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Negotiating the Rapids

November 2014

By Keith Houck

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It's a disruptive environment for higher education, but institutions of all types are evolving their business models and processes to navigate safely.

Higher education’s long history and deeply embedded traditions should not be impediments to our ability to change and better serve our students. Critical not only to survive but to flourish in the future, community colleges must develop and maintain cultures of adaptability in response to disruptive change." These were the concluding words of an article I published in Leadership: The Academic Journal, Winter 2014 (www.chairacademy.com/journals/Journal_19-3.pdf).

Highlighted in the piece were a number of speculations as to the effects such "disruptive innovations" (initially named and described by Harvard’s Clay Christensen) might have on higher education institutions. 

I ventured to identify the trends most likely to influence the need for dramatic change, focusing on community colleges, as that is my current perspective. Research into responses to those trends—by all institution constituencies—led to this follow-on article, which describes many actions colleges and universities are taking to ride the disruptive rapids to smoother waters. 

Telling Trends

The flow of higher education revenue has clearly changed course in recent years. Whether it is in the way that private institutions discount their tuition or states reduce their funding for higher education, the result is a much-changed revenue model that has tightened many budgets. For example, at Valencia College, Orlando, where I serve as vice president for operations and finance, the state’s proportion of revenue for the operating budget has gone from 60 percent to less than 40 percent in 10 years.

This shift to more of a user-fee or tuition-based model has also put a large strain on federal financial aid. Florida residents watched university tuition rates double in only five years. President Barack Obama has said, "We can’t just keep subsidizing skyrocketing tuition; we’ll run out of money."

While those inside higher education understand the reasons tuition is rising much faster than the cost of living, the general public tends to focus its blame and frustration on the institutions. This is also evident in the public’s focus on the increasingly higher levels of student debt. There are many who are even questioning the financial value of a college degree.

Colleges and universities need to do a better job of providing the value proposition for college to their stakeholders, and at helping students make the right educational and financial choices.

But, we need to do it in the context of limited resources. As a result, business officers have had to step up to develop more efficient processes and practices that will free up resources desperately needed elsewhere. Following are some of the trends institutions are dealing with as a result of a changing revenue model, and descriptions of some of the successes institution leaders are finding as they strategize for a future with less state funding. 

TREND: The burden will most likely fall on colleges to develop new and innovative ways to provide quality education at a lower cost to students. Valencia College and others are continuing to focus on cost-saving initiatives in a number of areas, so that funds can be reallocated to areas that will more directly enhance student experiences and learning outcomes.

Valencia College

Orlando

Valencia College has achieved significant energy savings through a three-phased approach to its sustainability program: construction of high-performing buildings(either LEED Gold or Green Globes certification); upgrades to chiller plants, controls, and lighting; and the adoption of behavioral-change programs.

The combined efforts have reduced the college’s kWh usage per square foot of space by nearly half in a five-year period. During this period, Valencia constructed six new buildings, totaling approximately 500,000 square feet, or about 25 percent of the college’s total square footage. While most of the funding came from state dollars, a large portion came from student fees or auxiliary funds. State funding also paid for most of the upgrades to chiller plants and controls, which allowed the resulting energy savings to provide operating dollars to help offset reductions in overall state funding to the college.

The program to motivate behaviors that would help reduce energy costs did not begin until almost all of the traditional equipment enhancements were in place and benchmarked. But, behavior in support of conservation efforts has become a powerful filter for decision making, such as the scheduling and use of facilities. People are thinking twice about heating and air conditioning multiple buildings on a Saturday, for example, when several class sessions could be combined in a single building, leaving the other buildings’ systems off.  

This year alone, energy savings directly attributable to behavior changes will total approximately $1 million, after deducting the service fees of a consulting firm. The amount represents a nearly 20 percent reduction in energy usage on top of the college’s other conservation efforts. 

For example, Valencia College has made a fundamental change in landscaping for its campuses. St. Augustine grass has been replaced by Bahia grass, which requires much less water, fertilizer, and pesticides. Well over 100 trees have been planted to increase the tree canopy. Also, the college has been replacing plants that require higher levels of water and attention with more native and low-maintenance shrubs. As a result of these xeriscaping efforts, along with the increased use of water sensors, Valencia’s water consumption has been reduced by 20 million gallons per year. 

