How Small Colleges Can Not Only Survive, But Thrive

With the closing of two more private not-for-profit colleges in recent months, Clearwater Christian College (FL) and Marian Court College (MA), many more college leaders and boards across the country realize they must take the difficult steps required to ensure survival for their institutions. Clearwater Christian, like Sweet Briar College, while struggling to keep its doors open for years, actually strengthened its financial position in the last few post-Great Recession years. The National Student Clearinghouse data documented a 2.4 percent decline in enrollment this spring in colleges of 3,000 or fewer students. Moody's forecast the lowest revenue growth for the sector in over a decade. Yet the boards of Clearwater Christian and Sweet Briar--schools with strong cultures, missions, and values--came to the same sad conclusion, strong wasn't strong enough, and they closed their doors. (Sweet Briar may now reopen after a recent court decision but its prospects remain poor.)

Indeed, virtually every college and university faces difficult decisions about how to deal with a declining and changing 18-year-old demographic; increased competition for enrollments; fewer adults returning to complete their degrees; and increasing costs. The most common strategy is to increase enrollment, but that may be a zero-sum game and, even when successful, can create capacity challenges that are expensive to address. Many schools, but not as many, are reducing staffing, cutting salaries and benefits, shedding programs, and shuttering older buildings. Moody's reported that 19 percent of private colleges suffered revenue declines again in 2014. A recent Inside Higher Ed and Gallup poll of college business officers found that almost 20 percent fear that their schools may not survive the foreseeable future. For small, private colleges, the pressure is increasing and daunting, but survival, indeed prosperity, is possible and necessary.

Budget Strategically
Nineteen years ago, Saint Leo University faced these same problems: declining enrollments and increasing deficits. We changed our approach to strategic planning and budgeting. Today, at Saint Leo University budgeting is not about incrementally enlarging or, sadly as it seems is increasingly the case in many private colleges, shrinking budgets. The university now follows a discipline advocated by Peter Drucker many years ago; the first rule of strategy is to abandon activities that require the resources of personnel or money, indeed even time, if they are no longer productive enough. This strategic discipline contributed greatly to the university's annual revenue growth of 573 percent since 1997 and 49 percent just since 2008 at the start of the Great Recession. Accumulated net assets increased 821 percent since 1997 and more than doubled (112 percent) since 2008.

Drucker posited that all organizations should have two budgets: the normal budget which should be adjusted as necessary during business cycles and "a future budget" which should not be cut whether in up or down business cycles. He said that the normal budget should be built by asking the question: What is the minimum amount of resources required to maintain our operations well? Then the normal budget should only be funded to that level. If the business declined, those levels should be reduced. The future budget, he asserted, should be built by asking: What is the optimal level of resources required to maximize our chances for a successful implementation of this initiative? The future budget should never be reduced no matter business conditions.

Take Risks
In 1997-98, with my first budget at Saint Leo, the Board of Trustees supported a single risky initiative. We reallocated $600,000 by abandoning some activities and programs and cutting some others to develop the infrastructure, content, and services to launch online programs. Our total budget at the time was $26 million and tenuously balanced, at best. Our faculty did not have university-supplied computers, every roof leaked, salaries were depressed. The need for that $600,000 could be found everywhere in the institution. We generated less than $90,000 in online revenue that first year. This past year (FY14-15) Saint Leo University exceeded $85,000,000 alone in online tuition revenue (nearly half the university's total revenue) from nationally marketed and self-operated fully online undergraduate and graduate degree programs and from online courses available to our students on campus or through one of our 40 off-campus locations where students learn in traditional classrooms. Even some of those classroom courses are blended with online content.

At the May meeting, the Saint Leo University Board of Trustees approved the budget proposal for the 2015-16 academic and fiscal year which began on July 1. The budget forecasts increases in students and revenues and a solid surplus for the 19th consecutive year. It allows for Saint Leo to add more than 20 full-time faculty positions, increase salaries at averages exceeding 3 percent again (for the 13th consecutive year), invest in new programs like cybersecurity, open new locations, and improve academic quality and services. And as Saint Leo does every year, it funded four initiatives as part of our future budget.

Eliminate What No Longer Makes Sense
Over the past two years, the board also approved recommendations to eliminate an academic major (the seventh terminated in the last decade) and two degree programs, as well as close a few of our more than 40 teaching locations now spread throughout the Southeastern United States, plus one in California. The university also stopped offering several majors at some of those teaching locations. Each year all five of the vice presidents eliminate activities in their areas that no longer make sense and continuously reengineer operations to reduce costs or increase productivity.

University administrators should not be afraid--rather they should embrace--the process of objectively evaluating degree programs and teaching locations and eliminating those that don't make sense by the numbers. This process allows the Saint Leo administration and board to reallocate resources to growing academic programs and locations from shrinking programs and locations. Other reallocations include eliminating some university publications to fund new publications and changing some fundraising strategies to initiate some new ones as well as finding less expensive ways to deliver services and process the administrative work. The savings are used for other needs.

When I explain the university's budget discipline in our internal leadership development program for administrators and faculty chairs, I ask them where Saint Leo University would be today if we had waited back in 1997-98 for an extra $600,000 to invest in online programs. My answer: still waiting. The budget for the 2015-16 fiscal year provides the resources required to launch new programs, new locations, and new initiatives successfully and well. Academic programs dropped, new programs added. Locations closed, new locations opened. Processes reengineered, overhead costs lowered.

Jim Collins in Good to Great, also advocated this kind of budget process: "In a good to great company, budgeting is a discipline to decide which areas should be fully funded and which should not be funded at all." So with management gurus like Drucker and Collins emphatically recommending this approach, why is it rarely implemented by schools not under duress?

Colleges are notorious for being good at addition but bad at subtraction. That has to change. Adding without subtracting results in insufficient resources for new and old programs. Across-the-board cuts leave weak programs weaker while weakening stronger areas. Both approaches accelerate the downward spiral.

To get started in the right direction:
  1. Forecast revenues realistically.
  2. Reserve a minimum of 3 percent for surplus and contingency. (You may require a couple of years to reach this level if the budget is out of balance.)
  3. Reserve 2 to 3 percent for future strategic initiatives.
  4. Identify what can be abandoned or reduced, aiming to cut 2 to 3 percent.
Then
, determine and allocate the remaining resources for "business as usual," but do so strategically. Provide more to growing programs. Provide no increases to stagnant ones.

This budgeting discipline is needed more than ever in colleges today. Small private colleges produce great results for students: higher graduation rates, greater student satisfaction. Tough, courageous choices will be necessary to preserve these American treasures for future generations of students. Courageous leaders have to make these choices for the survival of their schools and the good they do for society.

You can read more in a report by Amit Mrig, Daniel Fusch, & Patrick Cain from Academic Impressions (Art Kirk, contributor), "Small But Mighty: 4 Colleges Thrive in a Disruptive Environment."