Institutions are successfully fighting back against the current headwinds of inflation, demographic change, and investment market uncertainty. Some have saved millions of dollars. This victorious battle against the elements is executed with a robust evaluation of academic program economics.
Success is realized when leadership has the conviction and courage to make data-informed decisions. Increased net revenues, cash flow, and margin are additional outcomes of building consensus and establishing accountability, which accompany these data-informed decisions. Academic programs should be streamlined, increasing cash available for reinvestment and strategic initiatives for the campus and its community.
Margin analysis is the tool needed to gain understanding of the operational levers that control cash flow and margin. Through a deep dive into the economics of courses and academic programs, university leaders can make data-informed decisions that help create and sustain financial health.
Financial sustainability remains a key topic for higher education administrators. Many academic leaders have convinced themselves that academia is not a business, nor should it be envisioned in that light. On the surface, this concept is true because education serves the broad goal of developing and equipping the next generation to contribute to society through the formation of productive citizens. But this is only half of the issue. This idea should not preclude applying proper business and cash management principles that tend to build financially stable organizations that produce consistent quality outcomes. Mission is critical to the operation of the university, and margin is critical to the operation of the mission.
The power to drive conversations that move a school’s leadership toward an improved business model starts with conviction paired with courage to host conversations on your institution’s future. These conversations are especially powerful when conviction and courage are supported by good data. Think about conviction and courage as the engine for change, and consensus and accountability as the traction needed to make meaningful progress. Academic margin analysis is a worthy project that can help provide a positive return on investment when leadership stops strategic planning and begins strategic doing.
Affordability is the hot topic creating pressure on enrollment and net tuition revenue. As a result, most institutions need to evaluate their economic model. This may involve discussions related to sticker price, discount rates, marketing efforts, telling “your unique story,” or rightsizing the institution. This also may involve discussions about collaborations with industries that hire graduates and neighboring schools. Often the cost to deliver education is ignored during these affordability conversations. The actual cost structure of instruction and instructional support is often a black hole. The appropriate size, shape, and type of academic delivery systems tend to follow a philosophy that leads to doing exactly what has been done plus a little more each year.
Annual budget cycles are built upon a percentage increase or decrease. As enrollment declines—based on fewer high school graduates and a bearish adult student market—institutional leadership must have the tools to address the question of affordability and the specific costs to deliver individual courses and programs. Without the net revenues, cash flow and margins can all suffer.
Higher education appears to be losing the battle on affordability. The value of a degree is questioned. Student loans remain an albatross that prevents prospective students from finding a pathway to a better future. Board members and campus leaders often ask questions such as: Does the institution know the cost to educate a student? What does it cost to deliver a nursing degree? Are the online programs as profitable as we think? What percentage of operational costs are covered from cash received through tuition and fee payments? Are annual tuition and fee increases based on the cost of delivering a degree? Do we have sufficient margins to sustain the operations of the institution over the long term (including those nasty downturns that come along periodically)?
The financial team will often attempt to answer these questions through a spreadsheet analysis. This could involve the use of pro forma financial projections with enrollment, salary, and department expense assumptions. A breakeven analysis, based on the relationship between fixed costs, variable costs, and enrollment (units sold as either full-time equivalent or credit hours), is another option sometimes used. Due to the simplicity of the breakeven analysis and lack of application to higher education, institutions could develop a variable cost approach to address the cost-to-student relationship. The approach is based on the concept that the school can function at various cost levels for a certain range of student enrollment. This can be visualized with a line graph with step increases as compared with a smooth line.
While trendline projections and breakeven analysis have been used, the preferred method is margin analysis. Conducting a margin analysis can establish a cost baseline for a budgetary unit like a department or school and provide the medium for moving forward toward sustainability and affordability, making a margin analysis the better solution to manage academia’s economic model. Conducting a good academic margin analysis considers the direct relationship of individual students in a classroom and the related direct instructional costs required to deliver educational services. In addition, it provides the flexibility to also incorporate indirect instruction costs and overhead.
