Is Your Institution on the Brink of Failure?

0:00:11.5 Speaker 1: Hello and welcome to Office Hours with EAB. Our guests today examined the worsening financial health of a large number of colleges and universities. The good news is they also share specific steps that higher ed institutions should be taking now to assess their current financial health and to chart the best path forward. So give these folks a listen and enjoy.

0:00:41.0 Michael Fischer: Hello and welcome to Office Hours with EAB. My name is Michael Fischer and I’m a Senior Director of Research here at EAB. One of the areas of focus that occupies more and more of my time these days is the financial performance of colleges and universities around the world. If you haven’t delved too deeply into the financial backlogs and information that is out there on universities, you might suspect that given how high tuition costs are that colleges must be flush with cash, but you couldn’t be further from the truth. Those who work in the budget offices of higher education know that most institutions are struggling financially and that, as the saying goes, about one institution per week either closes for good or gets absorbed by another institution.

0:01:34.3 MF: There are a variety of macro trends that are impacting this performance for the industry and we’re gonna talk about a few of them today, but we’re also gonna unpack the proactive steps that schools can take to assess their current financial health and to determine what the right process for going forward will be, whether it be cost containment, growing revenue opportunities, or trying to rethink institutional strategy. With me today to explore this topic is one of my colleagues, Molly Bell.

0:02:06.6 MF: Molly, would you mind introducing yourself for everyone listening?

0:02:10.9 Molly Bell: Of course. Thanks, Michael. Happy to be here. My name is Molly Bell and I’m Associate Director of Research here at EAB. I work on our administration finance and operations team, which focuses on business, facilities, operations, admin, all of those aspects of higher education. Most recently, my team and I completed research on cost containment and how institutions can make sure they’re financially resilient and sustainable going into the future. But in addition to that, I’ve been doing a lot of research on the current state of mergers and acquisitions or consolidation in the higher ed sector.

0:02:44.1 MF: Thanks, Molly, and thanks for being here today. That actually might be a good place for us to start on the consolidation trends within the industry. Again, there’s that rule of thumb, that number that people have cited sort of off the cuff of about one institution per week. Can you give us a little insight into how true that is and what actual trends are happening behind the scenes that might suggest where the mergers and acquisition market for higher education is heading?

0:03:15.0 MB: Yeah, let’s dive right into there ’cause it’s definitely one of those hot button headline issues. I’m sure many of those listening today are familiar with the near daily headlines about institutions closing, merging, being acquired. It can be really concerning given the increased financial pressures that the whole sector two years, four years, large publics, privates are all facing.

0:03:39.3 MF: What I found in my recent research is that, well, there’s been a lot of increased interest in consolidation with one recent survey showing that 16% of presidents have been discussing mergers within the last year. Mergers and acquisitions have actually decreased over the past six years while closures have increased. Mergers and acquisitions or consolidation activity has really leveled out since 2019. We see about three to five of these arrangements per year. But by comparison, closures have increased significantly with 74% more closures than consolidation deals since 2020. This is 40 closures versus 23 mergers and acquisitions.

0:04:22.5 MB: What this means is that more institutions have been waiting until it’s too late to consider consolidating or forming partnerships with others and are then forced to close due to financial circumstances. It’s important to note some additional context and segmentation trends among these closures though. Of the nearly 4,000 US higher education institutions, 777 have closed since 2010. But 51% of these are two-year institutions and nearly 80% are for-profit organizations. So, there are important trends to call out in the number of closures that we’ve seen.

0:05:02.7 MF: That’s pretty grim news, even if in large part the impact on non-profit higher education has been relatively small compared to those other segments that you mentioned. But if we’re thinking about the realities of higher education and this continued pressure, it won’t be surprising that we forecast that there will be more and more institutions that are faced with this circumstance. In fact, one of our enrollment studies recently found that about 550 or so not-for-profit four-year institutions in the United States will experience about a 25% or more decline in their enrollment over the next 10 to 15 years.

0:05:47.5 MF: And that level of enrollment decline is almost impossible to recover from without some strong strategic planning and exercising restraint and productivity early on in the process. Now, Molly, one of the things that came out of the research that you worked on was five states of higher education finances, ranging all the way from a stewardship mindset of holding the line and thinking ahead about the needs of the institution, all the way to the catastrophic existential threat that consolidation and M&A activity provides. So, let’s shift a little bit more away from the most dire to the realities of institutions that are either very concerned or actively in financial crisis right now.

