Written in collaboration with Kaufman Hall, our strategic alliance partner
Higher education is experiencing significant disruption in an increasingly complex and demanding operating environment. In many colleges and universities, the basic business model and value proposition are under significant pressure. Scrutiny is increasing due to new delivery systems, nontraditional competitors and students, and demographic changes. Operating margins at many institutions are eroding.
Public institutions must grapple with competitive forces, while state funding is stressed and declining. Moreover, small tuition-dependent institutions are struggling to brand their niche, maintain their applicant pool, and diversify revenue to stay viable.
The reauthorization of the Higher Education Act, under discussion in Congress, may include changes to the bill that could negatively impact colleges and universities. And, the administration’s new tax bill poses challenges for some schools in the area of taxes on investment income, and in the higher standard tax deduction for all taxpayers, which could harm charitable contributions by lowering giving incentives.
Resources are challenged; hard funding choices will need to be made. According to findings in Financial Outlook: 2018 Report for Higher Education, a report based on a recent Kaufman Hall survey, nearly half of senior finance professionals believe their institution’s current model is not sustain- able. A full two-thirds of respondents say that they are not prepared to respond quickly to change, using existing tools and processes.
To meet the imperatives of the changing business environment, leading chief financial and chief business officers are fostering the construction of a more contemporary finance function at their institutions. As described in this article, based on interviews with senior finance executives at six colleges and universities, the finance function shares five key characteristics: (1) an expanded leadership role; (2) the right team; (3) integrated, data-informed planning; (4) embedded accountability; and (5) seamless execution through education and communication.
Their strategies for meeting the challenges in higher education point to areas of recommended focus for CFOs and CBOs nationwide.
Elevating the CBO Role
Elevated financial management starts with who’s at the table. As part of small leadership teams, several chief business officers featured in this article have assumed essential leadership oversight for the whole enterprise, not just the finance function. They partner with the president and provost to help realize the institution’s mission. Their boards of directors encourage and sanction this partnership, lending the weight of sufficient authority and structure to the CBO’s expanded role. That role includes informing and helping guide decisions, adding a strategic component to existing operating responsibilities. These chief executives actively participate in strategic visioning and decision making in collaboration with the board.
At the University of Kentucky (UK), Lexington, the leadership team has actively and purposefully developed a coalition among the president, provost, and executive vice president (EVP) for finance and administration. “Meeting weekly with the president and provost to intentionally build relationships and institutional alignment is one of the most important things I do,” says EVP for Finance and Administration Eric N. Monday.
All these activities elevate the CBO role from the traditional one of silo-based influencer, to a higher level and breadth of authority and impact. “Roles Played by Leading Chief Financial Executives,” identifies four emerging C-level responsibilities in higher education.
Roles Played by Leading Chief Financial Executives
- Chief Transformation Officer: Envisions new business scenarios and uses a team approach to make these a reality.
- Chief Integration Officer: Evolves siloed financial management into an assimilated framework for integrated decision making.
- Chief Transparency Officer: Ensures that accessible data can “tell” the performance story and facilitate accountability.
- Chief Financial Education and Communications Officer: Improves institution wide financial management through effective financial education across the enterprise.
“I spend time on reputation-defining initiatives—in fact, more time on high-level administrative matters than on financial matters.” - Eric Monday, executive vice president for finance and education, University of Kentucky.
The strength of UK’s finance team enables him to maintain an enterprisewide focus on such initiatives as identifying potential disruptors to the institution’s strategic plan, and approaches to address those disruptors (see sidebar, “Collaborating to Overcome Disruptive Challenges”).
This effort, accomplished in conjunction with administrative leaders and trustees, has resulted in several tactical strategies—new revenues, efficiencies and effectiveness, outreach and service, and structures and staffing—the work streams of which are integrated in a more detailed financial plan to help achieve the strategic plan.
Nicole Trufant, vice president of finance and administration of the University of New England (UNE), Biddeford, Maine, notes that building a finance and administrative structure enables the execution of institutional vision.
“Our financial model must have the flexibility and nimbleness to allow us to try new things and invest in new areas to support the strategic plan”
But ultimately, comments Trufant, a CBO’s fiduciary responsibility is to protect the institution’s financial health as a public entity with a debt rating for outstanding bonds purchased by bondholders. “We have given bondholders specific performance expectations,” says Trufant, “so these commitments must not be broken by the CBO, who also is accountable to bondholders.”