Given South Florida’s environment, which requires air conditioning during most of the year, Valencia installed a water treatment process for the cooling towers for each of its campuses, which has reduced water consumption by another 25 million gallons per year.

The cumulative savings from Valencia’s water program—which also included moving to dual-flush toilets, using faucet aerators, and collecting rainwater for irrigation and toilets—is approximately $200,000 per year. 

Berea College

Berea, Ky.

The business model of Berea College, a small private liberal arts college in Berea, Ky., is different from most. More than 90 percent of its approximately 1,600 students receive financial aid, mostly through Pell grants.

All students receive a full tuition scholarship. Nearly three quarters of Berea’s educational and general operating budget is funded from its endowment. While in good economic times this model works well, when the economy began to falter a few years ago, the high dependence on investment returns placed a high level of stress on operations. 

Fortunately, in the late 1990s, when endowment returns were quite high—and knowing that lean times would come in the future—the college’s leadership had taken a very disciplined approach to Berea’s long-term financial strategy. While tempted to use those resources to expand programs and services, they had the foresight to not expect double-digit returns to continue in the long term. "Through reasoned restraint in those years of plenty and strategies for building reserves, the college was able to temper the effect of the recent downturn in the market, while not deteriorating the student experience at the college," says Jeff Amburgey, Berea’s vice president for finance. 

Another step the college took to reduce expenses was to use some of its reserve funds to provide a voluntary early retirement incentive program, which helped reduce both immediate and long-term operational expenses.

Yes, the institution had to cut back in a variety of areas, by as much as 14 percent, overall. But, this disciplined approach to college finances and good stewardship helped Berea stay on course during tumultuous times—providing continuity of services and maintaining the quality of the educational experience. 

TREND: Business officers are challenged to identify the core activities that have the biggest impact on learning and treat them as priorities. Conversely, noncore activities must be managed as efficiently as possible to budget savings that can be devoted to student learning. For example, the classic "make or buy" decision is becoming even more critical as we move forward. What are the things your college does well and can do less expensively than contractors and outsourcing agents? And what things can others possibly do better and/or less expensively?

There is no fixed answer, and frequently changing external conditions can quickly affect the economic parameters of such a decision.

In the late 1990s, Valencia determined that it was necessary to outsource its IT functions. Ten years later, we realized that we could do as well or better by bringing the services back in house—saving $2 million per year by doing so. At the same time, Valencia took the opposite approach for custodial services and began outsourcing evening custodial services for its smaller campuses, resulting in an increase in satisfaction and a 30 percent reduction in costs.

 Texas A&M University

College Station

One of the most significant outsourcing efforts is taking place at Texas A&M University, College Station, starting in 2012. When faced with a significant decrease in governmental funding, the system outsourced all of its dining, custodial, grounds, and maintenance operations. This 10-year agreement is projected to produce $270 million in revenue and cost savings, while protecting current support services employees. 

The benefits to the university will derive from savings split fairly evenly between dining and facilities support functions. "Outsourcing these services allows us to deliver facility services in a better way, while getting money back into our core functions of teaching and research, and protecting our existing employees," says Texas A&M University Chancellor John Sharp. 

Two years into the program, Phillip Ray, the system’s chief business development officer, is very pleased with the success of the transition both for the university and for the employees. "The university was committed to make sure that all employees were hired by the company and were provided compensation and benefits consistent with what they had at the university."  

Ray says, "Even the buildings and grounds are in better condition." He expects that the institution has reduced its custodial, grounds, and maintenance costs by 18 to 20 percent through these outsourcing efforts. 

It is critical that colleges and universities continually reassess what they are doing to determine what things are best handled internally, and which ones can be better handled by others. You can’t be great at everything, so be sure to focus your efforts on your primary mission.

TREND: Higher education institutions will experience major changes in the way capital funds are invested in the future. 