0:06:35.2 MF: Those are the institutions that are thinking about budget cuts and the consequences that cost containment might do. What are some of the major trends that you’re seeing when you talk to institutions about what they can do for cost containment and for trying to hold their financial books in line?

0:06:56.5 MB: That’s a great question, Michael. And I’m sure I could go on and on with an answer for it. But what I wanna point out first is one of the most important and interesting findings from this recent research was that higher ed leaders know the menu of options available for cost containment. But as you pointed out, what really is necessary to make effective change is this proactive planning component. Hence, why we created this Five Levels of Financial Performance Continuum. A lot of what we’ve heard from partners is their cost base continued to increase year over year, particularly with labor and their physical plant. We know those are primary cost centers with 50 to 70% of operational expenses comprising labor costs. So, there’s some interesting case studies and examples I’d love to point out from partners we’ve talked to over the last few months, such as the University of Central Arkansas has undertaken a resource optimization initiative. So, as part of this, they’ve saved over $5 million from an 80 full-time employee or FTE reduction.

0:08:09.0 MB: This is a combination of labor tactics they’ve employed from offering voluntary retirements, redesigning roles that have been vacant to better suit future needs, and a reduction in their part-time or temporary positions. They also took a look at where they could trim the fat, so to speak, on technology around the institution, such as reducing desktop printers, which gave them over $100,000 in savings. Another example from the New School on that space component, they were able to incentivize faculty to relinquish their private offices and saw $3.4 million in annual savings by being able to shed 48,000 square feet of lease space. Granted, that’s New York City market, some higher rental costs there, but it’s a really interesting trend we’ve seen of institutions thinking about reducing their physical spread in order to contain costs and meet new demands. The last example I’d love to touch on is just Pepperdine University, who, while being a smaller school than the New School, was also able to exit a lease and reclaim significant savings because they’ve seen the shift to hybrid and remote work post-pandemic. This is something that a lot of institutions are thinking about now.

0:09:29.6 MF: And I know, Molly, that you and the team pulled together 130 or so different tactics of institutions making those cost containment efforts, and just those three are a drop of the water in the larger bucket of options that are available. But as I was reading through this work, I was touched by a few broader trends that we’ve seen that really influence our philosophy at EAB as we advise institutions undergoing significant financial pressure or needing to cut a certain amount of costs in order to achieve their financial targets. One of which is that there aren’t any silver bullets.

0:10:10.9 MF: It is gonna be a combination of a variety of efforts, some of which will have to be labor ’cause labor costs are so high and because so much of the institution’s budget is caught up in human capital-related activities. So if you’re unwilling to think about position control, vacancy review, voluntary layoffs, you’re unlikely to be able to achieve the magnitude of savings necessary to actually right the financial state of shift. The second one that I think we’ve observed quite clearly is that across-the-board cuts don’t work.

0:10:45.5 MF: There’s a natural tendency in higher education to wanna spread the pain and ensure that everybody is collectively dealing with the consequences of these shortfalls. But so often when that across-the-board, everybody suffers a certain percentage of cuts happen, it leads to cutting strong muscle and growing programs along with that in areas that are low priority for the institution. It doesn’t mean to say that all the burden should lie on the academic or administrative or auxiliary side, but instead that institutions have to be strategic in deciding what to cut, where, and what level or percent of the cuts should be based on that long-term strategy.

0:11:26.9 MF: I think that speaks to the third overarching philosophy, which is that institutions as part of these cuts have to think proactively in the long term about being leaner but stronger for it, recognizing that we can no longer be everything to everyone and that not every initiative that has some sort of successful outcome for our research, for our student success, or for our community engagement can be funded and supported in an era of fewer resources and less opportunity.

0:11:57.5 MF: So instead, determining what are our core priorities, what is our core business, and where do we wanna focus our investments, and then shedding over time some of the investment in those non-core areas so we can be leaner but stronger moving into the future. Molly, speaking of that point about labor costs, I know that you’ve looked at the vacancy review position control space recently. Are there any major changes in how people are thinking about looking at positions and thinking about the kinds of roles that they might wanna have on campus with that spirit of cost reduction in mind?

0:12:37.3 MB: Absolutely. Well, labor has been long an area that people are hesitant to touch. You know, you’re talking about possibly eliminating or downsizing roles. It’s very hard. But what position control can do is help you assess your institution’s current needs, review vacancies to determine opportunities to reallocate funding, to fill a role that has a critical need, or to redesign a role to meet your current and future needs better. So while the playbook hasn’t changed drastically of the methods of position control, one of the key trends that I’ve discovered is it’s become a lot more common among higher ed.