At Tufts University, Medford, Mass., Thomas McGurty, vice president of finance and treasurer, is part of an executive budget committee, along with the president, provost, and EVP, that works toward clarity and direction on how the university’s financial goals should intersect its educational business objectives.
“We need to feel confident that we’re not going to get out over the tips of our skis. This requires making resources available for the university’s agenda in a fiscally responsible way that doesn’t overly constrain the institution”
At the University of Vermont (UVM), Burlington, Richard Cate, vice president for finance and treasurer, regularly works with cross functional teams to examine data and their implications. “Yes, it may take time to get to the right decision,” he says, “but I always present the president, provost, and board members with the data, options, and my recommendations.” Summing up this expanded leadership role, he says: “As we consider initiatives and look at their financial impact, our most critical responsibility is to ensure that decisions are made in the institution’s best interest.”
The Right Team
Top-performing CBOs ensure that the right people are in the right positions, and encourage them to manage their areas of accountability. Mark Varholak, vice president for finance and CFO of Quinnipiac University, Hamden, Conn., is developing a team that will transform what was a small budget-focused unit during high-growth decades to a sophisticated budgeting, financial planning, and analytics operation that looks to provide appropriate guidance and support during periods of more moderate growth.
Beginning in the 1990s, Quinnipiac University acquired or developed schools of law, education, nursing, medicine, engineering, and an online university, growing enrollment from approximately 2,000 to 10,000 students. It also achieved No. 1 ranking in average annual percent- age increase in net assets from 2000 to 2010, as noted by author James L. Doti, in his article “A Vital Statistic,” in November 2013 Business Officer.
In 2010, the focus of the university budget process was on a one-year operating budget. Long-range planning and analysis, while considered, were not critical. “The growth was great,” says Varholak, “but from a budget perspective, it masked inefficiencies.” For example, salary and benefits expenses had increased disproportionately to program revenue growth due to inefficiencies in the hiring approval process.
To address these problems, Varholak started to integrate budgeting, planning, and analytics functions through a joint team and expanded finance framework (see sidebar, “Integrated, Data-Informed Planning”). From experience at GE Capital, he knew that “as a finance professional, I am only as good as the information technology (IT) professional standing right next to me.” He sought professionals with a diverse skill set, including computer science, mathematics, economics, and finance/accounting. This multidisciplinary team began to focus on using data to inform decision making institutionwide.
The team implemented a position management plan to address the inefficiencies cited earlier, which were identified and quantified through data analysis. Through the resulting change plan, the university experienced a double- digit reduction in the annual growth rate of labor expenses, saving the university millions of dollars. The budgeting, financial planning, and analytics team is now in a position to succeed at Quinnipiac University, says Varholak.
Coupling Data With Strategy
Disciplined long-range financial planning, developed and implemented by leading CBOs, ensures appropriate analysis, integration, and coordination of strategic endeavors that are securely linked to financial capability during the plan period. Long-range financial planning must be coupled with strategy development to ensure communication and understand- ing of a complete picture of institutional financial performance. Such integration must use the annual budget, which is based on the first year of the financial plan, as a tool to implement and achieve the institution’s multiyear strategic vision.
Leading CBOs skillfully execute the multiyear financial plan and annual budget processes, managing the fundamentals with attention to key performance
indicators, peer benchmarking, and best practices. This process builds and maintains credibility with institutional constituents, and creates a highly effective decision-making framework that can be used by the board and executive team. Decision makers need to know what resources are available and how resources are expected to change as the institution implements its programs.
“All challenges, issues, and institutional drama emerge in the budgeting process,” comments Nicole Trufant, vice president of finance and administration, University of New England. She notes that all these items can have a big impact on the numbers, if not appropriately addressed. (Trufant describes UNE’s recent financial transformation in “Revenue Regeneration,” published in July 2016 Business Officer).
In general, the more evidence, the better the decision making, but judgment also is critical, particularly with important considerations that cannot be quantified, such as effects on stakeholders, mission, or institutional culture. Eighty-seven percent of respondents to the Financial Outlook survey indicate that more insightful data into their institutions’ performance would result in better financial decisions. “Without data and analytics, a planning team is crippled. The data allow us to say, ‘Here’s what’s happening with this department or function, and here’s why that may be the case,’” says Varholak.
