Campaign Planning Retreat Presentation Title Campaign Executive Committee August 6-8, 2006

Better, Cheaper, Faster

Board-CEO Partnership for ChangeEllen Chaffee, AGB Fellow and President Emerita, Valley City State University (slides 1-38)Rick Staisloff, Vice President for Finance And Administration, College of Notre Dame of Maryland (slides 39-60)ASSOCIATION OF GOVERNING BOARDS NATIONAL CONFERENCE, ORLANDO, 2010

Association of Governing Boards of Universities and Colleges. All Rights Reserved.1State-Level Relative Hardship2Association of Governing Boards of Universities and Colleges. All Rights Reserved.Goals for the WorkshopUnderstand strategic finance as a context for achieving long-term institutional sustainabilityLearn new strategies and tools for dealing with current challenges

Association of Governing Boards of Universities and Colleges. All Rights Reserved.AgendaChanging Landscape in Higher EducationA Strategic Finance ApproachReducing Cost and Increasing ProductivityBreakStrategic Finance: CFO PerspectiveNew Tools for New DecisionsWrap UpAssociation of Governing Boards of Universities and Colleges. All Rights Reserved.4Changing Landscape of Higher EducationAssociation of Governing Boards of Universities and Colleges. All Rights Reserved.The Changing Landscape of Higher EducationWe CANNOT doWhat we MUST doIf we KEEP doingWhat we USUALLY do

Association of Governing Boards of Universities and Colleges. All Rights Reserved.What we MUST doBy 2020, America will once again have the highest proportion of college graduates in the world- President Obama, 2/24/09

Association of Governing Boards of Universities and Colleges. All Rights Reserved.And theres consensus on that To increase the percentage of Americans with high-quality degrees and credentials to 60 percent by the year 2025

Currently: 39%

Lumina Foundation for EducationAssociation of Governing Boards of Universities and Colleges. All Rights Reserved.

College DegreeKnowledge-Economy Work Force

Association of Governing Boards of Universities and Colleges. All Rights Reserved.Economy requires more graduatesPeople driving the economy now are not the ones who are growing the youth populationIncoming students have greater challengesPreparationParticipationAffordability9Can we go on this way?

Association of Governing Boards of Universities and Colleges. All Rights Reserved.Our business model is still geo-centric and depends on physical capital, expensive equipment, acreage, etc. Business model fails to optimize key resources (e.g., empty classroom seats) and tends to ignore potential synergies, partnerships, etc.10State funding: 3%Tuition: 3% above CPIStudent aid: 4%Expenditure per student : 1-2% above CPIRecent Revenue/Expense TrendsAssociation of Governing Boards of Universities and Colleges. All Rights Reserved.Business model is becoming non-viableAll revenue sources are maxing outRevenue and expense trend lines are not sustainableAs these trends show in graph on the next page.

11TuitionExpend/FTEState AppropCPI

Our Business Model is Not SustainableAssociation of Governing Boards of Universities and Colleges. All Rights Reserved.State funds are not keeping up with cost per FTE (so institutions turn to other sources, especially tuition), while tuition soars over CPI (the easiest source of additional funds, until it hits a wall; demographics mean more students are keenly price sensitive, while tuition is ever-farther out of reach). If a trend cannot continue it wont! 12State Financials: Gaps could approach 7% of spending - The Lost Decade of state funding

Source: Don Boyd (Rockefeller Institute of Government), 2009*Association of Governing Boards of Universities and Colleges. All Rights Reserved.Rockefeller Institute predicts that state shortfalls will continue through the teens decade and could AVERAGE up to -7% from 2009-2013. Universities can forget about state incentive money for new programs to reach the new students and increase the graduation rate. In fact, they will indeed have to do more with less.13

We cannot go on this wayHITTING HOME: Quality, Cost, and Access Challenges Confronting Higher Education Today, Travis Reindl, www.makingopportunityaffordable.org

Association of Governing Boards of Universities and Colleges. All Rights Reserved.Further illustration of the affordability gap. People often complain about their increasing inability to afford a new car of their prescriptions drugs, and the nation is boiling over the cost of health insurance yet tuition at all institutional types has risen faster than any of these!14The Change Process

Association of Governing Boards of Universities and Colleges. All Rights Reserved.All of this means that change is in order for most if not all of us, and we will either create the changes we can believe in or be changed by the forces at work. Change is often uncomfortable, and many of you are or will be in very difficult and uncomfortable circumstances. Boats will be rocked and some turned over. Some people will not be happy (bring in the warrior).