0:13:17.8 MF: It’s a variety of formal and informal policies. So some institutions have taken to instituting position control strategies directly into their HR handbooks and their hiring processes to make sure every vacant role is evaluated for how can we make this more efficient? How can we make this better?

0:13:36.0 MB: Is there an opportunity to combine this with another role that has a similar need? We’ve also seen some informal proliferation of this as well, where it’s not directly written into the hiring processes or policies, but committees or practices are formed. Sometimes this is a measure of one-off cost containment, such as creating mandatory hold open periods where an institution chooses to set a period of typically between two and four months where all vacant roles remain open to harness those one-time cost savings.

0:14:15.8 MF: We’ve seen institutions be able to achieve upwards of a million dollars in savings on this sometimes. The other major trend I’d love to call out here as it relates to position control is the formation of position control or vacancy review committees. A lot of higher ed leaders are taking a more deliberate approach to how they evaluate vacancies and elevating that to the executive level to make sure that we’re looking at taking a whole institution approach to addressing vacancies and our head count across the institution.

0:14:47.4 MB: We often find that unit level leaders are quick to backfill a vacancy where elevating that to an executive committee is able to look at, okay, how does this role align with our strategic priorities? Maybe even mapping back to goals in the strategic plan. But overall, the menu of options such as mandatory hold open periods, redesigning roles when they become vacant, or creating a vacancy savings target haven’t changed significantly. Michael, you touched a little bit on leaner but better. And I’d love to get your thoughts about how would you advise university leaders with respect to running a lean organization to go about this without stripping away their ability to provide a full range of support services that today’s students desperately need to succeed?

0:15:41.9 MF: Some of that is thinking about what does a truly innovative organization look like? Where can you break down silos within the institution, whether through shared or scaled services, elimination of redundancies, or even thinking proactively about services that you might be able to provide to the broader institutional network, shared resources with your medical center or hospital, with local community or governmental bodies, or with industry partners that you might have. Thinking about the places where there are existing resources that are under-tapped or underutilized, but you are paying for them cost-effectively. Some of it’s also thinking about technology. There’s been a lot of talk about artificial intelligence and generative AI tools, and there will be continued novel approaches. We at EAB are tracking them.

0:16:37.7 MF: We’ve put together more than 30 of the most innovative ideas that we’ve seen in higher education that can serve as inspiration for looking for those. But those are more long-term plays. You’re gonna require investment upfront before you see the ROI on those. But there are a lot of processes and existing technological investments that are inefficient for the organization, shadow systems, redundancies, delays that require waiting for organizations. And just evaluating your existing processes, organizational structures, and activities that people do can probably net you a lot of efficiencies and meanness without making significant fundamental changes to the organization. In the long term, though, we’re just gonna have to think differently about how we run our organization. As I mentioned earlier, some of that is thinking about what we prioritize and what we don’t. But some of it’s also thinking about what we reward versus what we dismiss or dissuade people from. Right now, there’s a lot of praise and accolades that come from our faculty or our staff growing programs or launching new endeavors.

0:17:46.7 MF: We don’t necessarily reward people or give them high praise for significantly cutting back costs or holding the line amidst growing inflation and growing cost measures. There could be a lot more innovation and opportunity for us to praise people who are allowing their organization or entities to run more efficiently alongside those that grow and expand the institution scope and scale. Let’s turn, Molly, then to the final portion of that financial spectrum.

0:18:14.5 MF: We talked about the existential threat of consolidation. We’ve talked through now some of the opportunities for cost containment and financial strategy for those that are more in the concerned or crisis mindset. At the far-left end of the spectrum are those that are proactively thinking about their financial state or in full-fledged stewardship mode, gathering resources now for whatever storms might lie ahead. When we think about those institutions that are in okay financial shape right now, what should they be proactively doing in order to prepare for the next 5, 10, 15 years of uncertainty within our industry?

0:18:52.2 MB: There’s a mix of both short-term and long-term strategies here, Michael. First, if you’re in that stewardship or a state of vigilance category, a little bit more information on those is you might be seeing positive operating margins, steady enrollment, maybe some fluctuations, and maybe even cost growth outpacing your revenues. The importance here is thinking about where you currently are and implementing strategies to help maintain that or improve, and also having a plan in place should your financial state deteriorate.

