What’s Your Problem?

I have argued that approaching planning for higher education as a process of designing solutions to problems can produce better results than a traditional strategic planning process. The problem with thinking in terms of problems, though, is that we don’t always define a problem clearly or specifically enough.

Defining clearly: we often confuse problems with solutions, which presents the danger of jumping to a solution before defining the problem. For example, “our enrollment is too low” states a solution (growing enrollment) rather than defining a problem.  The true problem in need of a solution is probably a financial issue, and growing enrollment may or may not be the right solution, especially if the tradeoff for growing enrollment is a deeper discount rate or accepting students whom your institution is not well-prepared to serve. Another confusion arises when we focus on what designers call “gravity problems.” A gravity problem is not really a problem, because we are not going to be able to come up with a solution. In the physical world, gravity is a force we need to live with, not a problem we can solve. In higher education, gravity problems include demographic changes, declines in public perception and therefore public funding of higher education, and even Covid-19 (unless you are involved in finding a vaccine or a therapy). From the perspective of individual institutions, these are constraints within which our design process must operate, not problems to be solved.

Defining specifically: Let’s say you define your problem as “poor financial health.” That is a legitimate problem, because it does not imply a solution and it is a problem with multiple solutions, rather than a gravity problem. (Designers often work with “wicked” problems that are not easily defined and that require complex and multiple solutions.) But what does “financial health”  mean specifically? Financial health indicators such as the Composite Financial Index are of limited use, as I have argued elsewhere, because they focus more on measures that tell banks whether they will get their money back than on measures that tell an institution what’s really wrong, and because they assume that financial health can be contained in one composite number. You would never accept a statement from your doctor that “you have a health index of 1.5 on a scale of one to three”; you want to know what the specific problem is—Am I at risk for a stroke or heart attack? Is my arthritis getting worse? Do I have cancer?

My basic definition of financial health is very simple, and it comes from my experience as a small-business owner and as a small-college president: you are healthy if, over the long term, you can reliably expect  more cash coming in the door than is going out the door. This means excluding non-cash revenue from consideration, investing cash reserves in revenue-enhancing programs rather than spending reserves to balance the budget, and looking at trends over time. This requires a CFO and president who can look beyond a composite financial score or the bottom line of a financial statement.

Financial health so defined is a very different matter for different kinds of institutions. If you are a wealthy private school with an endowment in the billions, most of your income will come from endowment returns, and (barring a stock market crash), you can discount tuition to your heart’s content, because it’s only a small portion of your revenue. That’s why, even though the sticker price of tuition at those schools can be $50,000 to $60,000, the average net cost to students is often lower than the average net cost of tuition-driven schools with a much lower sticker price.  For example, for 2017-18, Centenary University (where I was president at the time), a tuition-driven college with a sticker tuition price of $33,492 in tuition and required fees, reported to IPEDS an average actual tuition and fee cost of $22,257. At Williams College, with a sticker price of $57,280, the average actual cost was lower, at $18,789. (When I worked at Appalachian State, a modestly priced regional public comprehensive university, I once heard a smart, low-income student say he was transferring to Wake Forest University, with a sticker price of over $50,000, because he could no longer afford Appalachian.) But at Centenary tuition accounted for 74% of revenue and endowment returns only 4%, while at Williams endowment returns comprised 69% of revenue and tuition and fees only 14%. Such schools can increase enrollment if they so choose by dipping into their waiting lists, but they don’t have to increase enrollment to pay the bills. Their problems may be a low rate of diversity, shifting levels of academic preparation for all students, or how to choose the right ethical and financial investments for the endowment, and they face constraints (gravity problems) such as a potential recession, demographic shifts, and the public perception problems facing all colleges.

The problems for a tuition-driven institution (which is to say an institution with a small endowment) are different and much harder to solve. The burden on tuition revenue can be incrementally decreased by auxiliary income, which is rarely a large percentage of revenue, as well as by reliable fundraising such as the annual fund, but not by depending on unpredictable one-time gifts and bequests, even though they show up in annual revenue. (The exception is that such gifts may increase the endowment, which will mean an incremental increase in endowment interest that can be a legitimate part of annual revenue.)

So if financial health as I have defined it is to be achieved, the solution will have to involve an increase in net tuition revenue unless expenses can be brought down to match the level of revenue. Increasing net tuition revenue usually means increasing enrollment, but they are not identical solutions, for two reasons: (1) Increasing enrollment also increases expenses, though not in a linear pattern: additional students added to existing programs that have faculty and facilities capacity may add few expenses, while increasing enrollment by establishing  new programs may add significant new faculty and facilities expenses. (2) If increasing enrollment requires deeper tuition discounts, then there is a point at which enrollment increases can produce diminishing returns: more students paying less while generating more expenses can actually reduce net tuition revenue. So if increasing net tuition revenue is the goal, increasing enrollment may be part of that solution, but not the whole solution. The gravity problem of demographic changes presents an added complexity in the market for students: because all schools are looking at a smaller pool of traditional-age prospective students, those wealthy colleges with lower actual costs are now recruiting students that in the past would have attended the less elite, tuition-driven colleges, which further narrows the already reduced pool of prospective students.

Defining an institution’s problems in the area of financial health requires not only a deep dive into specific financial health issues and an eagle eye on true revenues and expenses, but also an understanding of trends from the national to the local level, especially when all institutions are caught in the quadruple pandemic of  health, racial, economic, and political crises. This makes the problems all the more wicked and the search for solutions all the more complex. Innovative solutions are required, but it’s important to understand what kind of innovation is needed. In my next post I will take on this issue by addressing the distinction between sustaining and disruptive innovation in the drive to increase net tuition revenue.

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