Higher education institutions need to rein in (especially internal) costs

William Patrick Leonard 29 July 2012

In an article in The Seattle Times last month, featured in University World News, two members of the University of Washington’s board are quoted as saying: “This is the fourth year in a row our students have seen a double-digit tuition increase…It can’t go on.”

The University of Washington is not alone in facing declining external support. The American higher education community’s prospects for its own sustainability are questionable. It is unlikely to endure as we know it, with reliance on tuition fee and enrolment increases compensating for the failure to more rigorously control costs and balance budgets. Public and non-profit private institutions alike have focused for too long on short-term solutions.

Without a large endowment income cushion, the bulk of US public and non-profit private institutions have been focused on the short-term imperative of bringing revenues in line with an array of immediate, unavoidable and inflexible operating costs that these institutions bear.

Short-term remedies to balance institutional budgets present only a limited solution. Decades of relatively predictable government support appear to have engendered a sense of unquestioned entitlement, as institutions have added programmes and services on top of existing expenses.

There are three short-term internal tools for balancing institutional budgets. To date, only
two – increasing tuition fees and-or enrolment – have been regularly used.

Tuition fee increases have become an annual expectation. Conversely, increased admissions, while not often recognised as a revenue enhancement tool, have been used with equal frequency.

The former has been until recently grudgingly accepted by students and their benefactors. The latter has been widely accepted inside and applauded outside the academy as a means of expanding access to the American dream. Unfortunately, economies of scale aside, increasing the size of the student body tends to lead to future cost increases, as more faculty, staff and other resources are needed to support a larger student body.

An unsustainable cycle

Near-exclusive reliance on these two short-term remedies has trapped many of the nation’s public and non-profit private institutions in an unsustainable cycle.

After decades of tuition fee increases exceeding the Consumer Price Index, coupled with declining measures of value added, students and their benefactors are increasingly less tolerant of these annual increases. This disquiet has been exacerbated by mounting student debt and questions about the subsequent income students need to earn to settle the obligation.

Popular expressions of growing dissatisfaction have in turn prompted the steady decline of the once unquestioned support of elected officials. In recent years, state subsidies to public institutions have declined to the point that some flagship public institutions are publicly considering morphing into some form of non-profit status without any governmental support.

Enrolment and tuition fee increases appeal to institutional leaders. They have been perceived as far less internally contentious alternatives. Pushing for a higher enrolment gives the institution and the public a sense of positive momentum.

Increasing tuition fees has been received by students, parents, elected officials and the public at large as inevitable. The objections from external constituents have been met with the reminder that quality must be maintained, if not enhanced. Recently, the traditional grudging acceptance of the quality defence appears to have reached its limit.

Cutting costs avoided

The third internal budget balancing tool, cutting costs, has been the least favoured. It can negatively influence programmes and hence careers. I suggest that many institutions, large and small, have found it politically easier to increase revenue rather than control costs.

They have tended to resist seriously questioning the viability of ineffective or inefficient programmes and services. Simultaneously, many have increased their continuing cost burden by enhancing existing programmes and services as well as adding new ones.

Simplistically, institutional costs may be crudely subdivided into two categories – external and internal.

The external costs are composed of purchased goods and services. Unless the institution has the power to negotiate price, its utility, insurance, contracted services and consumable costs are largely beyond its control. External costs are strongly influenced by the internal costs that institutions should have more control over.

The place to start is internal costs. In American higher education internal costs are governed as much by unquestioned culture as by contractual obligations. Institutions have tended to regard the traditional mix of faculty, curriculum, calendar and infrastructure as immutable. This has been accompanied by an exaggerated sense of entitlement to external support.

The majority of US higher education institutions can no longer rely on the historic levels of government support or philanthropic largesse. Nor can they depend on the continued utility of tuition fees and enrolment increases to align revenue with their immutable culture-driven costs.

In order to endure, these institutions will have to restrict, rather than abandon, their dependence on external support. In the near term they should carefully assess the relevance, efficiency and effectiveness of each existing programme and service in their current cost portfolio.

To further dampen cost escalation in the longer term, they would be wise to recall that it is far less painful to stop a recommended programme or service addition before implementation than to subsequently terminate it.

Institutions must become much more responsible for the internal balancing of their budgets. Otherwise, their sustainability is questionable. Consistently demonstrating internal cost control could go a long way towards rebuilding external trust and funding.

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

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