The margin analysis must be detailed enough to account for student billing and financial aid activity along with specific faculty salary and benefit costs. This practice requires deep access into the student and payroll information systems. Without this granular approach, the university is only able to use generic tuition and cost patterns derived from averages and related assumptions. Margin analysis should not rely on anecdotal information when it comes to revenues and expenses at department, degree level, or even the course subject levels. Therefore, a proper analysis should rely upon the detailed information available within the student information system, general ledger, payroll, and other key data sets across the institution.
Identifying Academic Margin
Defining Margin: Economic margin is a simple concept with powerful complexity. In its simplest form, margin is the difference between revenues and expenses. Total margin for a university is the remaining funds after recognizing operational and nonoperating revenues and recording all expenses of the institution. The operating margin is based on the operating revenues and operating expenses. A third level of margin to consider is the instructional margin focused on instructional revenues and costs.
The benefit of tightening the definition of the margin to academic departments and programs provides leadership with a deeper understanding of tuition-related activities. The instructional margin is, therefore, refined to the relationship between tuition and fees associated with the classroom and expenses directly and indirectly related to the delivery of education to students. Therefore, on the revenue side of the equation, it’s best to exclude registration fees, student service fees, and other fees that aren’t directly related to classroom activity. Likewise, academic costs should be associated with faculty salaries and benefits, academic department expenses, stipends and overload payments, and dean and other academic department salaries.
Overhead allocations also can be included in a deeper analysis of the university’s margin analysis. However, it’s best to start with the margin level that can develop consensus and maintain accountability among academic leadership. It’s difficult to hold deans and department chairs responsible for the financial decisions of plant services, athletics, registrar, or the student life office. The primary benefit of allocating nonacademic overhead into academic margin analysis is to understand and communicate the overall cost of providing for student success and allocating these total costs in future program planning and forecasting. It answers the question: Is the institution financially stable and sustainable?
Building the Business Case: The most important question related to doing this work is “why”? Why are we spending time on this? Getting the right answer to that question will make or break the success realized. The right answer will motivate leadership and the governing board to take the right course of action. To answer the why question, the most important task to accomplish is to build a visual model that displays in clear terms “why” there is a need for streamlining the institution’s core operations. A simplified graphic pulled from audited financial statements will help. In the model (Exhibit 1) it is clear why optimizing core operations is so important.
Exhibit 1 – Illustrated Business Model of Higher Education
The business model in most private and some public institutions looks just like the exhibit with large operating deficits requiring funding by philanthropy, endowment return, and auxiliaries to break even at the bottom line. It’s clear from this example that even schools with robust investment return and philanthropy have a need to focus attention on Core Operating Margin.
While the Philanthropy and Capital return in the example is very positive, it was due in large part to situational and one-time issues. It does not always look this good. When this is communicated clearly, constituencies both inside and outside of academia will understand the need for the hard work that is academic program assessment and optimization. What, then, are the steps in making this work successful?
Step 1 – Establishing the Project Team: The journey of program economic analysis should begin with cross-functional teams. By its nature, academic margin analysis is a data-dense process. It’s a data-informed process of collecting, assessing, and deciphering data to inform strategic decisions. If the institution only focuses on data, decisions will lack mission focus.
A successful project must establish a project champion along with a finance lead and an academic lead. The project champion is typically the provost, chief financial officer, vice president of strategic initiatives, or a similar administrative position. The project champion’s primary responsibility is to clear the pathway for the working team to maintain the priority of the project. The finance lead is best served by the controller or similar position and the academic lead is best served by institutional research or associate provost personnel. The remaining individuals needed for the analysis include representatives from the registrar, human resources, financial aid, student billing, and sometimes well-chosen faculty representatives.
A sufficient level of detailed information is required to make data-informed decisions. Relying upon high-level, aggregated data does not highlight the complexity of the university. It’s important to draw conclusions based on a combination of course and student attributes. Course attributes are data points associated with course locations, types, levels, and hierarchies. Student attributes provide detailed economics on programs of study, student classification, location, CIP code, and other demographic information, including athletic or fine art programs.