0:19:26.3 MB: Some of the short-term tactics or practices that I would advise in this area is to begin looking at opportunities to trim budgets of possibly offering voluntary separations, reducing your headcount, reducing travel budgets, but there’s also opportunities like you mentioned in those processes. So, establishing an organization review committee to look across your organization, identify opportunities for efficiency across units. There’s also the long-term component. So, part of this, back to our mention of position control, is critically assessing vacancies before we automatically backfill, making sure there’s an express need or a criticality to every role. There’s larger-scale initiatives like implementing shared services. We also think it’s really important to create a five-year budget plan that’s modeling future scenarios.

0:20:30.5 MB: This can be really difficult when we get caught in the year-to-year budget cycle that higher ed often is, but engaging in this five-year planning really helps you set the stage for not just thinking in a one-year mindset. What’s important to know about some of the strategies that we would advise in a more stewardship or vigilance, these better states of financial performance, is that some of them, and many of them, take years to implement and see returns on. So, it’s not something to wait on. It’s something to implement now. Even if your institution is in a state of growth, that might not always be the case. So, your best bet is to prepare for a less secure financial future by taking these efficiency and effectiveness steps now.

0:21:13.1 MF: I would also throw in that some of this is about devolving responsibility and knowledge beyond the senior leadership team, whether through financial literacy courses and training. We’ve seen great examples at the University of Kentucky and the University of Wisconsin-Madison to establishing mechanisms to communicate to the wider stakeholder audience of campus, whether it’s students, faculty, staff, the community, what is the financial state of the institution, where do we expect to be through forums, constant communication, language that makes sense and cuts through the jargon or the complications and numbers of this year.

0:21:56.1 MF: One institution we profiled recently is Howard University that did a great job working with some of their broader leadership group of establishing financial scenarios. What does optimal performance versus average performance versus suboptimal performance look like? How would that change the kinds of financial strategies we have to do? But making it clear that there’s three main buckets and making it simple and easy for people to understand how likely it would be for them to enter into one of those versus another. That kind of level of expanding out the financial knowledge I think will be essential moving forward in order to be successful.

0:22:32.5 MB: I think you’ve hit on something really important there, Michael, and what would be one of my top pieces of advice. So one thing my team heard call after call with leaders across higher ed when it comes to making changes is there’s a culture issue. The culture prevents us from making some of these necessary changes to support our financial resiliency and financial sustainability. A lot of the common answers we heard on calls, we categorize them down into four buckets. It’s really easy to not see, or it’s, I don’t see a problem. It’s not my problem.

0:23:12.7 MB: There’s nothing in it for me, and I don’t know how to solve it. Some of those practices like the training programs and financial literacy or communicating budget information, financial reporting in words and language that a non-financial audience can understand helps that change management process. That’s how you ensure that your stakeholders have more of an understanding and don’t just view you as, say, the big bad wolf coming in to take resources and harm their ability to do their jobs. You’re really looking out for the long-term sustainability of your institution.

0:23:49.7 MF: Molly, as we near the end of our time together today, I know that the team has put together a wide variety of resources that people could follow up with. What are a few of the most pertinent or interesting things people might be able to read, download, or watch and follow up today’s episode if they wanna learn more about EAB’s view on financial resiliency and cost-containing strategy?

0:24:13.0 MB: The first resource I would mention is an infographic we created based around those five levels of financial performance that we’ve discussed over this podcast. It’s a lovely thermometer graphic that’s gonna walk you through five levels of financial performance, help you identify what level you may fall into, and identify short- and long-term strategies that you may implement. Along with that, we have a recent blog post on consolidation in higher ed that breaks down some of that data I shared earlier in our time. One of the last things I would highlight is one thing you mentioned earlier in this episode as well of our cost-containment playbook with over 130 cost-containment strategies to lead to immediate cost savings. If you’re at a state where you’re looking for ideas that maybe you haven’t tried before as well as case studies of institutions that have seen success with them, that’s gonna be one of the first places I would direct you.

0:25:17.1 MF: Well, Molly, it’s been a pleasure having you here, even if the conversation has been on something that’s a little bit less pleasant to talk about. But we will continue doing research on this topic over the months ahead as our industry deals with the consequences of these financial pressures we’re facing. And if we have additional updates, I’m sure we’ll be able to get back on one of these episodes and share more. Thanks for being here, Molly.

0:25:43.7 MB: Thanks for having me, Michael.

0:25:44.3 MF: And thanks to all of you for listening today.