University of Kentucky 

Lexington

Under the agreement, EdR is expected to provide as much as $500 million in private equity to provide up to 9,000 beds. This is allowing the University of Kentucky to achieve a major upgrade to its student housing, while preserving limited debt capacity for other high-priority capital investments. While several institutions have entered into public-private partnerships in recent years to replace a portion of their student housing, the University of Kentucky is among the first major institutions to enter into an agreement with a public-private partnership to replace and manage all of its on-campus undergraduate housing.  

Early outcomes demonstrate a greatly enhanced student demand for on-campus housing with these newer, more-modern housing units. "Given better housing options, we are finding that students want to return to live on campus," says Ben Crutcher, associate vice president for auxiliary services at the University of Kentucky. "These modern, high-tech, light-filled active living and learning spaces are generating student demand well in excess of supply." All of this is happening without increasing the university’s debt load.

TREND: Institutions must carefully scrutinize the way resources are allocated to maximize impact on overall outcomes. 

University of Alabama–Birmingham Health System (UAB)

Birmingham

Perhaps no sector has felt change more powerfully—and disruptively—than the health-care industry. For academic health centers this equates to a double whammy. Both sides of the house, so to speak—clinical and academic—are dealing with reduction in resources.

"Historically, clinical revenue was robust enough to help offset waning academic revenues," says Mary Beth Briscoe, chief financial officer for the University of Alabama–Birmingham Health System, (UAB) since 2002. 

"Now the confluence of change seen in reduced tuition revenue on the academic side and decreased reimbursements on the clinical side has the entire institution under financial pressure," she adds. As Briscoe sees it, "the real revenue coming into the entire institution has decreased." 

A major center for clinical research, UAB Hospital is one of six hospital locations within the University of Alabama–Birmingham Health System, which is the largest academic medical center in Alabama and one of the largest in the United States. UAB Hospital provides patients with a complete range of primary and specialty care services.

Careful allocation of resources will be critical to the hospital’s ability to continue operating in this capacity. For university medical centers, supplies, equipment, and services are second only to labor in magnitude of spend. 

In 2010 Briscoe co-led an organizationwide initiative to cut costs, bringing together clinical, operational, and financial staff in reducing annual supply costs on a range of medical and surgical supplies. This initial effort resulted in more than $10 million in savings. 

One case involved a new diagnostic probe claimed by some to provide better information on which to base clinical decisions. However, the cost per patient was $1,000, for which the hospital would receive no additional reimbursement, and there was limited historical information to support the product claims.

A multidisciplinary team was established to study and evaluate the product. After the team established goals and measures of success, the hospital began using the probe, and the team tracked and monitored the patients on whom the device was used. During the evaluation period, approximately 47 percent of patients who received care using the device realized a change in treatment or avoidance of an unnecessary surgical procedure, ultimately resulting in net savings of $95,000. 

This type of process approach to cost reduction and improved outcomes remains in place today. "We have seven standing value analysis teams in key departments, including surgery, laboratory, and pharmacy," Briscoe explains. "These are self-directed teams, and ownership for partnering and achieving savings lies in the departments themselves. They have specific value analysis goals each year."

"Because these are their initiatives, they will get them done," says Jason Sussman, managing director at Kaufman Hall, a leading adviser to senior management teams and boards. Sussman and Briscoe presented the concept of cost reduction through value analysis to the hospital’s middle management team. Sussman observed that the "only way to sustain cost reductions is to actually change how the organization does business and establish a framework for the organization to understand the implications of those changes." 

For Briscoe, establishing a process that required new infrastructure to support teamwork and systems-level thinking was an exciting challenge. "Now physicians and clinicians are involved in the process," she explains.

Having achieved a level of cooperation internally, as opportunities arise, the UAB system works as a whole on specific initiatives. "In the past, the academic component and the health-care component have operated in silos," says Briscoe. However, as collaboration has grown, the health system and the university have been able to identify and realize savings in key areas.

For example, the health system recognized the need for a new contract management system and inquired as to whether the university had a similar need, before moving forward. "By working together, we identified and purchased the same contract management system to meet our respective needs," says Briscoe. "From there, we decided to continue to identify mutual opportunities."

