Funding and ROI Challenges: How Universities Can Respond

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Funding and ROI Challenges: How Universities Can Respond

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T  raditionally, universities in the U.S. have earned their revenues through state (government) funding, tuition and fees, research and development grants, returns from endowments, and philanthropic donations.

Funding and ROI Challenges

The prolonged cash-crunch due to the long-winded recession of 2008 forced the policymakers to make some nearsighted (and some say misguided) policy changes like cut in public spending on higher education. The policy changes caused steady decline in state funding to universities and many universities found themselves grappling with financial sustenance. The slump in economy also caused research grants and philanthropic donations to shrink. In the face of volatile and unreliable nature of returns from endowments, universities were compelled to shift the burden of additional costs to students in the form of increased tuition and fees.

Universities in the U.K. too are facing similar funding challenges. According to the data published by Higher Education Statistics Agency (HESA) and the Universities UK (UUK), the public spending in U.K. on higher education reduced by 6.9% post the recession. Over the last few years there has been a reduction in the proportion of income from funding body grants to total income. The funding from Higher Education Funding Council for England (HEFCE) is expected to reduce further. The recession has also contributed to a large decrease in the ratio of research income from research grants and contracts. Nevertheless, the past three years have seen relative stability in terms of the total amount of money flowing to institutions. HESA data also points to 38.6 per cent decrease in endowment and investment income over 2009-10 and it decreased by 25 per cent across the U.K. over the period 2000-01 to 2009-10. Gradually, the universities in U.K. too increased tuition and other fees to cover for the costs. One major difference between universities in U.S. and U.K. is that, the private expenditure on higher education is much greater than public expenditure in the U.S. universities.

Overall, the balance between the funding grants, and tuition and fees is moving towards fees, a trend seen in the U.S. universities too. Gradually, the rise in tuition and other fees are becoming unsustainable, especially for postgraduate students, already under huge debt from undergraduate studies. Exhibit 1 shows the comparative trend between changes in college tuition and fees vis-à-vis the changes in the cost of all consumer items in the U.S.. Starting at the same level in 1978, the tuition and fees cost seems to have increased five-fold as compared to consumer prices over the last few decades.

Funding and ROI Challenges: Exhibit-1 college tuition and fees cost trends

Moreover, the rates at which people’s incomes have gone up have not been able to catch up with this high rate of increase in college fees. The rate of change of college tuition has overshadowed the inflation rate consistently since 1981 as shown in exhibit 2. Considering that students join higher education primarily for higher pay packages, this unsustainable rise in the cost of college fees in the face of high unemployment is impacting universities’ enrolments adversely.

Funding and ROI Challenges: Exhibit 2 - college tuition vs inflation graph

From the perspective of the universities, the costs are steadily increasing. The costs such as faculty salaries, college infrastructure budgets, administrative expenses, IT infrastructure costs, and marketing overheads form the fixed costs that are incurred irrespective of any student taking admission. If the number of students enrolled goes down, the average cost per student goes up. This situation makes it unsustainable to run the famed institutions delivering the same level of quality. This results in pressure to achieve surplus funds, after accounting for staff, administration, and operating expenses. While the universities in the U.K. have managed to achieve a surplus in the last couple of years, it is not before raising the income from other services rendered such as, residences and catering operations, grants from local authorities, income from health and hospital authorities, and income from intellectual property rights.

So how can universities respond?

Universities can take a series of steps that will help them stand-up to these multi-dimensional challenges to save costs and increase incomes.

Firstly, in order to save costs, university leaders need to improve productivity on teaching related activities. This can be done by rationalizing the programs and courses offered, integrating departments to normalize instructional costs, streamlining operational processes to leverage synergies, and outsourcing non-instructional activities to specialized vendors. Many universities accept that the programs and courses offered by them have experienced proliferation over the period of time. Thus, merging similar programs will not only make them more effective but also save costs for the colleges. On the same lines, integrating departments and streamlining operational processes that are similar in nature will help making the operations leaner, faster, and cost effective. Most importantly, institutions must focus on providing value in the area of their competitive advantages. This entails outsourcing non-core activities to reduce non-instructional expenditure. Analytics can come very handy in helping to understand the potential levers to realize savings from taking up these activities.

Secondly, ensuring enrolments of the ‘right’ students will pave ways for improving incomes. In addition to bringing tuition and fees, the right students can help make the universities look good through their research and development activities, which in turn will help the institutions to attract funding from existing and other green-field sources. One big aspect of improving income is to retain existing students from dropping out. High drop-out rates has become an area of serious concern for many universities. Reasonably so, every dropped-out student creates a hole in tuition fees that invariably remains unfilled. Moreover a high drop-out rate impacts twice, in lost revenues and sunk costs. Therefore, student retention should be looked-at through the same lens as businesses look at customer churn, and earnest measures should be implemented to control the high drop-out rates.

To summarize, universities need to take unconventional actions to effectively overcome the funding challenges and strive to be lean in order to embrace the opportunities of the future.

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