Review essay

by Hans H. Jenny

Strategy and Finance in Higher Education: Surviving the '90s,

Measuring Institutional Performance in Higher Education

These books, two of a series, summarize practices and ideas originally discussed at conferences organized by the Stanford Forum for Higher Education Futures. The Forum's objective is to help colleges and universities improve their management skills. In this review I summarize each volume's contents and then offer, what I hope, are a few constructive criticisms.

In the Introduction to Strategy and Finance in Higher Education, William F. Massy and Joel W. Meyerson strongly urge higher education institutions that "spurn planning like a body rejecting a new organ" (p. 13) to study what is happening in strategic and long-range planning at the University of Michigan and at Stanford. The strategic planning process they discuss describes the roles played, respectively, by the board of trustees, the president, and the chief financial officer. On the subject of monitoring strategic change, the editors point to the book's last chapter, whose focus is on credit ratings as a proxy for how capital markets might view institutional change.

Richard Chait discusses "The Role of the Board." He divides the process of strategic planning into four phases: envisioning, formulating, implementing, and monitoring strategy. Envisioning, he suggests, is an occasional activity, whereas the other three are ongoing and are normally delegated to others; the board's task is to make sure that they are carried out and carried out well. Trustees may often be more comfortable in their knowledge of the institution's efforts and less in any progress that has been made. The author refers to the Association of Governing Boards' (AGB) (and others') efforts in the development of indicators of comparative and strategic indicators.(1)

"The Role of the President" is analyzed by Nannerl O. Keohane, as president of Wellesley College . She takes on Cohen and March's skepticism highlighted in their challenging book Leadership and Ambiguity. Although she does not entirely demolish their argument -- that presidents have little sense of continuity, normally have short tenures and therefore realize that planning is of little use, that planning outcomes seldom resemble the actual future, and that presidents should therefore occupy themselves with matters other than strategic planning -- she cites from her experience and shows convincingly that experienced presidents can play useful roles as strategic planners. She gives several examples of how Wellesley College is a case in point.

Michael Finnerty, vice president for finance and administration at Yale, tackles "The Role of the Chief Financial Officer," using his Yale experience as a backdrop. He states that the finance office must be perceived as a force that supports and protects the quality of academic programs even, or especially, in an environment of budgetary constraints and retrenchment. He adds that it must bring credibility to forecasts and financial projections used in or resulting from planning efforts, and that it can be most effective when planning is based on cooperative processes in which the finance office is perceived as a facilitator, not an enforcer.

Gilbert R. Whitaker, Jr., at the University of Michigan , and Susan M. Schaffer and Timothy R. Warner at Stanford University address the planning practices at their respective universities. Ann L. Sowder from the Standard & Poor's Ratings Group, concludes the volume with an essay on "Market and Credit Perspectives."

Except for this last essay, and given the fact that this collection was first presented at a conference, the volume presents an amazingly unified set of arguments and testimony to practices that work -- and to some that do not. Institution-specific conclusions may be more convincing than generalities that paint higher education issues in broad and bold strokes. Institutional managers less well versed in strategic planning than the institutions represented in the book could do worse than learn from these examples.

The seven essays in Measuring Institutional Performance in Higher Education lack a similar cohesion. Maybe this is inevitable, considering the book's topic. "Performance measurement" is a somewhat intractable subject. What and whose performance? The volume, at times, implies a varied framework, but seems finally to have settled on "financial" measurements. Given the vast number of protagonists "performing" within a modern university, an author must obviously pick and choose.

In the summary introductory chapter, "Change in Higher Education: Its Effect on Institutional Performance," Joel W. Meyerson and Sandra L. Johnson from Coopers & Lybrand focus on change in the broadest sense but highlight primarily basic financial performance measures.

In "Measuring Performance in Higher Education," Robert H. Scott describes the financial condition in terms of modified financial statements (Did we have a good financial year?) that, among other things, address modified financial reports, and the issue of inflation-adjusted plant depreciation, consumption, and obsolescence. He recounts Harvard's experience in the early 1980s, when the university began an analysis that disclosed unreported liabilities and costs. Of special interest is a table that compares, for a list of academic programs, the cost of the degree, the net cost to the student after financial aid, a student's starting salary, and his or her level of debt at graduation. The author writes, "when important goals are set, adequate plans must be made to measure performance toward their achievement. Such measurement is not only necessary for progress, it should be an integral part of the goal-setting process" (p. 27). Scott's (Harvard) examples of financial reporting formats should be of interest to readers.

