Strategic Finance For Higher Education: Understanding Academic Program Costs and Contributions

By John Braunstein & Adam Boyd

Unlike institutions of higher education, hospitals and health clinics have long understood the financial contributions of their various functional units: which paid for themselves, which required support, and which generated revenue above costs that could be used to subsidize other functions. Savvy college and university leaders do know that understanding the costs, revenues and financial “contributions” of their various academic and non-academic units is central to ensuring the financial health of their institutions. Yet most colleges and universities lack the data and financial-modeling capabilities to generate good information about their program costs and contributions.

This can be partly traced to the political environment in which colleges and universities operate. Some on campus may fear that knowing this information might lead institutions to cut programs that don’t generate revenues to cover their costs. Others may believe this information is not relevant to mission-driven institutions. However, our clients have found that, in fact, such information allows institutions to protect important programs that may not cover their own costs by taking steps to generate additional revenue from programs that produce revenue above their costs.

In other words, having solid program cost and contribution information allows these institutions to create financially sustainable enrollment and academic-program strategies that are consonant with their institutions’ missions rather than simply cutting costs.

While such information will not end campus debate over how resources should be allocated, it helps facilitate an informed discussion by presenting essential financial facts. As Daniel Patrick Moynihan famously said, “Everyone is entitled to his own opinion, not his own facts.”

Margin analysis is a tool we have used with our higher education clients to create this baseline of financial facts – the actual costs and revenues relating to each academic activity. Having seen the thoughtful debate this knowledge facilitates among diverse campus constituencies, we believe it is relevant and useful to institutions of higher education in general, and by extension, to all nonprofit organizations, with certain obvious differences with respect to specific categories of income and expense and organizational unit.

What is Margin Analysis?

Margin analysis establishes on a highly granular basis the specific revenues and expenses attributable to each academic and non-academic department, degree program or other activity of an institution – by student, faculty member, class, department, college/school, or campus. Indeed, it can conceivably be applied to almost any category of expenses within a given institution.

The specificity of these data is typically an eye-opener for faculty, academic and financial officers and trustees. Such information not only helps identify promising program opportunities or under-tapped student demand, but promotes constructive discussion about resource reallocation. It can also demonstrate to sometimes restive creditors, rating agencies and insurers that the institution has a firm grasp of its financial facts.

Most importantly, when combined with other internal and external data about the institution, margin analysis can be a building block for sound enrollment strategies, academic planning and especially for strategic planning to articulate goals and initiatives to achieve the institution’s vision.

From the Bottom Up

College and university leaders are generally most interested in program costs and contributions at the department, school and institution-wide levels. Margin analysis begins at the level of the individual classroom – the revenue and expenses attributable to every single class. The initial step is the collection of revenue information: tuition and financial aid data for each student.

When these are aggregated, one obtains, for each class offered: total revenue produced; average financial aid discount rate; and the total net revenue produced by the class. These data are then “rolled up” to generate detailed reports covering every aspect of the institution – from the micro (course, faculty member, student), to mid-level (department), to the macro (degree program, school, campus).

The specificity of these data is typically an eye-opener for faculty, academic and financial officers and trustees.

To understand “margin,” however – how much the class contributes financially – it is important to understand the direct expenses associated with it. By examining compensation and workload data, each instructor’s cost can be applied to his or her classes and subtracted from the total net tuition revenue for each class to arrive at the class margin.

A View of the Whole Institution

This class-level analysis is the foundation for margin analysis at all other levels of the institution – department, program, school and the entire institution. Net tuition and instructional costs obtained at the class level are rolled up to the departments offering the classes, and departmental administrative expenses (e.g., portion of instructor compensation allocated to administrative duties, office expenses, etc.) are added.

Department revenue and expenses are then aggregated to the school and then the institutional level, and the administrative expenses associated with each level (e.g., the deans’ and the president’s offices) are included. The table below provides a hypothetical example of the results of margin analysis at the school level based on the courses offered by each school (as opposed to the students enrolled in each school’s degree programs).

School Margins by Courses Offered

Overall, the data generated by the margin analysis facilitate comparisons of departments within and across the individual schools of the institution to highlight the effect on department margins of different approaches to pedagogy, levels of faculty compensation, desired student-faculty ratios and similar factors. The analyses may also be used to reveal the financial impact of students who are degree candidates in one school of the university taking classes in another, an issue of importance at many institutions.