15Board-President Relations in Times of Change Find common ground on how much/what kind of change. Trust AND verify, both ways. Early and often. Keep roles clear and support each other.Define the North Star and navigate by it.Association of Governing Boards of Universities and Colleges. All Rights Reserved.BrainstormIs your university feeling these pressures?What are some of the barriers to dealing with them?Association of Governing Boards of Universities and Colleges. All Rights Reserved.Strategic FinanceAssociation of Governing Boards of Universities and Colleges. All Rights Reserved.Strategic finance is aligning financial decisions

regarding revenues, creating and maintaining institutional assets, and using those assets

with the institution's mission and strategic plan.

What is Strategic Finance?Association of Governing Boards of Universities and Colleges. All Rights Reserved.In graphic termsMissionStrategic PlanFinancial DecisionsAssociation of Governing Boards of Universities and Colleges. All Rights Reserved.The New Bottom LinesCore IssueBalanced ScorecardKaplan and Norton/et alGood to GreatCollins/Staisloff/et alIs the organization doing the right things and doing them well?Quality, effectiveness, customer satisfactionMissionDoes the environment want/need what the organization does?Financial stability and strengthMarketIs the organization ensuring that revenues exceed costs?Operating efficiency, internal processesMarginIs the organization investing in its own future?Learning and growthMomentumYESWhats the cost/benefit of improvement in this?Whats the cost/benefit of improvement in this?Whats the cost/benefit of improvement in this?Association of Governing Boards of Universities and Colleges. All Rights Reserved.These are the foundation elements for successful organizations. Their long-term existence depends on success in ALL FOUR. The good news is that one of them (market) is clearly present. In what areas might your university find the greatest payoff for improvement? Are there any areas of deficit/concern that must be addressed?21Importance of ALIGNMENT and Tracking ProgressCommunicationInformationAnalysisCourse CorrectionStrategic Goals (Mission, Market)Association of Governing Boards of Universities and Colleges. All Rights Reserved.All action plans need specific goals here called strategic indicators that we use as touchstones for all our decisions. For example, If we do X, will it move the needle on Goal 3?The Action circle is implementation, where the heavy lifting typically involves little or no time from you as leaders. Instead, you must take responsibility for everything else on the screen!The most efficient and effective pathway to the strategic indicators comes from making sure that your goals, financial plans, and actions are ALIGNED and that you TRACK progress, making course corrections as you learn from experience.22Strategic Indicators (North Star Proxies)(examples)More studentsEnrollment growth by in/out of stateAffordabilityNet tuition/median household incomeTotal financial aid/Total tuition revenueAccessibilityEnrollment growth by race, income, transfer statusEfficiencyCost per SCH by program, by site, by deliveryEffectivenessRetention and graduation ratesAssociation of Governing Boards of Universities and Colleges. All Rights Reserved.What do strategic indicators look like? Here are some examples based on your five goals. Once you have indicators, you ask What level of performance in what time frame do we aim to achieve (strategic goals)? What will CAUSE the needs to move on these (action plan)? And what business model and resources are required to achieve the progress and sustain the organization (strategic finance, resource plan)?23Removing the brick wall

College DegreeMore graduatesAffordableEffectiveEfficientAccessibleAssociation of Governing Boards of Universities and Colleges. All Rights Reserved.Current Institutional ResponsesIncrease efficiencyIncrease administrative productivityLeverage stimulus money

APLU survey just out: The survey results indicate that "universities are striving to protect the core education mission of their institutions.

Whats missing from this picture?Association of Governing Boards of Universities and Colleges. All Rights Reserved.So far, the typical university has not embraced strategic change as a response to the financial downturn. Given the conditions we discussed this morning, typical responses are likely to prove quite inadequate.25Missing in Action?Progress to strategic goalsGrowthQuality improvementAcademic productivityInnovationDevelopment of a sustainable business modelDavid Wiley, BYU, http://davidwiley.org/Association of Governing Boards of Universities and Colleges. All Rights Reserved.Among other things, typical responses are reactive hunkering down. They do not strengthen the institution, foster growth, or prepare the institution for future conditions.26What do institutions need?Growth by substitutionGreater cost containmentGreater productivityClear expectationsInnovation

LEADERSHIP$Association of Governing Boards of Universities and Colleges. All Rights Reserved.More money is not a realistic answer. We will find the funds we need in other ways, at least for the time being.27Roaring Out of RecessionCompanies that recovered well from past recessions:Used multi-faceted strategies that were highly customized to their own circumstancesFocused on operating efficiency, market development, and asset developmentReduced employee numbers as little as possibleContinued to invest in asset development, marketing, and new product/ market development

