You can't cut your way to financial sustainability

Reallocating resources to sustain and extend mission is critical

While the public sees higher education as more expensive than ever, many universities are actually struggling with flat or declining revenues. State support and net tuition revenue are no longer growing at pre-recession rates. In fact, at a significant share of institutions, revenues per student are declining.

While revenue growth has slowed, costs continue to increase. Just maintaining current staff and services costs more every year, driven by rising benefits costs, increasing compliance costs, and other factors. But maintaining is not enough—all universities are committed to improving the quality and impact of their teaching, scholarship, and public service, and that requires new investments.

The question on many campuses is how can we continue to invest in our mission without new funding?

1. Administrative cuts necessary, but not sufficient

Since the recession, many universities have looked to cut administrative services, hoping to reduce costs while protecting core academic programs. A series of large consulting engagements found a range of common cost savings on the administrative side, amounting to nearly $100 million at some large research universities in areas such as procurement, IT, finance, and HR.

Learn more about using diagnostics and analytics to find cost savings at your institution

But administrative savings opportunities—while significant—are not large enough to close the growing gap between revenues and costs on their own. Administrative costs represent a relatively small share of overall costs. And even the most successful major consulting engagements were rarely able to achieve savings of more than 5% of operating expenditures.

Operating Expenses by Function
Expense Break-Down Across Four-Year Institutions

Operating Expenses by Function

Universities forced to make large cuts—10% or more in a single year—often see costs grow faster after the cuts are made, and in just three years many find their costs are already higher than they were before the cuts. In other words, one time cuts, no matter how large, rarely reduce the rate at which costs are growing.

The underlying drivers of administrative costs—increasing regulation, market diversification, rising benefits costs, and institutional complexity—mean that costs in this area are likely to continue to grow, even with an increasing focus on administrative efficiency.

2. Examining academic costs

Some universities, facing more dire financial situations and reaching the limits of administrative cost cutting, have been forced to make cuts to the academic side as well. While this is typically a last resort, many acknowledge that it is sometimes necessary.

Simplistic attempts to reduce academic costs through across-the-board reductions or policy changes, however, can do significant harm to the university. In an effort to “fairly” allocate cuts, for example, institutions may create disproportionate burdens for certain academic programs. Some programs may not have the ability to absorb the cuts, while others may have significant excess resources. Program closures can also backfire. A requirement to close programs that produce a small number of degrees, for example, threatens service departments that make critical contributions to student success even if they have few majors.

The Unintended Consequences of Academic Cuts

The unintended consequences of academic cuts

3. Reallocating academic resources to improve quality

While untargeted or across-the-board academic cuts can have negative consequences, this does not mean that academic units should remain immune from scrutiny. Many universities are finding that they can no longer sustain all of the programs, practices, and structures that proliferated during an earlier period of rapid growth in revenues. They must find a way to reverse or slow the growth in costs without sacrificing academic quality.

Even well-resourced universities now recognize that they must concentrate resources on a smaller number of institutional priorities in order to support the rising cost of world-class excellence. Efficiency for them is not an end in itself but a means to enhance quality.

Looking for more on realigning resources without sacrificing quality?

The Academic Affairs Forum offers a range of resources—including best-practice research—to help academic leaders control academic costs and support institutional priorities. Speak with an expert to learn more about the support we offer.

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Breaking the Trade-Off Between Cost and Quality

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