Seven Questions Every Board Should be Asking to Prevent Becoming Financially Challenged

By Robert Witt and Kevin P. Coyne    //    Volume 27,  Number 6   //    November/December 2019

This article is part of the Assessing Financial Vitality Toolkit, which includes a host of resources that enable board members to take action in ensuring institutional sustainability.

The competition among colleges to provide a unique value to students is increasing. Boards should ask these questions to guide their decisions that help increase institutional value to students and prospective students and help maintain the fiscal health of the institution.’

A decade ago, it might have been rare to hear of declining student enrollments to the point of threatening the financial health of a postsecondary institution. However, in recent years, it is not so rare. In 2017, 251 private nonprofit colleges had both declining enrollments and expenses that exceeded revenues. Many other colleges also fared poorly on one or both measures. While a few of these may have simply experienced a negative one-time event, for the large majority 2017 was another year in a longer trend— one that could lead to closure for many of them.

We are confident that every board of such challenged institutions have already asked many questions of their administrations. However, in our combined 75 years of working with boards of higher education institutions, commercial enterprises, and nonprofit institutions of all types, we have found that boards often have trouble articulating some of the most important and insight-producing questions. To that end, we provide here a set of seven questions that we believe most boards have not asked—but need to.

The first two questions relate to how strongly the board should believe in the fundamental value its institution provides.

1. Can we honestly say to our incoming students that “this college will better prepare you to prosper (however the student defines that word) than any other relevant college (or any other use of the time and money you will spend here)”?

Surely, that is the only reason why students (with their parents’ help) should choose your college, so surely that must be the guiding mission of your institution. But most colleges do not think so explicitly of their underlying purpose. If your administration cannot articulate a set of students and circumstances for which the above statement is true, then the college’s financial troubles are most likely a reflection of a more fundamental problem: the college does not provide unique value to anyone.

2. Given our administration’s new plans for improvement, if I were a prospective student, would I definitely better understand this college’s value to me than my predecessors did when they were applying?

It is not enough that your college actually provide unique value to its students. Prospective students and parents must understand the uniqueness your college provides. By definition, if your incoming class wasn’t full last year (or if you relied on last-minute discounting to fill the class), then too few students and parents understood your unique value at that time. Is your college already acting to change that perception this year? Are the changes substantial, or just at the margin? If the latter, then why should the board believe the administration’s new plan will fare better than its previous one?

The next two questions focus attention on whether the board has a true understanding of the degree to which the college is simply “buying time,” and how long that strategy can last.

3. What is the full set of actions the college is taking that we know in our hearts are only temporary measures that buy us time? What would be our financial situation without them, and for how long can these temporary measures be maintained?

Every college with financial challenges learns to conserve cash. Some methods constitute genuinely sustainable efficiencies, while many others simply put off the day of reckoning in the (often unspoken) hope that some not yet invented innovation or some external force will improve the financial picture before it is too late.

The tricks are many—some obvious and easy to measure, others far more subtle and difficult to quantify. They range from deferring maintenance to various ways to raid the endowment without admitting to yourself that you are doing so to admitting students who do not have the capability to succeed just to collect tuition for a year or two. Some are more damaging than others. But unless the board has already seen a full list in one place, understands the college’s dependence on these measures, and knows how long they can last, the college is likely to be in more danger than you realize. Once a certain point is reached, the final collapse of an institution comes on rapidly. Many presidents of failed colleges report that the end came sooner than they expected.

4. What sustainable pace of progress is required if the institution is to displace reliance on these temporary measures before they run out, given that any progress on replacing them comes only after subtracting the negative influence of the headwinds in the environment for higher education?

Every management team we have ever met in any type of institution “knows” it is making progress, because it can point to things that it does better now than it did last year. What most management teams do not recognize is that financial progress occurs only to the degree that management-led improvement outpaces the negative trends in the environment. The situation is analogous to the story of a man swimming forward in a river at two miles per hour, feeling himself successfully plow strenuously through the water. Meanwhile, he is swimming upstream in a river that is flowing backward at three miles per hour. A child on the shore says to his mother, “Look, Mommy, that man is swimming backward!”

It is no secret that the environment for private nonprofit colleges will be distinctly negative over the next several years, with declining enrollments and increased pricing pressures. For financially challenged colleges, evidence of strenuous swimming is not enough. Boards need to quantitatively understand that the pace of progress must exceed the sum of: (1) the rate of degradation of the environment plus (2) the displacement of the reliance on the temporary measures discussed above before they run out. For many schools, that sum is probably 10 to 15 percent improvement in the fundamentals every year for the next five years.

The third set of questions tests whether the administration understands its enrollment
and retention problems at a sufficiently granular level to improve the situation, or whether it operates at a level of generality that leads to weak solutions.

5. Who are the 50 applicants that our college accepted this year whom we thought would join us but didn’t, or whom we would honestly assert made a mistake by not enrolling here? Why didn’t they come?

On average, 67 percent of applicants accepted by a school do not matriculate at that school. Why is this portion so high?Because many students apply to colleges that they have no intention of attending
if they get in somewhere else. You should not care very much about the views of such students. But if you are not careful, these will be voices you hear when you ask the question “What do we need to change?” because they will comprise the respondents in national surveys of “What high school seniors want in a college today?”

But hiding within the hundreds who do not come to your school are those students whom your college almost won, or really should have won. These are the students whose stories you should know, because they are ones for whom small, achievable changes on your part could have changed the outcome in your favor.

An extra 50 students in your incoming class would make a huge difference in your financial situation. So, if your college doesn’t change what it is doing, who will be next year’s 50 stories? These are the 50 least expensive additions to your class you can find.

6. Similarly, who are the 50 transferring-out students who could have been saved through actions that the college had within its control?

Many college students transfer. The latest figures show that only about 65 percent of entering freshmen at private nonprofit colleges will graduate from that institution. A full third leave! The problem with that figure is that it makes you numb. It makes you assume that attrition is a giant wave that the college can take some institution-wide actions against, but nothing more. Every college has at least some retention program that sounds impressive to the board. Those programs just often don’t have much impact.

Students do not leave for general, institution-wide reasons. Each student leaves for his/her unique set of reasons. The college must fight this battle on an individual, not just institutional level. Of course, some turnover cannot be prevented. But 50 cases can, if they are worked individually, and if the administrators in charge of these cases have discretionary resources to devote to “fixing” the case. “Saving” a transfer will likely cost far less than recruiting an additional freshman.

The final question assesses whether the board should continue to follow the lead of the administration or should it become much more proactive in the quest for a lasting solution to the college’s issues.

7. Are we bringing world-class minds with fresh perspectives to bear on our problems, or are we relying on the same people as last year to fare better simply through more practice, or trial and error?

Many administrations do not believe they need outside help. It is a rare administration of a troubled institution that does not have in place a “new” plan that it has presented to the board and that it is sure is “better than last year’s.” It probably is—but as should be obvious from above, this issue is not whether the plan is better but whether it is “better enough.” If the same administration has presented two or more plans before this one, and the trends you see are not moving solidly in the right direction, you already know the answer to our final question.

Robert Witt, PhD, is the chancellor emeritus of the University of Alabama system, president emeritus of the University of Alabama, and former president of the University of Texas at Arlington. 

Kevin P. Coyne is senior teaching professor at the Goizueta Business School of Emory University. He was formerly the leader of McKinsey and Company’s worldwide Strategy Practice and a professor at the Harvard Business School. 

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