Ranjay Gulati, Nitin Noharia, and Franz Wohlgezogin, Roaring out of Recession, Harvard Business Review, March 2010.28Association of Governing Boards of Universities and Colleges. All Rights Reserved.Reducing Cost and Increasing Productivity*Association of Governing Boards of Universities and Colleges. All Rights Reserved.Cost Effective: Cost Reductions + Productivity*

XFrom paying $1 for XTo paying $1 for X + 2From paying $1 for XTo paying $0.75 for X

Association of Governing Boards of Universities and Colleges. All Rights Reserved.Examples of Cost Reductions Reduce high cost/low demand programs Address retirement eligibilityReduce growth in health care costConsolidate administrative functionsReduce spending on non-revenue producing athleticsRestructure debt Restructure faculty compensation and rewards (use turnover to substitute teaching faculty for research faculty)Strategies for Tough Times, Dennis Jones and Jane Wellman, November 19, 2009Association of Governing Boards of Universities and Colleges. All Rights Reserved.Examples of Productivity Improvements Increase in student retention and graduation Reduce excess credits for the degreeIncrease credit-by-exam Increase distance-based learning programsIncrease proportion of graduates who meet goals for critical learning Increase proportion of students who remain and are employed in stateStrategies for Tough Times, Dennis Jones and Jane Wellman, November 19, 2009Association of Governing Boards of Universities and Colleges. All Rights Reserved.Building Cost-Effective Institutions Reduce administrative costsTackle automatic cost increasesReengineer curriculaReengineer course deliveryEliminate, innovate, or consolidate high cost/low demand programsStrategies for Tough Times, Dennis Jones and Jane Wellman, November 19, 2009Association of Governing Boards of Universities and Colleges. All Rights Reserved.This list is actions that are primarily administrative, some in close consultation with faculty.33Learning ProductivityStudents come to college fully prepared (no remediation)Accelerated learningMinimize rework and reduce credits to degree Improve rates of course completionEncourage use of assessment/test out optionsLearning in the workplace/credit for experienceStrategies for Tough Times, Dennis Jones and Jane Wellman, November 19, 2009Association of Governing Boards of Universities and Colleges. All Rights Reserved.This list is oriented more toward faculty governance initiatives that administrators can encourage.34Improving Affordability & ChoicesCommit to average undergraduate tuition growth no more than CPI, with increased need-based aidAllow differential tuitions for high cost/demand programsExperiment with low priced options Greater on-campus employment opportunities for studentsReduce time to degreeStrategies for Tough Times, Dennis Jones and Jane Wellman, November 19, 2009Association of Governing Boards of Universities and Colleges. All Rights Reserved.Ways to make enrollment more affordable for students.35Implications for LeadersRe-imagine your business model to create long-term sustainabilitySupport change in approach to budget building Examine old habits and conventional wisdom about costsFocus on big picture, and progress on achieving strategic goalsCommit to institutional innovationExamine long-term implications of current decisionsStrategies for Tough Times, Dennis Jones and Jane Wellman, November 19, 2009Association of Governing Boards of Universities and Colleges. All Rights Reserved.This is a CHANGE agenda. Keep goals at the forefront and work to/from the Big Picture, learning as you go.36From Steve Jobs to YOUR Job20th Century was one of technological innovation21st Century must be one of institutional innovationDavid Wiley, BYU, http://davidwiley.org/Association of Governing Boards of Universities and Colleges. All Rights Reserved.Speed Dating Strategic FinanceAround the table, 1 minute each:

Give an example of an effective change (at your institution or another) that represents a strategic finance perspective

Association of Governing Boards of Universities and Colleges. All Rights Reserved.Strategic Finance?

Association of Governing Boards of Universities and Colleges. All Rights Reserved.Magic Formula

Mission + Market + Margin = Success

Association of Governing Boards of Universities and Colleges. All Rights Reserved.Tried and True ReportingBudget to ActualQuarterlyYear over Year ComparisonProjectionsMulti Year Rolling Budgets

Financial StatementsQuarterly

AuditAnnual

Focus must be on what the numbers mean, more than on the numbers themselves

Association of Governing Boards of Universities and Colleges. All Rights Reserved.41Financial RatiosBuild off of the audit

What are the numbers telling us?

Debt Rating

Central Question Are we financially healthier this year than last?

