The Economics of Phased Downsizing

A decline in enrollment would affect the cash flow of any college or university, not just those deemed to be at risk financially if their enrollments declined by 15%.  Those that would not be considered at risk simply have more Staying Power because they have cash on hand or a positive or relatively small negative cash flow, or some combination of the two    So this is what would happen to the average of all 44 schools in The 2024 New England Survey if its enrollments declined by 15% over three years and it did nothing: 

Scenario 1:

The average school starts off Year 1 after the Base Year with $31 million in the bank and might feel comfortable in terms of its "working capital position".  But as tuition revenues drop and a seemingly minor $2 million operating deficit emerges, negative cash flow jumps to $16 million and that $31 million cash cushion is cut in half.  

If the school had been focused on its negative $10 million cash flow in the Base Year instead of the $4 million budget surplus, it might have been more aware of its tenuous position.  

As Year 2 after the Base Year begins and the school realizes enrollment declines in Year 1 were not a passing phenomenon,  it might put more resources into recruiting and/or begin to discount more deeply to try to keep headcounts up.  It might even put some constraints on spending in place. But, on balance, it might not be enough to avoid a shortage of cash toward the end of they year.  Fortunately, a $7 million line of credit tides things over until tuition and room and board revenues flow in in August and September of Year 3 after the Base Year.   

And this is what it might happen if, despite best efforts,  it becomes clear enrollments will not turn around as Year 3 approaches.  The school realizes it is headed for serious trouble financially, and it is not able to raise enough immediate cash for operating purposes from other sources.  The school has no choice but to downsize faculty and staff to avoid a cash crisis.  Pure chaos.

Scenario 2: 

And this is how things could have been handled by anticipating the possibility of declining enrollment  and preemptively downsizing faculty and staff by 8% per year,  with 8% chosen for illustration purposes only, starting immediately after the Base Year, with a substantial portion, if not all of that reduction in force, put in place by taking advantage of normal attrition.

Since staff attrition typically outpaces faculty attrition by a substantial margin, this approach should appeal to those who believe – right or wrong – that there has been too much growth in administrative staffing at colleges and universities over the years. 

To be sure, all of this would require thoughtful attention. High priority positions would have to remain filled and this might well require promotions and transfers.  But phased downsizing in this manner would be substantially less painful in terms of disruption, morale and, frankly, viability than the kind of RIF that would be required if put in place under duress.

Some Additional Thoughts:

This report does not purport to be a "how to" manual.  But a few thoughts on the economics of both academics and administration might be helpful. 

On the academic side:  Tuition accounts for 76%  of total revenues at the schools in this study on average.  And tuition is earned by teaching.  And teaching occurs at the section level.  Some may find the concept as described objectionable, but each section generates a financial contribution or "margin" that is the excess of the cost of faculty time over the tuition earned based on credits.  

Now the analysis can be made rather complicated by debating things like:  How to apportion compensation, how to credit tuition and account for aid, whether to assign "overhead burdens", whether margins should be calculated at the section or some higher organizational level.  But keep it simple,  The data should be readily available.  Calculate the margin for every section for every member of the faculty and their individual averages along with whatever other averages makes sense for assessment and comparative purposes.  As long as compensation is apportioned consistently, the questions raised by the analysis will be obvious. 

And when a school simply needs to be run more economically to avoid layoffs, hiring freezes, across the board cuts, wage freezes, suspension of retirement contributions, and similar desperation moves, the idea of exploring how the academic enterprise can be managed in a way that maximizes its financial contribution consistent with academic standards should not be seen as anathema to institutional purpose and priorities.

On the administrative side:  

Discussions that begin with the premise that "administrative bloat" contributes to the high cost of a college education or exposes misplaced institutional priorities, serve absolutely no useful purpose.  

But administration does serve solely in support of the central missions of a college or university.  And right-sizing administrative functions assures that available resources are directed to the maximum extent possible to those missions.  So critical review of administrative functions with this aim in mind should be a continuous process.  But it becomes even more important in the context of phased downsizing.  

Managers should develop a simple matrix for every office.  Define its primary functions and quantify those to the extent possible.  An example might be the number of requests for transcripts that come in each year from alumni.  Allocate staff time to that function.  And ask: What is the turnaround time?  Does the output per employee seem reasonable? Are there observable best practices?  Could the commitment of staff time be reduced without extending turnaround time too much?  Or, conversely, does more time need to be devoted to the function to improve on the standard of performance? Or are there ways to more fully automate the process?  What would the payback be on that investment in terms of time saved?

In short:  "Manage" each department in the classic sense of the term.  And those in leadership should evaluate their department heads based on their ability to do so.  A school that has a well-conceived multi-level chart of accounts that captures what people work on ("Activity") as well as the things they spend money on to do it ('Natural Class")  has a head start and may already be well engaged in this form of "Program Budgeting".  

It does not take an extremely expensive and entirely new Enterprise Research Planning  ("ERP") system to put this kind of mindset in place.  A good manager can do capable work with some thought about why the department exists and what it does,  a simple Excel spreadsheet,  and a conversation with each employee.  

Sometimes the most efficient way to get something done is not necessarily the most elegant, time-consuming and costly way to do it!  

Perhaps this perspective on the administrative side of things – rather than a purely political debate about “administrative bloat” – will ease tensions on campus and actually help schools maximize their investment in the academic enterprise now and, certainly, in the event of possible declines in enrollment.