As this team is brought together, a couple of concepts are important to communicate:
- Success is not about just cutting programs. Success means finding (among other things):
- The right combinations of program resourcing and enhancement;
- Application of the right labor force to staff the teaching function;
- Perhaps some letting go of the nonessential;
- The right class size and frequency; and
- The optimal individual time management plans for teaching staff in regard to load and load relief and, in some cases, overloads.
Call this a portfolio approach to the decision-making process. One idea for everyone to understand and use when debating possible solutions is that a “rising tide floats all boats.” In this context, that means that some small but important departments and programs are needed even when they don’t return adequate margin. It then becomes the job of larger, “wealthier” programs to raise the tide so the entire community can thrive. That is easy to say and hard to do in real life, but try you must. It’s at the heart of a successful margin analysis and the related decisions that are needed.
- Staying positive and finding early wins will help propel the remaining hard parts of the project along. This change management concept is very common, but it works well in this environment. Paraphrasing educational change management expert Howard Teibel: People don’t have a problem with change. They have a problem with uncertainty. Also, it’s important to shift the team’s mindset from anticipating bad things that will happen to envisioning the opportunity that this change will bring.
Step 2 – Data Collection and Assessment: The foundation of the analysis is the Course Data file. This file contains—at a minimum—course attributes such as year and term, student IDs enrolled in the course, faculty IDs of those who taught, course name and section, credit hours, location, and instruction method. The format of this file should be a row format with each row representing the individual students in each course section. A course with 35 students should contain 35 rows in the file with each student ID, along with the same faculty ID, course ID, year/term, and so forth.
A Course Hierarchy file is created to map each course to its respective academic departments, schools, and colleges. This can be done at the subject level rather than each specific course. The relationship between courses and subject should be one-to-one. Likewise, each subject should be linked to only one department, school, and college. As an example, FIN115-A3 would be a Finance subject. The Finance subject should only map to one department: Department of Business. The Department of Business can only map to the College of Social Sciences. This concept appears reasonable at face value, but often a student database does not accurately reflect a clean course hierarchy. This is a critical pathway in the analysis to prevent duplication of data across multiple departments or divisions.
The Student Data file represents student attributes that enhance the economic analysis. The file should contain key information such as the year/term, student ID, major, CIP code, classification (freshman, sophomore, etc.), degree level, student location, and other demographic information. If the student is pursuing a second major, this information also can be included in the data file. It’s best to collect this information in a row format rather than a second column representing a second major. The additional rows will be a duplication of all student data with the exception of the major, CIP, and other data attributed to the major. It’s best to exclude minors and additional majors from the analysis.
Financial information is drawn from the accounting system’s general ledger trial balance report and finance to academic mapping. Linking general ledger department codes to academic program departments allows the analysis to integrate actual expenditures into the model. It’s common that financial departments identified in the general ledger do not always match the actual academic departments at the institution. The reconciliation process requires clear communication between the finance and academic divisions to help ensure accuracy.
For the best accuracy on teaching costs, the model should use a payroll file that maps faculty IDs to the courses they taught listed in the Course Data file. The payroll file must identify the academic year, faculty IDs, faculty type, position, home department, salary, and benefits (often a set percentage of base salary). A second payroll file can provide key details on adjunct faculty and overloads paid to faculty.
Each of these files must be able to join together on a set of primary keys: Year, Term, Student ID, Faculty ID, and Course Record Number (CRN). If a CRN is not maintained in the system, it must be created with a combination of year/term/course number/course section. The idea is that these files must have primary keys that coordinate between all files.
