Higher Education Policy and Practice

Explosive Growth

Too many budget-enrollment and net tuition strategies are based on finding just enough new students to cover next fiscal year’s budget expense.  This strategy worked fine when colleges tended to stay within their own markets, labor costs were low for skilled positions, and technology was not transforming the industry.  The slow growth strategy leads to feeble cash reserves and heavy debt to fund capital expenses that jack-up the breakeven cost of operations.  We are now seeing the leading edge of a massive change in higher education:

  • Enrollment declines in the Northeast and Midwest are taking massive chunks from revenue, generating multiple deficits and depleting cash.
  • Technology is reshaping the cost of and the demand for a degree.
  • Colleges with marginal income are unable to hire high quality technical staff to transform instructional delivery or to develop new programs that can generate large increases in revenue and net income.
  • The sunk costs of tenured faculty, existing programs, unprepared students needing costly academic support, and infrastructure not attuned to current technology constrain options for colleges with marginal net income from operations, meager financial reserves, and insufficient debt capacity
  • The probability that the federal government will extend “gainful employment” rules may force colleges to restructure academic programs to assure graduates leave with employable skills. Faculty attempting to protect their programs from change could impose substantial delays and costs on a college. Moreover, new regulations of this type will necessitate new and extensive data collection systems and staff to track graduates for the first several years in the work force.

Below are several examples of what has actually happened when colleges do not have the resources to compete for resources or in the market for students.

The first example, involves a small private college that attempted to hire a new online director with the experience and reputation for designing and managing new programs that markedly increased student revenue. However, the college hired this person on a shoe string budget. The director-elect received a counter offer that included a hiring bonus and salary that was way beyond the means of the small college to compete. They not only lost a golden opportunity to leap ahead of their regional competition, but the original hiring offer was rejected in early summer when it was too late to find another qualified director. Instead of a new strong director, the college lost a year in their strategy and dropped into deficit because traditional enrollments fell below budget expectations.

The second example involves a college that was unable to convince its faculty that the college had to redirect its resources to new programs even though new income was positive. However, net income had been falling in real terms and as a percentage of expenses. The college was adding new programs but enrollment from these programs barely replaced declining enrollment in older programs. The administration and board of trustees recognized that their student markets were shrinking, costs were growing faster than revenue, and students were choosing other colleges that offered degree programs more tightly linked to the job market.

The third example involves an institution where enrollment, student revenue, and total revenue grew slowly and steadily. Nevertheless, the revenue growth rates were so low that it barely kept pace with expenses. As a result, change in net assets was small, operational cash flow was negative and plant re-investment and replacement was stagnant. They were surviving but lacked the financial resources to face stiff competition from a nearby competitor making large new investments in new programs, internet instruction, and alternative revenue strategies.

A fourth example involves a private college with a dramatically different outcome. For ten years, they followed the plodding slow growth model and after ten years they were bouncing into and out of deficits. With a new administration and several missteps, they decided to initiate a number of programs at once that they believed could result in explosive growth and long-term advantages against the opposition. In the first year, revenue grew twenty-five percent and over the next ten years the college continued to grow revenue at a double-digit rate. Within five years, they moved from the bottom of the pack in market share to second in the state. It even outgrew one of the two public institutions, and its programs were larger than comparable programs at the flagship state university. Explosive growth gave the college huge market leverage that granted them price leverage and broadened their reputation in the region allowing them to start new branches in neighboring states.

Here are several strategic implications of the changes mentioned earlier and the preceding examples:

  • Academic program have become inextricably linked with the job market.
  • An increasing number of students are choosing academic programs that prepare them for employment.
  • Academic strategies must rapidly respond to changes in the student and job markets
  • Strategies, organizational plans, and implementation must move at a faster tempo; dawdling is no longer possible
  • New revenue growth must have an explosive phase so that the institution can leap ahead of its competition and provide it with the reserves to reach and develop new markets.
About the Author: Mike Townsley, Ph.D.

Michael Townsley has more than 20 years of experience in academic services, financial systems, budgets, marketing strategy, payment plans, IT administration, ancillary operations, and site management. Mike is Senior Consultant with Stevens Strategy and former President of Pennsylvania Institute of Technology. During his 20 years … (Read More)

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