Many higher education institutions are facing budgetary challenges, and a student enrollment cliff — which would further aggravate these budgetary challenges — is potentially around the corner due to demographic changes.
For many years, colleges and universities embraced a standard of increased spending to upgrade and modernize facilities or launch new programs. Many of these investments aimed to improve the recruitment and retention of faculty and students. During a period of economic prosperity and enrollment growth, schools of all sizes were able to leverage funds from historic endowment gains via low-interest rate borrowing or from friendly donors. Operations were supported by a steady flow of tuition revenue and other revenue streams. However, even before the industry was shocked by the COVID-19 pandemic, institutions were starting to feel the effects of this spending pattern.
Many schools have been left with high levels of debt, unutilized space, and increasing maintenance costs. Paired with steady increases to employee payrolls, many institutions are now faced with a difficult decision on how to prioritize spending amid winnowing revenue streams. Across the industry, colleges and universities are now working to right-size budgets in order to manage costs and achieve financial sustainability. To identify where to make cuts, institutions should start with a zero-based budgeting system. They can then consider opportunities to cut, share, or outsource services to reduce costs.
Sustainable Budgeting Starts With $0
Many colleges begin building their annual budgets by carrying over the budgets from the prior year and looking at what line items to cut, increase, or keep the same. But simply looking at the previous year’s budget as a baseline does not allow college administrations to clearly see which expenses are contributing to revenue and which are just costs.
When colleges are looking to cut costs and balance the budget, they may turn to a blanket approach by applying a flat percentage reduction across line items. But this can hamper strategic initiatives. Alternatively, making the “easy” decision to reduce administrative staff to maintain levels of academic and student offerings can cause schools to be under-resourced to the point where they can no longer effectively run the business of the university.
Typically, colleges begin building their annual budgets by carrying over the budgets from the prior year and looking at what line items to cut, increase, or keep the same. But simply looking at the previous year’s budget as a baseline does not allow college administrations to clearly see which expenses are contributing to revenue and which are costs.
A zero-based budget starts from zero dollars, with each line item added into the budget based on whether it is driving revenue or is otherwise necessary for a healthy operation. While this process may be tedious, it is critical to identify unnecessary spending.
Institutions often do not have visibility into the cost of operating their various programs. In working to right-size through a zero-based budget, institutions should begin by assessing which academic programs are bringing in revenue. Also, analyze the ongoing trends regarding course enrollment and market demand to help inform decisions. This assessment could be done in tandem with a survey of both current and prospective students on their academic interests. To support this, also communicate to corporate and business partners to understand what knowledge and skills they are looking for from graduates. This could further inform which programs could boost enrollment.
While colleges and universities remain committed to providing students with diverse learning opportunities, some unpopular program offerings may become a significant strain on university budgets. Department leaders may sometimes push to expand their programs, but this could involve including more niche offerings. Further, institutions should evaluate the overall design of its curriculum. While many students appreciate and seek the traditional liberal arts structure of engaging in courses across a variety of disciplines, the changing nature of the economy may require new approaches to education.
Additionally, not every class needs to be provided in-house. Some schools may be able to set up direct affiliation programs to allow students to access classes at other institutions, whether in person or online. Affiliation programs can also help institutions struggling with enrollment fill empty seats and bring in additional program revenue. A reimagined approach to budgeting can help institutions tailor their spending to student needs. If programs are restructured, academic affiliation programs allow universities to responsibly provide students with additional academic opportunities.
Outsource and Share Services
While aligning program offerings with student interests can improve financial sustainability, institutions must also focus on reducing the overhead costs that contribute to increased expenses.
Across the financial, academic, and administrative functions of colleges and universities, there are two primary ways to reduce costs: outsourcing and sharing services.
Many university functions can be sourced to outside vendors, including finance functions. Since the pandemic, many institutions have experienced high turnover across their finance functions, which contributes to increasing recruitment and retention costs. This may lead colleges and universities to hire candidates who lack the skills they need for the job.
When staff leave accounting and payroll departments, they take institutional knowledge with them, like how to use recordkeeping systems. Third-party vendors use economies of scale to lower the cost of providing financial services like payroll, accounting, and tax reporting, and such vendors have access to the latest tools and the necessary experience to navigate the unique financial services needs of colleges and universities.
Learn how BDO helped a liberal arts institution strategically outsource its financial functions and improve overall financial sustainability in our recent case study.
Essential cost drivers like IT and technology services can also be shared between higher education institutions.
Software, including learning management systems, can be purchased collectively, reducing licensing costs across several institutions. Considering the vast data storage needs of higher education institutions, shared data centers are another avenue for greatly reducing costs.
Maintaining and supporting the technology that powers virtual classrooms and file sharing can be a large cost driver for institutions. By purchasing IT support and help desk services collectively, universities can lower the cost of providing high-quality, 24/7 technical support to professors and students.
When institutions share technology services, it is also possible for them to collectively purchase cybersecurity support and insurance. This can make it less expensive than if each institution is individually paying for robust cybersecurity solutions.
To cut costs and improve financial sustainability, higher education institutions should consider outsourcing and sharing in key back-office operations.
Creating Long-Term Sustainability
While focusing on controlling costs, institutions should also have their eyes on revenue streams. While operating profitable academic programs is an ideal goal, realistically institutions know that they will need to supplement revenue for certain academic programs. To supplement unprofitable programs, colleges and universities should not only increase the promotion of profit-generating programs but also leverage alternate revenue streams from auxiliary programs or rethink asset use to enhance revenue.
Streamlined, sustainable budgets help colleges and universities get closer to achieving the financial security required to consistently fund necessary student resources. A zero-based budget helps institutions define what is truly essential to their academic, administrative, and financial operations. Outsourcing and sharing some operational functions can also help cut costs from essential functions without sacrificing quality.
No matter the steps taken, colleges and university leaders must also become familiar with key financial metrics and leverage routine processes for reporting and reviewing financial performance and health. With a healthy financial footing, academic institutions can focus on empowering the next generation of professionals to determine their own future.
BDO’s higher education professionals have helped universities large and small achieve greater financial sustainability. Learn how BDO can help you implement better budgetary practices, align your academic offerings with student needs, and reduce overhead costs.