Originally published June 2017
We have a revenue problem, not a cost problem.
Imagine an educational institution that finds itself running a budget deficit – projected revenues just do not balance projected costs. It’s a very familiar scene in higher education in 2017.
And so what happens? The Board of Trustees says “balance that budget!” and the Administration hears “tighten your belt!”
Cost Cutting is Easy. Revenue Growth is Hard.
Why don’t we hear “strengthen your revenues”? The answer is pretty simple: cost cutting is easier work. Cutting costs means looking inward and relying on bureaucratic authority. One can tell one’s reports to cut costs by X% and then hold them accountable for results. They in turn tell their reports to do the same and wait for results. And the work is done by poring over budget reports and having meetings with PowerPoint slides full of numbers. The work flows down the bureaucracy. Bureaucracies are more comfortable when work flows down. This process is NOT rocket science.
On the other hand, to pay attention to and do something about revenues, people have to look outward, become informed about the outside world, take in new ideas, struggle to understand opportunities and communicate them to colleagues, do the very hard work of finding out what the world wants and telling the world what you can do. This IS rocket sciencey.
What Usually Happens
By my estimation, it’s easy for a college over the course of, say, two years to deploy thousands of hours of its best people’s time and creativity talking about how to nibble away at the margins of the expense side of its budget. A 20+ person budget committee will meet several times a month, C-suite folks and their staff will meet even more often, faculty meetings, committee meetings, and all-campus meetings are devoted to the task. Consultants are hired to crunch data, in-house people crunch the data again. It’s probably not too far off the mark to imagine the institution puts more energy into this than anything else during this time.
It’s not surprising, though, because most institutions have a management team that has been selected on the basis of their ability to manage the status quo, to keep things running as they are (perhaps with modest expansion and growth). The “technology” of innovation, growth, expansion, rethinking business models, being entrepreneurial, leveraging resources, finding efficiency, building strategic platforms on which new revenue streams can grow, all of these are beyond their ken. It is easy to predict that we will put all our energy into saving and so very little into earning.
And when we DO turn our attention away from cost-cutting, the furthest we usually get is to devote ourselves to RETENTION. We tell ourselves that each retained student is $15k net tuition we have next year that we might have lost. Retention attention activates our missionary zeal and provides concrete focus for building programs and hiring staff. But we are inclined to measure neither the cost effectiveness of these efforts nor their fundamental limitedness – perfect retention will only ever get you back to the already anemic enrollment you started with. And when your best people are working on this, they are not working on growth.
There is No Smaller Right-Size
This is a very big problem. When most institutional energy and brainpower is devoted to cutting costs and stemming losses, very little is leftover for actual expansion of the revenue pie. Most colleges that are struggling will not achieve anything close to a sustainable business structure via cuts and retention. They have fundamental structural deficits related to their size and there is not a smaller size that works. All of the efforts at cost management and loss prevention are efforts at managing the wrong problem.
Wedell-Wedellsborg, Thomas. 2017. “Are You Solving the Right Problem?” Harvard Business Review, January-February.