The Five Dysfunctions of Enrollment Management
Dysfunction #5: Inattention to the Consequences of
Trade-Offs in Stewarding Net Revenue
This is the fifth and final article in a series of Insights addressing the five dysfunctions of enrollment management. We welcome your comments and feedback at the end of the article.
We save the most egregious dysfunction for last. It’s also the most interesting! In our work as advisors to college and university leaders, one of the most frustrating situations we find is when rushed or ill-informed decisions are made that jeopardize much-needed revenue.
Sometimes, institutional leaders are not fully aware of the complex, reciprocal relationships among enrollment, financial aid, class profile, net total revenue, and discount rate. That’s understandable, but that’s also when leaders risk making short-term adjustments to one of these variables without anticipating the implications of those changes on other variables, especially revenue. Sometimes, institutional leaders are simply protecting their own positions in choosing to focus on a particular short-term performance metric rather than considering all the variables in the context of what is best for the entire institution.
Here are a few of the situations we regularly encounter:
- Discount rate before revenue. We fully understand that a low discount rate is used by rating agencies and others as an indicator of financial health. However, we encounter too many situations where institutions needlessly force a low discount rate and, as a result, forfeit millions of dollars in net revenue that could have otherwise been put to good use. These institutions are, in effect, suffocating themselves financially by remaining too loyal to useful but hardly canonical metrics such as the discount rate. We encounter this all the time. Most colleges and universities have the data they need to envision different scenarios that reliably explore the relationships and decision-making outcomes among enrollment, net total revenue, and discount rate. They simply choose not to explore these various options and scenarios.
We often demonstrate that a one- or two-point increase in an artificially low discount rate can result in millions of dollars in extra revenue for an institution within one year, and tens of millions of dollars within four years. This extra cash allows the institution to stabilize itself until it has gained market share and position needed to explore decreasing the discount rate without jeopardizing enrollment or revenue. This approach enables them to make this choice, however, from a position of relative strength. Sometimes, even when institutional leaders are shown the revenue their institution could realize given a small uptick in discount rate, they choose discount rate over revenue. Until such time that discount rates actually fund improvements in services and facilities for students or generous need-based scholarship programs, we believe institutions should first consider their class profile and net revenue before the discount rate.
- The quest for “quality.” We have often heard, “If we could just improve the quality of our students, then so many of our problems – such as retention – could be solved.” Again, this is a simple solution to a complicated issue. Put bluntly, attracting and enrolling students who score higher than an institution’s average (ACT, SAT, GPA) is an expensive proposition. Unless a college or university is significantly underperforming, discount rates will likely rise and revenue fall as a result of offering generous scholarships and discounts to high-scoring students who have many other college options. We have found that changing the profile of an institution’s incoming class has to be done carefully, methodically, and always keeping net revenue at the forefront of the discussion. Increasing quality should only be considered if an institution is on solid financial ground, has a robust application pool, and can withstand a decrease in yield, increase in discount rate, and possibly stagnant growth in net total revenue. It may well be the right strategy, but it must be undertaken at the right time and under the right circumstances.
- Just do it all! Leadership teams often argue over institutional priorities largely to defend their own turf. The old saying, “Where I stand depends upon where I sit” rings very true in these situations. The chief academic officer wants to increase the SAT or ACT profile. The chief financial officer wants to decrease the discount rate. The chief advancement officer is interested in enrolling legacy donor families. The chief admissions officer is terrified of not making this year’s headcount. The college deans want to fill their new programs. You have all been there and are often left with a “mission impossible” strategy that says just do it all! Unfortunately, doing it all is rarely an option. The key is for everyone around the president’s table to understand the give-and-take that must be part of complex decision-making. If one metric eclipses the others (discount rate, for example), then net revenue might become a casualty and everyone around the table will feel the effect. We often find that, if the key decision makers can see the results of changing one metric on all the others, then the planning and negotiation process becomes more palatable – and more evidence based. For example, what will happen to net revenue and discount rate if the SAT or ACT average of the incoming class increases by 20 points or 1 point respectively? What will happen to enrollment and net revenue if the discount rate is decreased by two percentage points? How much will it cost to enroll students in new programs? What would the incoming class look like if net revenue were the only consideration?
The bottom line is that critical decisions about your institution’s enrollment, financial aid, class profile, net revenue, and discount rate cannot be made in a vacuum. Making a decision in one of these areas likely means you’re making a decision in all these areas, whether intended or not. In building the strongest possible executive team, therefore, the leadership team needs to understand the multivariate nature of these performance metrics: how they affect the positions and performance of each of the leadership team members, and, ultimately, how, why, and when they drive institutional revenue.
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We welcome your comments about this article or our entire series of “The Five Dysfunctions of Enrollment Management.” Are there any dysfunctions that we missed? We cannot identify you by your comments (unless you tell us who you are, of course), so we encourage you to become part of the dialogue!
I served several institutions as the person handling admissions and financial aid. Your article is exactly on point in terms of the challenges faced and the overall impact on enrollment when the strategy is not well understood or embraced by the the leadership of the instituion.
The schools I worked with were all almost totally dependent(90%+) on tuition, fees and other student generated income. I introduced the net tuiton approach and it worked very well for several years. Enrollment increased, as did net revenue and because there was space available in residence halls and classrooms no additional facilities were needed. However, around year 4 of using this approach, those around the table began to question the growth of the Financial Aid budget. In some cases new faculty and staff were hired as enrollment grew. Often salary increases were in the discussion. The question asked was phrased this way. “If we didn’t offer so much aid those funds could be used to increase compensation for our faculty”
I wish I had had your article to refer to as those discussions occured. Your article is right on target. This is a large issue for tuition dependent schools with low endowment.
Thank you.
09-28-11 » 8:50 am by Net Tuition Revenue