This podcast focuses on how the pandemic has forced strategic transformation for colleges and universities. Now as the end of the pandemic is in sight, institutional leaders find themselves at a critical crossroads as the change leaders in higher education create the new normal. But will this new normal result in institutions falling back into the old—and comfortable—ways of being? Or will leaders create a higher education model that is more effective, efficient, and forward-thinking?
The Pandemic’s Financial Impact on Higher Education
The implications of the COVID-19 pandemic on higher education have been huge, and could ultimately cost the industry more than $180 billion. Colleges and universities, on average, lost 14% of their revenue while also incurring additional expenses due to implementing COVID-19 mitigation responses. State institutions also have seen a decrease in state funding due to the pandemic, because states have lost significant tax revenues which are used to support higher education.
To help make up the shortfalls, higher education has received a significant amount of federal funds in a short amount of time, thanks to Congress’s rapid response. This funding, which was equally split between higher education institutions and students, included:
- The CARES Act in March 2020, which allocated $14 billion to higher education.
- The Higher Education Emergency Relief Fund in December 2020, which pumped approximately $24 billion into higher education.
- The American Rescue Plan, which was recently passed, provides nearly $40 billion.
Higher Ed Budgetary Challenges
While these federal relief packages offered substantial amounts of emergency funding, higher education is still facing mounting costs that will require budgetary cuts and new sources of revenue to make ends meet. Many institutions will also be forced to tap endowments or carry forward losses that are the most significant ever in higher education.
Because of the turbulent financial situation, many higher education leaders have been forced to go about business in new ways. This has resulted in the elimination of redundancies and the adoption of many efficiencies. For example, institutions have shed 650,000 jobs during this period. Much of this job loss was temporary because of campuses being closed at the start of the pandemic, e.g., most institutions used furloughs and hiring freezes during this time frame, but many of these jobs will be permanently eliminated.
The pandemic also has substantially altered the trajectory of higher education. The sector, which has a history of indiscriminately adding FTEs that were paid for through tuition increases and government subsidies, can no longer afford that – that model already was not unsustainable since half of higher education institutions were not meeting operating budgets and had budgetary deficits.
Now, many colleges and universities are using the pandemic as the impetus to take a hard look at faculty levels and programs that have lower student enrollments. Many of these programs were created 5-10 years ago to attract new students but never reached their potential. These are areas that are ripe for making appropriate budgetary cuts by institutional leaders.
Additionally, student-faculty ratios have been decreasing over time without a real strategic intent or active program management. While it is easy to start a program in higher education, it is significantly more difficult to kill it. As a result, there are high instructional costs as well as redundant costs caused by faculty on campus whose work is faculty-driven (instead of student-driven). Additionally, higher education has not fully integrated online and residential programs. When combined, these factors lead to increased academic and administrative costs, instead of decreasing costs which are desperately needed because of budget shortfalls.
Finding Efficiencies in the Business of Higher Ed
In most industries, leaders look for efficiencies that are grounded in good market research and use these findings to develop new revenue areas and creative ways to serve stakeholders differently. In comparison, higher education traditionally makes decisions around faculty expertise – a faculty member has an excellent publication record in a particular subject matter and attempts to build a program around that expertise (and thus creating job security for themselves). However, with increased costs and the need to balance budgets, this approach to creating new programs is becoming increasingly problematic.
While faculty may disagree, higher education leaders need to make appropriate adjustments based on the market needs of those who are hiring students and funding research. This requires shifting to meet the needs of society and becoming part of what is known as the talent supply chain.
Additionally, higher education leaders need to realize that corporations will be working much closer with colleges and universities in the future, both in designing and benefiting from programs. There is an increased focus toward life-long learning that will require universities to shift from a traditional four-year model and instead embrace new ways of teaching and learning, including certificate programs, executive education, and innovative partnerships with industry.
Strategic Use of Funds Moving Forward
As society emerges from the pandemic it offers a chance for colleges and universities to make a much-needed strategic transformation. However, leaders may choose to use the latest round of federal relief funding in ways that will not support this evolutionary period.
To help the institution move forward and create a new paradigm, higher education leaders should choose to not use the funds in the following ways:
- Faculty and Staff Raises. While pay cuts were common during the pandemic, the rise in administrative pay and positions have mushroomed over time. Sometimes this is due to governmental regulations and compliance issues, but more often than not, these positions emerged without a good reason. Pay also has increased at an unchecked pace for a significant period prior to the pandemic, especially at the executive level.