Association of Governing Boards of Universities and Colleges. All Rights Reserved.42Financial Ratios

Association of Governing Boards of Universities and Colleges. All Rights Reserved.43Strategic IndicatorsStrategic Indicators - Measures institutional performance in key areas How do you know if you have the right ones?Focus on important issuesImpact decision makingUnderstandableCome from available dataMust have trend, benchmark, and targetFew in number

Peer Group vs. Competitors

Importance of Telling the Story

Association of Governing Boards of Universities and Colleges. All Rights Reserved.44

Dashboard Indicators Notre DameStudent Faculty/Student Staff Ratio

Rev. and Exp. by Source

Cost per FTE

Age of Facility/Deferred Main.

Participation in Annual Fund

Endowment per FTE

Enrollment by Program HC and FTE

Matriculation

Graduation Rate

Diversity

Tuition DiscountAssociation of Governing Boards of Universities and Colleges. All Rights Reserved.45Is This a Strategic Finance View?Importance of the Reality Check Where are we right now?However, these tools are backward lookingNew tools are needed for us to look forward and to act strategicallyShift from input focus to output focusAssociation of Governing Boards of Universities and Colleges. All Rights Reserved.Top 12 programs account for89% of credit hoursActivity Drivers NursingBiology Religious StudiesPharmacyEducation BusinessCommunication Arts EnglishModern Foreign LanguagePhilosophyPsychologyMath1,9039047868131,2271,3308736,9918617997986674%35%4%4%4%3% 9%4%4% 7% 6%4%CHMHISCSTARTPHYMUSPOLHSVPEDAnchor4 Programs = 57%Core8 Programs = 32%

Other9 Programs = 11%Each 2% or < 47Association of Governing Boards of Universities and Colleges. All Rights Reserved.4790% of prospects originate from the top 12 majors

48Total prospects by majorMedian 1,16948Demand What Do People Want?Association of Governing Boards of Universities and Colleges. All Rights Reserved.48Yield

49Median33%Association of Governing Boards of Universities and Colleges. All Rights Reserved.49

# of Prospects vs. Yield (accepted to enrolled)High # Prospects/Low Yield High # Prospects/High YieldLow # Prospects/Low Yield Low # Prospects/High Yield Median Yield33%Median #Prospects1,169BioHigh10,681Low162BusEDUNursingPsychPol SciCommArtChemCriminEnglishEnginComp SciInternatHistoryHigh55%Mod ForLangMathRadiolPhysicsRel StudyPhilosEconElevate YieldMaximize50Low 0%Association of Governing Boards of Universities and Colleges. All Rights Reserved.50Net Revenue Modeling

Net Revenue Modeling - By DivisionUGPT UGAcceleratedGraduateEng Lang InstTotalRevenue15,686,4862,481,4463,999,99410,266,637464,20732,898,770Tuition Discounting5,656,57740,0260876,15806,572,761Discounted Revenue10,029,9092,441,4203,999,9949,390,479464,20726,326,009Total Discount %36.06%1.61%0.00%8.53%0.00%19.98%UGPT UGAcceleratedGraduateEng Lang InstTotalDiscounted Revenue10,029,9092,441,4203,999,9949,390,479464,20726,326,009Direct Costs8,284,3161,277,6691,554,4352,874,851347,93314,339,204Net Revenue1,745,5931,163,7512,445,5596,515,628116,27411,986,805Net Revenue %17%48%61%69%25%46%Percentage of Total Revenue BaseUGPT UGAcceleratedGraduateEng Lang InstTotalDiscounted Revenue10,029,9092,441,4203,999,9949,390,479464,20726,326,009Total Direct and Allocated Cost9,954,5832,366,8283,149,6687,858,580347,93323,677,592Net Revenue75,32674,592850,3261,531,899116,2742,648,417Net Revenue % - FY 20080.8%3.1%21.3%16.3%10.1%Net Revenue % - FY 20072.1%18.8%28.8%25.0%16.5%Net Revenue % - FY 20065.5%23.0%20.0%25.0%16.0%Association of Governing Boards of Universities and Colleges. All Rights Reserved.51

Student Credit Hours per FTE Faculty FY 2008NationalNormFY 2008+ 45

+30

+15

-20

-50

-80

-110

-140

-170BioBusEduNursingPsychCommChemEnglishMusicComp SciHistoryForeignLangMathRel StudyPhilosArtsHealthPhy EdSource: CND Delaware Instructional Cost Study52More efficient than market standardLess efficient than market standardAssociation of Governing Boards of Universities and Colleges. All Rights Reserved.52Direct Instructional Expenditure per FTE Student FY 2008NationalNormFY 2008+$12,000

