (EdR) to deliver undergraduate housing. EdR will provide up to $500 million in private equity to create 9,000 beds.

Tactic #4: Scrutinize resource allocation

Funding allocation is particularly important among health care centers, which face clinical and academic resource reductions.

"The confluence of change seen in reduced tuition revenue on the academic side and decreased reimbursements on the clinical side has the entire institution under financial pressure," says Mary Beth Briscoe, CFO for the University of Alabama Birmingham Health System.

As part of an organization-wide cost cutting initiative, Briscoe saved more than $10 million by limiting medical and surgical supply costs in 2010. In one such decision, she evaluated a diagnostic probe that claimed to provide better clinical decision information. The device cost $1,000 per patient, but after tracking impact, Briscoe found it resulted in $95,000 net savings.

Also see: To make the right decisions, administrators need the right tools

The health system and the university also work more closely than before, rather than in silos. "The balancing of cost and revenue needs to be managed as the same imperative on the academic side as the clinical side," says Jason Sussman, managing director at Kaufman Hall, a senior management and board adviser.

Tactic 5: Tailor academic programs to fill regional gaps

The University of Maine at Fort Kent (UMFK) directed resources to its nursing program following a decline in area high school graduates and a recent mandate requiring all state nurses to hold a bachelor's of science degree by 2020.

What jobs are in demand in your area? Check EAB's state market demand dashboards

Administrators say they knew strong enrollment numbers in another program (education) would begin to fade, so they proactively moved funding to the nursing program.

The shift also helped UMFK develop strong relationships with hospitals throughout the state.

"Hospital administrators began seeing our students in the workforce and saying, 'we need more," says John Murphy, UMFK's VP for administration (Houck/Motely, "Business Officer," National Association of College and University Business Officers, November 2014).

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