The most important lesson from the data collection and assessment process is that the perfect is the enemy of the good. Unless you’ve had a robust data governance process at your institution, chances are there are bugs in the data. Be patient with this process as data is collected and assessed. Data files used in this process typically include:
- A course hierarchy file
- Course data file
- General ledger
- Payroll file
- Student billing
Step 3 – Performing the Analysis: It’s imperative that the data is not displayed in a report or small print handout. Dashboards must be used to communicate clearly and help build consensus. Metrics of accountability can then be established. Determining the appropriate visualization of data is just as important as collecting the data. While the spreadsheet route is the simplest approach to margin analysis, the spreadsheet does not provide interaction with the depth of data. If the institution wants a simple margin analysis at school or department level without the ability to explore the multiple components of the margin, a black and white printout will normally suffice.
It’s best to explore a visual platform that will enable key personnel the ability to slice and dice the data to help understand the economics of courses, student types, degree levels, instruction methods, and even by locations. This approach is where the secret sauce of traction occurs, and it requires a solution that empowers the academic leaders with data at their fingertips.
As the team begins using dashboards and exploring the data, it’s critical to grow in knowledge about academic program margin. Several questions are important to consider:
- What is the data telling you?
- When you read the story being told by the data, do you find that you’re asking the right questions?
- What does the data tell you about the levers that need to be pulled to achieve needed changes?
- Are these levers ones you’ve been considering?
- Have limitations been imposed about what inputs and levers are acceptable for use in creating academic change?
Sometimes sacred cows need to be addressed on campus. These might include the following areas to identify and deal with:
- Release time policies
- Academic committee structure and process
- Legacy majors or newer majors with minimal enrollment
- Class section size
- Class section frequency/scheduling
- Space utilization
- Balance of full-time faculty and adjuncts
Setting goals on creating and maintaining a healthy margin can help support these academic decisions. Any margin policy or goal must be in alignment with academic mission and quality. Consideration must be given to the following questions:
- How much margin is sufficient for long-term health?
- Is margin based on operating cash flows or net income as measured on GAAP financial statements? A hybrid model could set margin goals based on EBIDA (earnings before interest expense, depreciation, and amortization).
- Is a margin percentage based on annual or a rolling three- or five-year average?
Performing margin analysis is the right approach to help improve net revenues and cash flow. The process requires a cross-functional team to help achieve institutional support. Providing the opportunity for open dialogue is critical for long-term success. When leadership allows for an environment for open minds and inquisitive spirits, objective truth can be discerned, and creative solutions determined. Allowing the data to tell the financial story may yield new ways to think about problem definition and solutions that might be acceptable. Allow the data to inform your decisions and develop your convictions. Design the information so that it becomes more than just a mountain of data that few understand or trust. It needs to be the source of your conviction and objective truth about financial management. The analysis must be in a format that is easily understood and easily queried. The data needs to be viewed in the broader context of mission and institutional knowledge. Margin analysis is the financial piece of the puzzle that also relies upon:
- Academic quality
- Life span of the program and related trends
- Market strength for the programs
- Competition related to the programs
Keep your growing convictions among a group of committed change agents. Once this group is comfortable with processes, the data provides support for the underlying assertions of this conviction. This is a critical linchpin in successful fierce conversations as all parties bring their own beliefs and biases to the table. Reliable and objective data can cure personal biases regarding academic program performance.
Areas for questions and additional research and discussions include:
- Level of staff for delivery (taught by full-time professors or by adjuncts?)
- Level of release time (How much release time has been granted in total and by department?)
- Students per course (Can we get by with fewer sections, thus increasing the students per course, yet retaining academic quality?)
- How do changes in the three areas above affect overall financial performance?
Be diligent with data. Seek objectivity. Consider the benefits of a third-party gathering and presenting data as academic buy-in is critical. Without it, you may trim around the edges of the real problem without solving the issue. Lack of agreement on the underlying data is often the reason nothing occurs. The long-term result of inaction is the suppression of innovation. Lead with courage and conviction because margin analysis can help provide a significant return on investment and improve cash flow and institutional financial health.
Want to learn more about how conducting margin analysis can benefit your institution? Visit our Program Economic Analysis page and connect with our higher education professionals or fill out the Contact Us form below.