Higher ed Moneyball: Building a sustainable business model

By: and | Issue: June, 2019
June 1, 2019
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James E. Samels is president and CEO of The Education Alliance and Senior Partner in the law firm of Samels Associates.

Nothing signals spring like the arrival of opening day for Major League Baseball. Long heralded as America’s pastime, baseball now faces daunting challenges on the road ahead.

Like baseball, higher education now finds itself in a perfect storm – perhaps, in danger of losing its fan base as a result of shifting demographics, craven competition, spiraling tuition discounting, and crushing student and family debt burden.

In his critically acclaimed book, Boys of Summer Roger Kahn chronicles the history of the Brooklyn Dodgers. This baseball story harkens back to a romantic era of American sports and pop culture – read as the lives and times of Joe DiMaggio and Marilyn Monroe.

A half-century later, the Dodgers find themselves in LA as National League Champs, yet still vulnerable to a sometimes fickle fan base, craven competition for entertainment dollars, and rising expectations of fans to speed up the game.

Analytical influence

Fast forward to the 21st Century. Nominated for six Academy Awards, the movie Moneyball tells the turnaround story of the 2002 Oakland Athletics and their epic American League Western Division championship. This story gives fans an inside baseball perspective on the rising influence of big predictive statistical analytics for valuing new talent acquisition.

In Moneyball, Billy Beane, the A’s general manager, crosses paths with Peter Brand – recent Yale Economics graduate. Brand has wild notions about creating counter-intuitive economic models based on sabermetrics for the express purpose of assembling a more competitive team. Uniquely, Beane’s “brand of sabermetrics” was driven by undervalued players who get on base – i.e. OBP. They were not necessarily players who were overpowering super stars.

Billy Beane saw it this way: “The problem we are trying to solve is that there are rich teams and there are poor teams. Then there is 50 feet of crap. And then there is us. It’s an unfair game.”

In the same vein, the higher education landscape is populated by large research universities and highly selective liberal arts colleges with mega endowments and significant brand equity. This wealth of resources places them in the position of not needing to risk their assets.

Transforming business models

Naturally, the most financially tenuous institutions must risk it all every day – living by their wits at the edge. Billy Bean put it thusly: “Managers tend to pick a strategy that is the least likely to fail, rather than to pick a strategy that is most efficient. The pain of looking bad is worse than the gain of making the best move.”

If truth be known, the vast majority of small private nonprofit colleges and universities are highly fragile and need now to transform their business model. The recent spate of institutional closures has attracted public attention. Unfortunately, this publicity has cast a cloud over higher education’s value proposition in a choosy student marketplace.

In our generation, parents just wanted to know that Sally or Johnny would get a solid liberal arts education. This mindset no longer exists in the evolving higher education market.

For small colleges, it is not just about bringing in the freshman class. Applications and deposits are not the current measures of future enrollment stability. We need to look at differentiated conversion yield models, and significantly, correlate them to selectivity, retention, graduation, and career placement in order to monetize return on investment.

For admissions staff, it is a whole new ballgame. Indeed, today it is about psychogenic and statistical profiling to produce the right fit in the hope of attracting the most financially and academically prepared candidates. This selection process is designed to increase net yield while lowering recruitment and admission costs.

Like old-time baseball scouts who looked at last year’s home runs and RBIs in the rear view mirror, higher ed sometimes relies on incremental budget making and inefficient resource allocation decision-making models.

Applications and deposits are not the current measures of future enrollment stability.

These arcane processes tend to look behind, rather than over the edge of the future horizon. These days, colleges and universities need to formulate big data analytics, key performance benchmarks, multivariate dashboard indicators, composite ratings, risk metrics, and quantitative milestones for measuring success by independent objective means and methods.

In the wake of 70% tuition discount rates; 90%+ tuition dependence; shrinking demographics; increased competition from tax subsidized public institutions; and increased regulatory burdens, American higher education needs to drill down now on its financial self-discipline.

As an interdependent higher ed industry, if we fail to demonstrate predictable financial results, we could witness a new wave of institutional closures. Ironically, these closures might be regulators and accreditors who are charged to protect the broader educational consumer interest.

Now comes Kaufman Hall, which helps colleges and universities become business savvy without proposing to run them like a business. Kaufman Hall helps institutions implement modern financial management processes and offers sophisticated Axiom software specialized for higher education.

These new budgetary planning tools have developed a data-driven resource allocation model based on real time financial conditions, future net revenue forecasts, and data-based future cost projections and assumptions.

In the words of Charles Kim, managing director of Kaufman Hall, “Leadership teams must ensure that the planning, allocation, and management of all capital resource spending occur within the institution’s integrated planning and management processes.

“Given competing demands for scarce capital resources, an organization’s long-term success and sustainability hinge on making smart, strategic investment decisions today. A thoughtful and comprehensive resource planning and allocation process helps ensure that the institution’s application of capital resources aligns with its evolving needs and its ability to absorb risk in a rapidly changing business environment.”


Read: What’s behind institutional closings?


 

With this background in mind, we thought it interesting to follow-up with Kaufman Hall Axiom Software users to get a better understanding of the higher ed version of baseball sabermetrics at the campus level.

University of Kentucky Executive Vice President of Finance and Administration Eric Monday reported that the University developed an enterprise risk management process and protocol, identifying top 20 risks, including public safety and security, cybersecurity, unplanned service disruption, and international programs and travel.

These risks are owned (by staff) through parallel mitigation plans developed and implemented for each risk. Kaufman Hall’s enterprise performance management platform helped UK build a data driven culture of transparency and accountability–with the capabilities to make mid-course corrections when assumptions and prevailing conditions change.

  • Tufts University Vice President for Finance Thomas McGurty reported increased confidence among institutional stakeholders. “We need to feel confident that we are 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.”
  • University of Vermont VP for Finance Richard Cate spoke about implementing an integrated financial management process through a new Kaufman Hall platform for financial reporting, multiyear budgeting, and salary planning.
  • Jim Henry, director of Finance at the Stanford University School of Humanities and Social Sciences, reported on improvement strategies emerging from a recent survey based on Axiom Software – the first graduate forecasting and planning systems, and in the second a budget planning system replacing Excel templates with intuitive systems for both finance and non-finance users.

What brings these several case studies together into a coherent lesson is that the challenges of transforming University business models ironically presents Windows of Opportunity for integrating and aligning institutional resource allocations, mission, and future growth trajectory – rather than perpetuating silos of disaggregated data and lost opportunity.

As Bill James, creator of baseball sabermetrics, said, “If you challenge the conventional wisdom, you will find ways to do things much better than how they are currently done.”

James E. Samels is president and CEO of The Education Alliance and senior partner in the law firm of Samels Associates, Attorneys at Law.