Getting to there from here: Decision-making in a challenging environment
Managing Directors, Kaufman Hall
This article is the first in a series, the goal of which is to help you and other leaders of U.S. colleges and universities to navigate a changing business environment. We will describe in consumable increments a recommended approach that has withstood the test of time in very difficult circumstances. It has enabled executives in U.S. organizations and companies to manage their traditional businesses effectively while simultaneously preparing for, and moving toward, different conditions. This article sets the stage with how leaders often currently make critical decisions related to resource spending, as related to organizational strategy and financial performance.
The challenges experienced on multiple fronts in higher education may be all too familiar to you and many readers.
Demographic shifts, flat support from government sources, increased competition, volatility in the financial markets, and other factors may be affecting your institutions. The impacts may include shrinking enrollment, decreasing net tuition, diminishing debt capacity, declining liquid assets, and more complex, interrelated financial hurdles for you and your leadership team.
Not surprisingly, U.S. college and university leaders responding to a recent survey rank “financial resources” as their top challenge. The reality is that few universities and colleges have sufficient capital to meet their comprehensive strategic requirements in this environment. Is your institution in this majority?
Leaders must make choices. How much to spend and on which initiatives are today’s critical decisions with long-term strategic and financial implications.
Important questions include:
• Who makes resource-spending decisions in your institution?
• What decision-making process do these individuals use?
• Are spending decisions in alignment with the strategic priorities of the institution?
In our work with colleges and universities around the country, we see wide variation in decision-making responsibility and processes. A first-come, first-serve approach or a political approach are common. In other instances, resource decisions are made without evaluation of long-term ramifications, tradeoffs, or rigorous business planning. In particularly problematic instances, donor-driven projects take precedence over strategic priorities or routine infrastructure investment requirements.
The most prevalent financial decision-making framework appears to be the annual operating budget.
Some institutions have planning forecasts that extend multiple years, but the budgeting and forecasting processes typically are not integrated. Additionally, major capital decisions occur through separate processes, affecting the annual operating budget solely through adjustments for increased debt service and depreciation. Consideration of programmatic investments often occurs only in relation to next year’s budget. The processes and participants typically are in silos.
Here’s what should and can be happening in many colleges and universities:
• Resource spending should align to the strategic plan and its goal of improved competitive position
• The resource decision-making process should be standardized and transparent; use of uniform criteria for project evaluation and rigorous business plans will lead to trust and an enhanced institutional financial IQ
• Funds for critical initiatives or infrastructure improvements should be allocated through a centralized resource decision-making process
• Short-term decisions should be made based on thorough consideration of long-term ramifications, tradeoffs, and sustainability
• Revenue-generating growth and spending/cost control initiatives should have equal emphasis
Given pressure on financial resources, the “investment safety net” is stretched thin for many institutions.
Bad financial decisions can have both immediate and long-term implications.
Executive teams in universities and colleges would benefit greatly from a planning process that enables improved decision making. Our next blog will introduce a planning framework that leadership teams have used successfully in many organizations and companies nationwide to navigate in challenging environments. Through this series, we hope to show you how your organization can adopt this framework.