Such an opportunity presented itself in the area of medical waste management, which affects both academic research and the hospital. The two groups bid out contracts together and saved $300,000 by leveraging their combined purchasing power. 

According to Sussman, these kinds of partnerships are crucial, since it has become "more difficult for clinical enterprises to generate enough cash flow to support the academic mission.

"This model is not sustainable," he says. "The balancing of cost and revenue needs to be managed as the same imperative on the academic side as it is on the clinical side."

Certainly, this would be a change, one that’s necessary to secure a sound financial future. And Briscoe believes any change, no matter how disruptive, can be effectively managed as long as the appropriate interdisciplinary groups are included at the table to discuss and implement it. "The clinical and academic enterprises are mutually dependent and must work collaboratively to solve problems and achieve their shared mission," she says.

Moving to More Open Waters

George Washington University

Washington, D.C.

Beyond the major trends causing turbulence for higher education, organizations also have a natural tendency to think and function in silos. Inefficiencies may result from lack of communication networks and protecting, rather than sharing, resources. By adopting more inclusive practices, institutions are finding collaborations that support common goals. 

For example, at George Washington University (GW), Washington, D.C., the cascade of technological devices, software, and applications was taxing the university’s information technology staff. However, adding more staff was not on the table. The leadership decided to merge three units into a single new IT Support Center, which allowed the university "to increase the productivity of existing staff," says Chris Megill, associate director of technology services.

The effort required the consolidation of three functions—console traffic operations, data center maintenance and monitoring, and the technology support help desk—into a single consolidated group titled the IT Support Center. By merging these three groups and their disparate responsibilities into one accountable and responsible team, GW was able, without hiring any additional staff,  to extend the service offerings for the help desk from 12 hours per day, five days a week, to 24 hours per day, seven days per week.

Another key benefit of the consolidation effort was that console traffic operators and data center specialists, who had been very specialized in their respective job skills, were now trained and available to assist with both general information calls and technology support calls around the clock.

The expanded support hours, says Megill, matched up nicely with GW’s need to increase technology support for our overseas and international students "who can’t always call for support during Eastern Standard Time business hours."

Initial startup costs were minimal for centralization of the three support groups and for technical and professional skill development, notes Megill. "GW’s return on investment was quickly realized in the increased professional skills of support staff, reduction in costs for maintaining multiple offices and work environments, and increased accessibility to technology support and services for the entire GW community of faculty, staff, students, and alumni."

The effective reallocation of staff resources into a single IT Support Center resulted in the following benefits:

Savings from the consolidation effort allowed GW to make further investments in self-help resources, such as a revised technology support Web presence (http://it.gwu.edu) and a self-help technology knowledge base for end users (see "GWiz" at http://go.gwu.edu/gwiz). 

Staying on Course 

The initiatives outlined in this article describe the kind of strategic leadership it takes to reevaluate business models and implement changes that keep higher education institutions on course. 

Similarly, at Valencia College, our leadership has long kept an open mind and willingness to think strategically, which explains some of the college’s success in dealing with disruptive change—and in the case of the college—explosive growth and expansion. With proper stewardship of the operating budget, for example, we were able to launch in 2011 two new programs—radiology and imaging sciences, and electrical and computer engineering technology. That same year, we dropped "community" from our name and became Valencia College.

Valencia is one of the largest community colleges in the nation, with nearly 70,000 students, and a track record of 95 percent job placement for graduates with associate and associate of applied science degrees.

It should be noted that the college’s total funding is only about $5,300 per student FTE, which makes it the lowest-funded college in the state. However, based on the high level of student outcomes produced, the Aspen Institute selected Valencia as the No. 1 community college in the country a few years ago.

Along with other higher education institutions that foresee an unpredictable future marked by choppy waters, Valencia will continue to seek innovative and effective ways to improve student success and serve the Central Florida community.

KEITH HOUCK is vice president of operations and finance, Valencia College, Orlando. Apryl Motley, Columbia, Md., who covers higher education business issues for Business Officer, contributed to this article.

Related Topics
Organizational Effectiveness

By adopting more inclusive practices, institutions are finding collaborations that support common goals.

You can’t be great at everything, so be sure to focus your efforts on your primary mission.