Cost-cutting makes sense for universities and colleges

Leaders at many of the United States' tuition dependent institutions are facing unprecedented financial challenges. Without large endowments and-or ever-larger state appropriations, their institutions must now depend on tuition fee income as the primary revenue source offsetting operating costs.

Many tuition dependent institutions are also challenged by lagging enrolments and the public’s growing intolerance of decades of ever-increasing tuition fees. The efficacy of their once reliable revenue source has lost its potency.

In spite of this setback, leaders of tuition dependent institutions have been slow to resort to their only other viable, albeit disagreeable, alternative to quickly balancing institutions’ budgets. Cutting institutional operating costs could provide a more reliable means of aligning budgets with tuition fee revenue.

Unfortunately, recent Gallup organisation surveys, conducted under Inside Higher Ed sponsorship, reveal a stronger preference for possible alternative revenue streams to replace the once reliable tuition fee increases.

Responding chief financial and executive officers revealed ambivalence about reducing operating costs as the favoured means of balancing budgets in the future tertiary market.

Rather, the majority appeared to clearly favour enhancing philanthropy, placing greater emphasis on retention, and marketing and other revenue enhancement rather than cost control.

Cost control

This reluctance or inability to abandon a long-standing operating procedure is not unique to US tertiary education. There are at least two parallel illustrations from the corporate sector.

The aftermath of the lifting of regulations constraining the American airline and savings and loan industries reveals similarities to what may be occurring in the nation’s tertiary education sector.

In 1978, the Airline Deregulation Act ended governmental control of fares and routes and eased market entry into the commercial aviation industry.

Many executives could not make the requisite behavioural and expectational adjustments for sustaining their enterprise in a more competitive market. As a result, airlines failed or were acquired by competitors whose leaders were more flexible in adapting to a new market environment.

In the 1980s and 1990s nearly a third of the nation’s 3,234 savings and loan associations were shut down. A major factor in their demise was the lifting of federal regulations that freed them to compete in the broader banking market. Many of their leaders were not prepared to survive in the more competitive mainstream banking community.

Abandoning the old financial plan

Tuition dependent institutions’ leaders face market challenges parallel to the formerly constrained airline and savings and loan executives. Their challenge is to abandon a financial plan that appeared to serve them well for nearly four decades.

Institutions without the cushion of large endowments or the market appeal accompanying elite status have habitually relied on annual tuition fee increases moderated by enrolment growth to generate the bulk of the non-government revenue required to financially sustain them through succeeding budget cycles.

This reliance was sustained by two complementary factors. One, tertiary education consumers accepted annual tuition fee increases exceeding the Consumer Price Index with little or no complaint with each increment for decades. Two, federal support and commercial credit masked the burden of the increases.

In recent years, consumers appear to have turned a deaf ear to the often-repeated rationalisation that the long-term financial benefits of a baccalaureate outweigh current tuition expenses.

The long-touted return on investment has been undermined. That argument’s credibility has been weakened by an average graduate debt burden of US$30,000.

Coupled with up to 50% of recent graduates who are either under- or unemployed, the public’s tolerance of continued tuition fee increments and arguments about the universal value of a degree both appear to have waned in the eyes of a substantial majority of consumers.

Non-sustainable plan

I suggest that there were five complementary factors that led otherwise responsible institutional leaders to anchor their faith in a non-sustainable financial plan.

One, it had worked for years and it was wrongly assumed it would continue to work in perpetuity. Two, many in the current cohort of leaders of tuition dependent institutions began and subsequently advanced in their careers at institutions that had successfully relied on such a financial strategy in previous administrations.

Three, learning on the job remains the dominant training method for academic administrators. Practices are ingrained in the institutional memory. Four, current financial challenges were assumed to be passing anomalies that would soon disappear.

Five, and most persuasive, meaningful cost reduction will require unpopular decisions that disrupt careers and livelihoods, drawing the ire of many stakeholders.

Fortunately, rather than wait for an uncertain return to normal, a growing number of institutions have begun to announce the implementation of very painful measures to align costs with more modest revenue estimates. The trade and popular presses are reporting that more undersubscribed degree programmes are being eliminated.

These necessary yet unpopular cost-cutting alternatives should provide short-term breathing space. Unfortunately, they are reactive. Sooner or later there will be no more weak or underproductive programmes to eliminate.

Sustainable tuition dependent institutions will need to become more proactive in aligning their costs with conservative estimates of expected revenue beyond the coming fiscal year.

This will require a major shift in the way leaders establish the institutional priorities that drive their budget decisions.

* William Patrick Leonard is vice dean of SolBridge International School of Business in Daejeon, Republic of Korea.