+$10,000

+ $8,000

+$6,000

+$4,000

+$2,000

-$2,000

-$4,000

-$6,000

-$8,000

-$10,000

-$12,000BioBusEDUNursingPsychCommChemEnglishMusicHistoryForeignLangRel StudyPhilosComputerHealthPhy EdMore efficient than market standardLess efficient than market standardMathSource: CND Delaware Instructional Cost Study53Association of Governing Boards of Universities and Colleges. All Rights Reserved.53Sample Financial Decision MatrixGrowWe willevaluate, dialoguethen organize decisions intofour bucketsSunsetRedesignMaintain/Manage Cost54 MissionDemandConversionContributionEfficiencyProgramMission# ProspectsYieldCredit Hours Student Cr Hr/FTE FacultyAYes> 5,000>33%> 1,000Above BenchmarkBYes< 1,000< 33%> 500AtBenchmarkCYes> 1,000< 33%> 500Below Benchmark DNo< 1,000< 33%< 500Below BenchmarkAssociation of Governing Boards of Universities and Colleges. All Rights Reserved.Reallocating To Areas Of Strength

Focus on what you will stop doing

Reallocation allows institutions to:

Create new areas of growth

Strengthen core programs

Invest strategically without new funding stream

Reinvent themselves

Budget shortfall as opportunityAssociation of Governing Boards of Universities and Colleges. All Rights Reserved.55Business Plan Pro FormaDevelop a model Relation to missionMarket analysis Competition

Test Externally

Association of Governing Boards of Universities and Colleges. All Rights Reserved.56Business Plan Cost AnalysisEnrollment Projections - 3 yearscannibalizationworking backwardsRevenueAdjusting gross for discounts and financial aidGrants, Fees, etc.Expense Projections 3 yearsnew and reallocateddivestingexisting faculty costsUse of DebtBreakeven How long until we get there?Mark-up How much above cost do we want to achieve

Association of Governing Boards of Universities and Colleges. All Rights Reserved.57Business Plan - AdvantagesSets the bar

Creates Milestones Go/No Go

Resources identified up front

Builds accountability

Association of Governing Boards of Universities and Colleges. All Rights Reserved.58How Will We Know When We Have Arrived?Feedback Loops

Go back to:Business PlansStrategic IndicatorsHowever beautiful the strategy, you should occasionally look at the results. Sir Winston Churchill

Association of Governing Boards of Universities and Colleges. All Rights Reserved.59Speed Dating #2 Strategic FinanceEach member of your table has 1 minute to share the following:

How would your role or your president-board relationship need to change in order to support a strategic finance approach?

Association of Governing Boards of Universities and Colleges. All Rights Reserved.AGB Support

Association of Governing Boards of Universities and Colleges. All Rights Reserved.61Now What Do I Do?Be an advocate for mission/market/margin opportunitiesInsist on seeing the data behind the decisionsFocus on what the numbers are sayingHave the courage to ask the hard questionsRegularly review the mission and market return from new initiativesDevelop joint board committee meetings and activities Example Finance and Academic Support rotation between board committeesConsider having a Board-Executive Strategic Finance workshop on campus (more info: 3:00 this afternoon)

Association of Governing Boards of Universities and Colleges. All Rights Reserved.62Evaluations, PleaseAssociation of Governing Boards of Universities and Colleges. All Rights Reserved.To continue the dialogue . . .Dr. Ellen Chaffee, Senior FellowAssociation of Governing Boards of Universities and Collegesellen.chaffee@gmail.com701-840-1780 or 202-296-8400

Rick Staisloff, Vice President for Finance and AdministrationCollege of Notre Dame of Marylandrstaisloff@ndm.edu410-532-5340

64Association of Governing Boards of Universities and Colleges. All Rights Reserved.reportMarylandCollege of Notre DamePrivate CollegesThreshold20052004200620052004ValueTrendMedianMedianComposite Financial Index6.04.75.53.0+F4.05.2Sufficiency of Net Assets Ratio:Primary Reserve96%86%87%40%+F78%83%Debt Management and Physical Plant Ratios:Viability2.62.11.71.25+F1.11.0Leverage5.95.25.02.0+F2.02.0Debt Burden4.4%8.7%5.1%7%-F5.0%5.0%Age of Facilities (years)14.313.312.3U10.611.2Operating Measures Ratios:Net Income9%5%10%3%+N7%12%Return on Net Assets5%3%10%4%+N7%9%Net Tuition Dependency83%76%77%60%-N81%66%Notes:Legend:(1) Maryland Private Colleges are Goucher College, Hood College,F= FavorableLoyola College, McDaniel College, Maryland Institute College of Art,N= NeutralMount Saint Mary's College, and Villa Julie College.U= Unfavorable

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