The Fiscal Fitness Formula for Colleges: Enrollment, Efficiency, and Margin Growth

February 4, 2025

Achieving fiscal fitness is a battle in our personal lives and our colleges and universities.  This battle is worth winning:  Fiscal fitness ensures that an institution can fund its mission, survive crises, and serve its constituencies.  This article will focus on the academic side of the house; administrative efficiency will be covered in a later piece.

Enrollment growth and efficiency drive fiscal fitness.  Accountants, consultants, regulators, accreditors, and boards of trustees demand a variety of other metrics; however, without enrollment growth, operating margins usually decline – as they do when academic or administrative operations are inefficient.  

Now is the time.  It is a little easier to grow than it was a few years ago when nationwide enrollment was declining and shifting to online.  The economics of growth and efficiency are also more favorable. 

First, the incremental margin on a new freshman is often higher than it used to be.  After years of enrollment declines, many institutions have small departments, programs, and classes that can absorb more students without adding faculty.  Dorms have empty rooms.  As a result, most revenue from an additional first-year student drives up the operating margin.  Some of this incremental margin is offset by one-on-one tutoring and advising to address issues in college preparedness and mental health.

Given such high margins on incremental students, their lifetime value has increased.  Higher student value justifies investing more in marketing and admissions to attract new students and in retention of existing students.  In fact, it is worthwhile to reset these budgets, starting with the enrollment goals and funding the activities required to hit the goals.  Too often, in marketing, we see budgets that were set using the prior year’s budget plus or minus a little.  Last year’s budget was set on the year before; none of these budgets were aligned with the spending required to penetrate markets and convince students to enroll.  So, start with the end in mind:  what is the lifetime margin for a student?  How much do we need to spend to attract a new student and realize the value?  How much should we spend to retain a sophomore?

These days, margins are in unexpected places.  The departments and programs that have lost the most enrollment often have the most excess capacity (unless you have already trimmed the staff).  As a result, attracting students who want to major in Philosophy or Languages are likely to be much more profitable than adding a student to an oversubscribed Computer Science program that has expensive faculty and no empty seats.  Perhaps you should let potential Liberal Arts students know you want them, offer special scholarships for them, and let them know that there really are good career opportunities for Philosophy graduates (who earn over $90k on average).

Efficiency – delivering education at a lower cost per graduate – usually benefits from growth, especially if you increase enrollment in unnecessarily small classes and programs.   As you add students, the cost per student hour decreases (instructional cost is divided by a higher number of students).

More broadly, efficiency has its own mechanics.  

Cutting small programs is a logical but ill-founded place to start.  Cutting programs leads to lots of discord on campus, raises concerns among parents and prospective students, requires endless teach-outs, and yields modest savings.  These savings are usually offset by lost students and revenue.  There are usually a few programs worth cutting but do not expect these cuts to significantly increase efficiency.

Academic efficiencies are found in courses and faculty workloads.  When we analyze faculty costs, we create three buckets:  instructional cost, release time, and unallocated time.

In the instructional bucket, we usually find millions of dollars tied up teaching small, under-enrolled classes.  It is relatively easy to cut some of these courses; it will have no effect on revenue and does not require teach-outs.  Unfortunately, the savings can only be realized by cutting people; on the academic side of the house, if there is no change in payroll, there are usually no savings.

High rates of low grades (D, F, or withdraw) reduce efficiency.  In effect, the college has to pay to teach the student twice, or worse, the student drops out, and all their potential future revenue is lost.  Typically, high DFW rates cluster in specific disciplines (i.e., Math) and specific professors.  Fixing a few courses (e.g., spreading a math course over two semesters or changing the instructor) can substantially improve retention rates, revenue, and efficiency.  

Release time also deserves inspection.  Many of the best professors are given time away from teaching and research to perform other work.  Some of this work is really needed and cannot be done by others.  Some of the work no longer exists – or should not exist – allowing the college to reduce release time and get professors back in their labs and classrooms.  

Unallocated time is neither release time nor instructional time.  This bucket usually includes millions of dollars of mysterious costs, some are valid uses of time, others not so much.  Without touching the curriculum, this time can be cut or put to better use.

Always remember the goal is to improve fiscal fitness, not just to reduce cost.  Often cuts lead to a smaller but equally inefficient college.  The goal is to reduce the cost of producing a student credit hour and a graduate.  The best path to fiscal fitness is usually to increase enrollment, run fewer, larger classes, and reduce time spent on unnecessary activities.  In some cases, costs may rise, but operating margins will improve.

Robert Atkins

CEO AND FOUNDER OF GRAY DECISION INTELLIGENCE

Bob led Gray DI’s entry into the education industry and the development of Gray DI’s proprietary industry databases and service offerings. He has worked directly with many of Gray DI’s education clients, consulting with CEOs and CMOs on business strategy, pricing, location selection, curricular efficiency, and program strategy.

About Gray DI

Gray DI provides data, software and facilitated processes that power higher-education decisions. Our data and AI insights inform program choices, optimize finances, and fuel growth in a challenging market – one data-informed decision at a time.

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