"I meant no harm. I most truly did not.
But I had to grow bigger. So bigger I got.
I biggered my factory. I biggered my roads.
I biggered my wagons. I biggered my loads.
I went right on biggering - selling more Thneeds.
And I biggered my money, which everyone needs."

As spoken by the Once-ler, "The Lorax," by Dr. Seuss

While this quote is referencing the business of Thneeds, it can also apply to the recent history of higher education. For years colleges and universities have been "biggering" their enrollment, programs, faculty, staff, endowment, facilities, debt and research. They have grown wealthier and done more with their resources. Success, for the most part, has been reported by growth percentages. But the economic contraction has been an unforgiving reminder that bigger is not always better. And while growth was easy in boom years, it is an unsustainable business practice that unchecked can erode the quality and distinctiveness of the institution.

This edition of In the Know shares some findings from my recent work with three very different institutions. In each of the diverse examples below we determined that a growth strategy was not a prudent response to today's economic climate.

Sincerely,

Tracy Filosa

Increasing enrollment contributes greater revenue to operations, but depending on the elasticity of student demand and campus capacity, more students often require more expenses, including additional investments in financial aid, faculty, student services and facilities.

Capital University
"Capital University" commissioned a facilities master plan that laid out exciting possibilities for new and re-commissioned buildings. The plan introduced modern facilities today's students have come to expect: new dormitory suites, recreational center, food courts, updated classrooms and laboratory spaces. The university devised a plan to achieve these facilities and reach a new echelon of quality and prestige: grow enrollment in several of its undergraduate and graduate programs.

Revelation: By developing a simple model that joined revenues and expenses associated with enrollment, staffing, facilities and financing we found that the programs with the greatest demand and potential for enrollment growth were also the programs that were strapped for space. Even though the student:faculty ratio was reasonable and would only require a handful of faculty hires, the growth in student revenue in high-demand programs could not match the additional costs of building and maintaining thousands of square feet needed to serve the expanded campus population. The bottom line analysis: the new facilities expenses exceeded the incremental tuition revenue net of compensation expenses.

Lesson: Integrate faculty and space capacity analysis into enrollment scenarios before you grow.

Start-up College

"Start-up College" is a group with a plan to open a new college on a vacant campus. Its leaders had done extensive market research and fundraising. While offering an innovative academic program the proposed school would fit into a traditional model of elite liberal arts colleges. Start-up's leaders anticipated an enrollment of approximately 600 students, an enrollment that imitated the peer group to which it aspired.

While tradition led to a 600 student conclusion, the financial projections for the early years did not. In addition to building programs, Start-up College had to renovate its entire campus. An enrollment of 600 and the corresponding faculty and staff to support this population would require a significant physical plant. The initial capital costs were insurmountable. The expenses would require unrealistic tuition charges and fundraising achievement for a new entity.

Revelation: A much smaller enrollment, starting with class sizes of 60 students, would require a more modest physical plant, so Start-up can bring its new physical space online more gradually. This strategy reduces capital costs of the school during the most challenging time of its development. This smaller starting size also reduces the initial costs of compensation and operations and allows the school to be more selective when admitting its founding classes.

Lesson: The right size is a factor of mission, sustainability and community. Not looking exactly like peer institutions may make the college more distinctive, innovative and financially healthy.

Perfect Storm U

"Perfect Storm U" is unfortunately not alone. It is like many public and private institutions that have experienced declining revenues from government, private, endowment and tuition sources. As tax revenues decline federal and state funding for research and financial aid have fallen. The endowment has suffered investment losses and so have even the most devoted donors. Enrollment expectations are down as many students have turned to more local alternatives and community college courses to reduce the cost of their higher education. Meanwhile Perfect Storm has ongoing expenses of a large research university, including tenured faculty, Division 1 athletic teams and vast facilities.

Revelation: Perfect Storm has been reducing costs, forgoing hires and doing more with less for years as it was struck by more minor squalls. The problems they face are not the results of irresponsible spending. Their expenses are in line with the University's size. The current storm demands transformation that will re-size the institution, because its leaders understand that this contraction of revenues is unrelenting.

The university will need to emerge smaller and better. Strategically reducing its programs will enable the university to proactively invest in its strengths. With contracting resources the school can no longer offer everything and compete with any school. It must hone offerings and retain the talent that leads its distinctive programs. By doing less, but doing it better than its competition the University will be less reliant on outside sources of funding and more attractive to students. It will produce graduates, research and services that attract the attention and investment of business and research partners.

Lesson: It is never easy to contract, but when market forces dictate contraction an institution needs to be proactive and cut strategically. The university should assess the contributions of its programs and then shed in areas that are unproductive or unsustainable. Institutions need to evolve and adapt. The recent downturn is expediting those conversations and reactions.

Don't Be A Once-ler

"The Lorax" concluded sadly. Although the Once-ler claimed that "a Thneed's a Fine-Something-That-All-People-Need!" his business model was unsustainable and destroyed the very resources required to continue production. Nearly 40 years ago Dr. Seuss described the ugly side of unchecked growth.

I am happy to report that the conclusion for the schools in the stories above is not nearly as dire. Education truly is something that all people need, and there is an outstanding network of institutions that are adapting to market conditions so they can continue to deliver this essential product. In a climate of contracting resources and options, growth is an investment that cannot be afforded across the board. Responsible strategic plans will consider near-term and longer term economic realities. Good, enduring schools will keep getting better, but not necessarily bigger.

 

About TAF

TAF CONSULTING helps colleges, universities and schools develop effective financial tools, strategies and documentation. Tracy Filosa applies her diverse experience in higher education finance, administration and planning to help institutions understand and deal with critical business issues.