- Refilling Past Positions. If a position has not been filled during the pandemic, the institution may not need it. Leaders should take the time to complete an assessment and benchmark whether there is a true need for each position.
- Physical Infrastructure. Higher education has over-invested in this area. Now with enrollments dropping and the majority of students are enrolled in graduate programs that require flexibility, institutions will not have the same need for physical space, e.g., dorms and classrooms. Therefore, it is not the time to return to that type of investment.
Leaders should instead consider using the federal funds for strategic purposes using the following tenets:
- Find the institution’s differentiation point, which is the starting point for developing a good strategy. Many higher education institutions try to match other institutions, which is often driven by ranking systems, and consequently, 98% of all institutions look the same and offer the same programs. It is important to strategically identify and build on what makes the institution unique.
- Pay attention to the world around you and make appropriate adjustments. Higher education institutions often are isolated, but this approach will no longer work. Leaders need to pay attention to what is happening in the world and forge alliances with businesses and employers.
Leaders need to focus their investments on three big priorities:
- Invest in career services (but not amenities) that help students figure out what they want to do professionally. This approach also will help with recruitment, retention, and after-graduation employment and income. Student mental health also is an important investment, exacerbated by the COVID psychological impact on higher ed. Additionally, admissions and financial aid should receive allocations.
- Efficient Operations. Higher education institutions too often have added FTEs without an overall strategy. Moving forward, leaders need to use IT strategically, including the use of the cloud. Redundancies between being centralized and decentralized need to be eliminated, as well as redundancies within a system. A better model involves consolidation of areas such as HR, finance, and IT that have fewer people who are working at higher pay rates and have access to have the technology to work more efficiently.
- There is room to grow in online education. Colleges and universities also can grow in partnership with other institutions to lower costs while still focusing on leveraging the institution’s expertise. Leaders need to find new revenue models, new certificates, and new research, which will help the institutions grow funding sources. Acquisitions can be an important part of the equation to grow the student population.
Focusing on Strategic Transformation Efforts
Services provided by higher ed institutions need to be tailored to the student demographics coming to their college or university. For example, students increasingly are not coming straight from high school – many are taking time off before starting or during their college experience. It is important for colleges and universities to invest in helping these students to be successful and complete their degrees instead of only seeking new students. This is an area to invest in and combine with efficiencies through virtual service delivery, such as smartphone-delivered degree programs.
Additionally, higher education may need to focus on creating a stronger supply chain through working with high schools and community colleges to better prepare students for entering college and being successful academically. Many institutions are doing this already through “dual degree” programs, but this isn’t happening nearly as fast as it could.
Universities and colleges cannot do this alone. They need to open themselves up to partnerships and collaboration, including at a system level. For example, OPMs were created to help universities move into online education.
Through using data and analysis to better understand the problems that the institution faces, higher education leaders can work with stakeholders on strategic transformation to develop a solution to create growth. These conversations need to be collegial and productive.
Mergers, Acquisitions, and Affiliations
Consolidation also can make sense since it will enable institutions to charge less but also have higher quality outcomes. However, there are many barriers because the idea of acquisitions is foreign in higher education, even though this is the norm for business. While some may consider this as a failure, it really is not. Instead, it is a way to increase the scale of efficiencies and add complementary expertise.
Affiliations that create a family of institutions are a strong strategic possibility. This requires strategic leadership and models for efficiency in operations but can provide a local franchise front so that institutions look and feel familiar. This approach allows this concept to be embraced by stakeholders, while still running the institution differently.
Three Recommendations for Higher Education Leaders and Boards
- Lead with a sense of urgency. Leaders need to help institutions think about issues long-term and use the momentum to create the impetus for strategic transformation.
- Be strategic. Do not revert to the original strategic plan, which often is generic. Push the institution toward a core differentiation that sets it apart. Have a succinct vision, mission, and values, as well as three priorities to focus the institution’s forward movement.
- Do not make incremental changes. Hold the tuition flat and then look for efficiencies. Develop big hairy audacious goals.
Dr. Drumm McNaughton provides strategy and change management consulting for higher ed institutions.