Margin Analysis in Planning

Margin analysis can be used in myriad ways to inform academic planning, enrollment strategy and overall institution-wide strategic planning. To illustrate some of the rich potential of margin analysis, consider a few of its potential implications for enrollment strategy at a hypothetical institution.

School Margins by Courses Offered

School Gross Tuition & Fees Institutional Aid Net Tuition Discount Rate Instructional Cost Class Level Margin Administrative Costs School Level Margin
Arts & Sciences $43,106,487 $13,170,687 $29,935,800 30.6% $7,894,355 73.6% $1,740,864 67.8%
Business $27,556,836 $5,742,933 $21,813,903 20.8% $5,468,773 74.9% $4,368,052 54.9%
Education $5,055,626 $640,097 $4,415,529 12.7% $2,191,640 50.4% $818,531 31.8%
Public Health $5,562,182 $1,307,690 $4,254,492 23.5% $1,884,246 55.7% $576,835 42.2%
Total $81,281,131 $20,861,407 $60,419,724 25.7% $17,439,014 71.1% $7,504,282 58.7%

 

Margin analysis presents a snapshot of an institution’s performance at a point in time; however, it can also be adjusted to demonstrate pro-forma results of running all programs at full capacity. One reason for doing this is to compare schools and departments on an “apples-toapples” basis and to consider their potential to generate additional net tuition revenue by adding more students where room exists. For example, our hypothetical School of Arts & Sciences, at full capacity, has a contribution margin significantly higher than that of other schools and, therefore, the greatest potential to contribute additional net tuition revenue to the institution as a whole. This might suggest a strategy of increasing enrollment in Arts & Sciences; that is, recruiting more heavily for students who will fill seats in classes offered by Arts & Sciences departments.

However, looking at the underlying data, the provost might determine that the largest number of seats in Arts & Sciences classes is filled with students enrolled in the university’s School of Business who are completing core academic requirements, and that a low rate of tuition discounting among business students contributes significantly to the high contribution margin of Arts & Sciences classes. But, imagine further that the School of Business has significant constraints on enrollment growth as a result of accreditation regulations or infrastructure limitations. Given such a situation – no additional Business School students could be added to Arts & Sciences classes – the university would need to look at alternative sources of students: could Arts & Sciences fill its classes with more of its own students (i.e., students who are degree candidates in Arts & Sciences) or those enrolled in other schools of the institution?

How Our Clients Have Benefitted from Margin Analysis

One of our clients realized that their approach to enrollment management was incomplete. The university understood how to use financial aid and admissions yield data to recruit and enroll the students it most desired: those who would maximize the overall academic ability of the student body and be retained through graduation. However, it did not understand the full financial effect of recruiting such students – the different margin contributions, say, of students recruited and enrolled in one program as opposed to another.

By adding margin analysis to their consideration of financial aid and admissions yield data, the provost and deans were able to restructure student recruitment to not only attract the most desirable students, but to do so in the most financially sustainable way for the whole institution. That is, the university came closer to the optimal balance among the number of students, academic ability and true net revenue – “true net revenue” here referring to that accruing from not only the net tuition revenue generated from the students, but also from the overall institutional margin contribution resulting from the particular configuration of students, in terms of their chosen degree programs and probable course selections, enrolled by the institution.

Margin analysis presents a snapshot of an institution’s performance at a point in time.

Another client used margin analysis to rationalize resource allocation between its professional schools and its core arts and sciences school, which was teaching many students from the professional schools but not receiving appropriate financial reimbursement for those students. It also discovered that enrollments in several programs recognized widely for their quality and distinctiveness could be carefully increased to respond to student interest and demand while generating highly attractive net margins. In addition, their margin analysis substantially increased classroom utilization and thereby improved the institution’s overall financial performance.

These are only a few ways in which margin analysis can stimulate an institution’s thinking about enrollment management, financial planning and overall institutional strategy. The versatility of margin analysis helps campus leaders test hypotheses about costs and revenues at all levels of their institutions and thereby generate enrollment and academic program strategies to maintain academic and financial health. Moreover, margin analysis helps a university establish a stronger institutional culture of data-driven management and decision making – a discipline that will serve institutions well as their environments become increasingly competitive and resource-constrained.

John Braunstein is a Senior Consultant at AKA | Strategy & Adam Boyd is a Director at Goldin Associates, LLC

STRATEGY MATTERS © No 6
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