A key principle on which the financial health of an institution rests is the stability of its revenue streams. Managing revenue streams may be seen as corresponding to management of an investment portfolio. Investment management attempts to minimize the risk (variance from the mean) that investment returns will not yield the expected returns. For institutions, risk is the probability that revenue will fall below budgeted expectations and lead to a significant deficit. As with investments, financial risks at colleges increase to the extent that the revenue stream depends on a single source of revenue. Thus, if an institution receives most of its revenue from engineering, and it falls out of favor with the student market due to changes in labor demand, the college will experience a marked fall off in revenue and find itself with a sizeable deficit. An institution reduces its revenue risks if enrollment is spread over degree programs that serve different sectors of the labor market. For instance, if a college has enrollment evenly spread (an unlikely situation) over business, health services, liberal arts, and education, its vulnerability to changes in labor market demand is lessened.
Diversified revenue stream is a critical issue now because there is accumulating evidence that enrollment in business programs has fallen considerably. Over the past decade, those programs have become the mainstay at many colleges both in their day and in their continuing education programs. Business enrollment has lost its attraction for new and current students because unemployment remains high in the private sector.
A sudden fall in business enrollment can put budgets at risk where a large proportion of enrollment is from enrollment in business programs. Colleges that face this risk will probably be reporting deficits at the end of the year. While a deficit is not a happy situation for a single year, it becomes much more dangerous if demand remains low for several years. Moody’s and others have suggested that if economic conditions remain weak, many colleges could face a substantial depletion of their cash reserves and investment assets.
The slow pace of the recovery from the recession places a heavy burden on enrollment at institutions which are overly dependent on a single academic program to attract new students. These institutions, like most institutions, face the same obstacles when they want to quickly restructure their academic programs. Obstacles include: faculty reluctance to eliminate programs, the time needed for faculty approval to revise programs or develop new programs, the fixed cost of the current structure (faculty compensation and facilities, accreditation and state regulatory approvals), and the cost of new programs. For most institution, responding to changes in student markets is slow, painful, and always carries the chance that after the program has started it may have missed the bus.
We are recommending that presidents do the following to reduce enrollment risks to their institution:
- Determine if the institution is overly dependent on revenue from a single program.
- Initiate a strategic realignment by:
- Identifying programs that feed growing labor demand.
- Increasing investment in academic programs currently offered by the institution that feed growing demand for a particular segment of the labor market.
- Beginning development of new academic programs that the college could serve.
- Analyzing the costs and benefits to the institution.
- Laying out a detailed plan to carry-out the strategic realignment.
If you need help conducting a strategic realignment, contact Stevens Strategy at: [email protected]
Originally posted July 22, 2010