“Planning and budgeting process improvements, using Kaufman Hall’s enterprise performance management platform, helped us to be more integrated across
the university and to build a data-driven culture of transparency and accountability,” says UK’s Monday. Axiom Software, including an enrollment/tuition projection model and a long-range financial planning model, were integrated into overall financial planning activities for the university. The enrollment/tuition model informed the development of the FY18 budget. Monday expects that expanded use of the long-range financial planning model will enhance integrated planning activities across the enterprise.
The creation of a long-range planning model at Tufts University derived from the desire to clearly understand and be able to communicate what resources the university had, and what the implications would be of drawing on those resources to further the academic mission, comments Thomas McGurty, vice president for finance and treasurer, Tufts University. Advanced tools and technology played a major role in the redesign of the finance structure at Tufts, where leaders consolidated budget development and management functions into a budget center for greater efficiency. “We’re about to take steps to eliminate shadow systems in several areas, which have been a legacy problem for Tufts,” says McGurty. Transparency with forecasts and the budget will improve, thereby improving data-driven decision making, notes McGurty.
Tufts implemented Axiom’s grants planning model to “get our arms around the portion of our business that accounts for about 20 percent of operating activity,” says McGurty (see sidebar, “An Expanding Leadership Role”). Limited transparency had made it difficult, for example, to answer questions from board members about the financial impact of the 2013 U.S. budget sequestration, or changes across the funding plans that were committed, submitted, and/ or yet-to-be proposed. Institutionwide forecasting and planning were required to understand the impact of grant flows throughout the year.
Best-practice, integrated planning embeds accountability by providing individuals with the data and analytics to understand their respective businesses. Looking at key drivers or indicators on a regular basis builds buy-in to initiatives and decisions made locally and institutionwide. “Accountability is a component of transparency,” says Monday. Similar to the concept of what is measured is what gets done, what is seen and understood facilitates accountability and empowers commitment.
For example, transparency can move participants from an “us-versus-them” mindset—with disproportionate focus on opaque allocations or overhead assessments—toward shared recognition of resource constraints and the need for a strong priority-setting process.
Richard H. Cate, vice president for finance and treasurer, The University of Vermont, says that maintaining embedded accountability is about asking questions: “When reviewing data, I enter into conversations being respectful of those involved. I don’t need or question every piece of data, but if I do see something that doesn’t look right, I’ll be the first to ask about it.” UVM uses a responsibility-centered management (RCM) budget model, which Cate says provides an excellent means to facilitate accountability for individual budgets (see sidebar “Embedded Accountability”).
Communication is a Way to Build Skills
Senior finance leaders spend much of their days communicating with executive leaders, managers, board members, and other institutional stakeholders, offering organizationwide transparency. “How administrative leaders carry out their jobs and interact with people is so critical,” comments McGurty of Tufts University.
Similarly, UVM’s Cate describes his bidirectional role as that of a “translator.” This involves bringing information from staff members who are knowledgeable in finance to various department leaders who do not have a finance background; then program plans from
these leaders are translated into financial requirements at the business plan and budget level to ensure everyone is on the same page (also see sidebar from UNE, “Seamless Execution
Via Education, Communication”).
Well-integrated planning and budget- ing is especially suited to the collaborative nature of higher education, which typically supports open processes that solicit input from numerous stakehold- ers, comments Jim Henry, director of finance of Stanford University’s School of Humanities & Sciences.
Skill-set building across the organiza- tion is a core focus for Henry. His team provides ongoing financial coaching and mentoring to deans and to staff in all the programs they represent. The goals are to build ownership and awareness of what planning and budgeting should be and how it is performed. “Continuous support is provided during the entire fiscal year to build those skills sets so that unit-level staff can actively manage throughout the year,” says Henry. For the deans, who typically rise through the faculty ranks and rotate frequently, academic excellence must be paired with financial expertise in order to operate their multimillion-dollar programs.
Henry says his big challenge is to convey a financial narrative or story of what is occurring, the financial effect of major fac- tors, and the impact of decisions if various scenarios occur (see sidebar,“The Role of the Finance Team in Educating Budget Unit Staff”). “We tell financial stories without hundreds of numbers on a giant page, but by presenting the same key drivers or indicators in clear graphics, as we meet with leaders and staff throughout the year. It’s all about education and communication,” confirms Henry. “You have to keep talking with people until they understand what you’re saying, until it resonates with them, and until it is something they can buy into.”
This article was originally published in Business Officer magazine, June 2018. Read the article here: https://www.businessofficermagazine.org/features/financial-fix/