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Benchmark based Resource Allocations that Improve
Cost of Capital, Financial Position & Competitiveness
Charlie Caciano, MBA, CPAFebruary 14, 2007
CACUBO’s 39th AnnualSt. Louis Professional Development
Workshop
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Charlie Caciano, MBA, CPA 2
Complexities of a University
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3 Benchmarking Resource Allocations
Charlie Caciano, MBA, CPA 3
Universities Encompass Diverse Operating Industries
• Human Resource Management• Academics• Student Housing• Food Service• Laboratory Research• Grounds Keeping - Landscape Management• Athletics• Donor Relationship Management• Community Relations• Advertising & Promotion
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Charlie Caciano, MBA, CPA 4
Building Long-termFinancial Strength
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5 Benchmarking Resource Allocations
Charlie Caciano, MBA, CPA 5
Best-managed & Governed
• Building long-term financial strength is achieved through an active partnership• Management, and• Governing Board
• Management, effective governance & strategy are expanding determinants
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Charlie Caciano, MBA, CPA 6
Rising Factors
• Today’s constrained balance sheets and revenues create a challenging job for business officers/financial managers
• Budget discipline in good times is key
• Those with discipline during the late 90’s are in positions of strength, and
• Ideally – governing boards are effective
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Charlie Caciano, MBA, CPA 7
Effective Governing Boards
• Set strategic vision for the university
• Exercise judicious oversight of financial operations, and
• Support management
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8 Benchmarking Resource Allocations
Charlie Caciano, MBA, CPA 8
Management Teams
• Articulate the university’s market strategies• Prudently manage operating budgets and
investment portfolios, and• Maintain conservative approach to
investments in facilities• Yet not overly cautious
• Develop meaningful decision-making metrics that inform the governing board
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Charlie Caciano, MBA, CPA 9
Business Officers
• Serve as the point guard in running the information offense
• Provide objective measures that cover a broad set of key performance indicators
• Develop expertise in reporting & informing the governing board, and
• Lend leadership to decision-making process
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Charlie Caciano, MBA, CPA 10
Business Officers
• Business officers are the bridge between management and the board
• Great business officers transform that bridge into an effective partnership
• Leading to strategic resource allocations, and
• Creating a sustainable competitive advantage for the university
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Resource Allocations
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Charlie Caciano, MBA, CPA 12
Resource Allocation Demands
• Enhanced academic offerings / programs• Deferred facility upgrades
• Student housing• Collaborative learning spaces
• Student recruitment & retention• Emerging medical, forensic & research
laboratory technologies• Deploying technological innovations• Ongoing repairs & maintenance
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Resource Allocation Drivers
• Revenue Constraints Continue to Drive Difficult Decision-Making
• Demographics Suggest Flat to Declining Student Populations in Midwest
• Student Housing Preferences Shifting• Financial cushion for debt is shrinking• State Appropriations under Pressure• Tuition Increases Adversely Impacting
Affordability
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Charlie Caciano, MBA, CPA 14
Resource Allocation Decisions
• Limited revenue growth adds another dimension to the Business Officer’s role
• Fundraising is today’s major emphasis• Universities are Shifting from
• Discreet capital fundraising campaigns to• Ongoing / perpetual fundraising emphasis
• Requires significant investment in soft costs• Human & admin. support resources
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Providing a Framework for Resource Allocations
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Resource Investment Optimization
• Deploy resource allocation strategy• Provide exposure to a broad set of
projects and programs• Include internal rate of return
assessment• Establish hurdle rates for approval
• Cost of capital plus an• Internal rate of return “cushion”
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Pitfalls to Avoid
• Failure to focus on returns after true cost of capital
• Often universities are tempted to exclude donor provided funds as a use of capital that carries a cost• Some argue that the money is “free”• The funds do not carry an interest rate burden• Prefer to let the project only bear a cost of capital
when associated with actual borrowings
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Pitfalls to Avoid
• Failure to include a “cushion” when establishing internal hurdle rate
• Temptation to minimize or eliminate reserve for contingent costs to initiate or implement
• Failure to properly anticipate ongoing operating costs
• Failure to establish a maintenance reserve fund for new facilities
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Universities with Sustainable Competitive Advantages
• Reduce & minimize real weighted average cost of capital
• Continuously seek-out most profitable mix of projects to deploy• Adding/eliminating certain projects & programs
• Systematically re-evaluate hurdle rate• Enhance endowments & reserves while
minimizing risk
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Lowering Weighted Average Cost of Capital Provides Leverage and Flexibility
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Prospective University Projects
12.0% 11.5%
8.0%7.0%
6.0%5.0%
4.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
1 3 2 5 7 6 11
# of Projects
Internal Rate of Return Cost of Capital - Today
With a WACC of 7.5% - only the first 6 projects are viable (financially) and exceed the hurdle
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Focus on Lowering WACC
• Reduce weighted average cost of capital• Develop a portfolio management approach to
issuing and structuring debt• Include both long-term and intermediate-term
maturities• Include a mix of variable-rate and fixed-rate
debt• Consider swapping a portion of variable-rate
issues to a synthetic fixed-rate
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Prospective University Projects
12.0% 11.5%
8.0%7.0%
6.0%5.0%
4.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
1 3 2 5 7 6 11
# of Projects
Internal Rate of Return Cost of Capital - Future
With a WACC of 5.5% - now the first 24 projects are viable (financially) and exceed the hurdle
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Sustainable Competitive Advantage
• The strategic university• Allocates resources that build financial
strength• Manages its cost of capital• Broadens the number of financially viable
projects that it can pursue• Leaving less strategic universities
scrambling to keep up
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University Benchmarking and Peer Group Analysis
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Criteria for EvaluatingKey Performance Indicators
• Always benchmark against a strategic target
• When possible benchmark against a peer group
• Consider university’s ability to substitute projects or programs to replace those that are reduced or discontinued
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Managing the Gap
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Managing the Gap
• Measure key performance indicators over a period of years
• Objectively establish peer group and target benchmarks
• Identify the gap between the university’s metrics and the target
• Manage the gap to achieve desired outcomes
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Live Demonstration -Morgan Consulting’sDashboard Approach
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On the Web atwww.MorganConsultingLC.com
Charlie Caciano, MBA, CPAFebruary 14, 2007
Morgan Consulting
© 2007, Morgan Consulting LC. All rights reserved.
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Thank You for Viewingthis Presentation
Charlie Caciano, MBA, CPAFebruary 14, 2007
CACUBO’s 39th AnnualSt. Louis Professional Development
Workshop
© 2007, Morgan Consulting LC. All rights reserved.