Higher education institutions are experiencing one of the most tumultuous times in recent history. First, the pandemic forced universities to completely change how they operate, and then came the impending demographic cliff and market pressures.
A recent survey of college and university financial leaders found that financial leaders ranked enrollment as their top issue followed by labor costs and inflation. Even with the many challenges, the report found that a majority of finance professionals (85 percent) said their universities should be doing more to leverage financial data to make better decisions.
Even though financial planning was turned upside down by enrollment declines, rising labor costs, recruitment challenges, and inflation, the pandemic created some opportunities for higher education.
Because institutions had to operate on tighter budgets, colleges and universities had to identify the gaps in their financial plans and rethink how digital transformation could improve their financial health. Despite these challenges, the report’s data found that nearly nine in 10 financial leaders are confident their organizations will remain stable over the next five to 10 years. This was a moment in time for higher education institutions to embrace the future of technology by exposing their outdated legacy systems and choosing to drive change in their organizations with scenario modeling.
The need for long-term planning + scenario modeling
As a method of strategic financial planning, scenario modeling enables finance leaders to mitigate risk and prepare for volatility. Market pressures caused by inflation and rising interest rates bring to light to the need for establishing a long-term financial plan. As all higher education institutions face future uncertainties, scenario modeling enables leaders to quantify the financial and operational implications of change and analyze a range of possible outcomes. In the aforementioned report, data showed that financial professionals believe tuition and financial aid would benefit the most from improved data analytics and long-term financial planning.
The process involves identifying the key drivers of change for an organization, calculating an array of projections based on scenario modeling for potential variations in performance for one or more of those drivers, analyzing the results, and then determining how best to apply those results to the organization’s long-term financial and strategic plans.
Recent data found that 61 percent of higher-ed leaders plan to use scenario analysis to prepare for the impact of external factors over the next one to five years. To build a strong financial plan, they need to follow six specific steps to identify a path forward: define a case, build an extensive library of potential drivers and initiatives, create dynamic scenarios, stress-test the models, gain stakeholder buy-in and establish consensus, and define KPIs to monitor performance.
From a higher-ed perspective, this process means looking at all recent crises and challenges — campus closures, hybrid learning adoption, changing tuition rates, drops in enrollment — and the impact of each on an organizational level. Once these plans are in place, higher education institutions can sustain their long-term operations and improve their overall financial health.
Proof of concept: Future planning in action
During the COVID-19 pandemic, officials at University of North Texas (UNT) System used financial modeling capabilities to run hundreds of scenarios to help guide decisions about the system’s pandemic response. Early on, things changed so rapidly that the finance team reran various scenarios numerous times and held weekly meetings to update the system’s presidents and financial leadership.
UNT used scenario modeling software to develop action plans for each campus, such as cutting costs, freezing new hires, and even closing campuses. The action plans were broken down into milestones, with different courses of action prescribed depending on which scenarios played out. These scenario modeling capabilities gave UNT’s leaders reliable, apples-to-apples comparisons and data analyses, which guided critical strategic decisions and helped build trust with students, community leaders, and other stakeholders across the university system.
The scenario modeling software also allowed UNT to predict scenarios that could occur 3-5 years into the future, which was critical during a time of uncertainty. By having insights into potential enrollment rates, they could make decisions around pay increases, staffing models, strategic investments, and debt decisions. These future scenarios also helped us create an incentive-based budget, which allowed us to grant more research opportunities. The long-term financial planning coupled with the incentive-based decentralized budget model put us in a pretty strong position for the upcoming school years.
As economic uncertainty emerges, are universities prepared?
As the value of a college education continues to evolve and economic growth slows, universities must prepare for any scenario to not only serve their students but build a solid financial future for their institution. The majority (60 percent) of finance professionals feel that higher education is behind other industries in adopting modern financial planning tools, indicating the industry is ready to step into the future of digital transformation.
To make financially-sound decisions for their institutions, higher education finance leaders need the right tools to enhance strategic decision-making, perform robust scenario modeling, and integrate planning processes. It’s critical to find the right partner to recession-proof and build a solid financial future, so universities can serve generations of students to come.
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