William F. Massy, in "Measuring Performance: How Colleges and Universities Can Set Meaningful Goals and Be Accountable," chooses a broader than purely financial perspective. He summarizes many of the arguments with which readers may be familiar from his previous publications on planning and many of which relate to Stanford's longrange planning experience. There are several useful checklists, including a major excerpt from the Peterson/ AGB Strategic Indicators Survey Questionnaire.

In "The Self-Transformation of Corporations: A Lesson from Industry?," Francis J. Gouillard from Gemini Consulting offers some useful tips that are not at all in the form of a question. Citing a variety of industrial experiences, good and bad, he points to directions that should be taken to heart by the types of higher education executives addressed in the preceding volume.

Gordon C. Winston returns to Scott's theme in "New Dangers in Old Traditions: The Reporting of Economic Performance in Colleges and Universities." After an overly lengthy diatribe against fund accounting (inappropriate and a red herring to boot), he calls for an a la Harvard "global account" reporting to answer such questions as: "Did the year's activities make the college better off or worse off economically?" "Will the behavior and policies we're considering now make the college better off or worse off in the future?" Or, as Scott, above, "Did Harvard have a good year or a bad year?" (p. 74). The "global account" (others have long called it the "Consolidated Net Worth") can provide the answer. Winston believes that the concept will travel well outside of Williams and Harvard.

In his chapter, "Benchmarking -- How Good is Good?," Sean C. Rush from Coopers & Lybrand suggests that colleges and universities can apply to performance measurement tasks a practice that is used in for-profit businesses. "Benchmarking is an ongoing, systematic process for measuring and comparing the work process of one organization to another" (p. 84). Benchmarking as an element in performance measurement answers such questions as "who is doing best?"; "how are they doing it7; "how good do we want to be?"; "how well are we doing compared to others?"; "how can we be better than the best?"; and "how can we adapt to our institution what they do?" (pp. 84-85).

The final essay in this book is by Nancy J. Dunn and Linda S. Wilson from Radcliffe College : "New College Leaders: Strategic Shortcuts for Short-term Success." In this chapter the authors describe their planning experiences from the perspectives of a president and a vice president as working partners" (p. 99). This is a detailed account of a process that could prove useful for top executives who wish to improve the planning process at their institution. Among many factors, the authors cite the lack of key financial information at the start as one of the hurdles and as in itself an indicator of "later difficulties in generating and gathering information necessary to support a strategic plan" (p. 124).

We commend editors and authors of these two volumes for their provocative contributions. Readers who wish to take the time to read them should benefit greatly, because most of the discussions arise from everyday experience. There is little "academic" theorizing here. Of course, what works for executives in one institution may fall abysmally in another. Institutional performance depends upon the roles played by and performances of many "people." It matters not only who manages people and how they are managed, but who these "people" are and what strengths and weaknesses they bring to the strategic planning task. Generalizations about what managers "should do" will go only so far; implementation at each institution will tell about the success or failure of a particular practice.

Topics such as "benchmarking" undoubtedly have their practical uses. The National Association of College and University Business Officers (NACUBO) is currently sponsoring a major "benchmarking" project. But there is less novelty here than the author seems to imply; colleges and universities have always had their "benchmarks" to allow comparison with other peer institutions and internally, and many of those "benchmarks" have focused on quality as well as on financial variables.

Several authors mention the need for sound indicators of financial and institutional (academic) performance. There is little in these books (except for Massy's contribution) on non-financial measures. And Measuring Institutional Performance, neglects important areas of financial measurement in spite of several explicit references to novel financial indicators. Scott's and, even more so, Winston's contributions imply a novelty and uniqueness for their concepts that is not merited.(2) The American Council on Education's (AEC) Annapolis workshops on financial indicators broached the subject during the 1970s, and numerous individuals and organizations had advocated inflation-adjusted accounting for plant and equipment long before that time, and many have done so since then. Well-established universities (no names will be mentioned) opposed the recommended changes stubbornly. Now their new management teams implement what others practiced without fanfare or recognition. Today, especially among independent colleges and universities, there is little opposition to the modernization of financial statements. The Financial Standards Accounting Board (FASB) explicitly welcomes and endorses the publication of aggregate net asset reports(3) and does not stipulate a "required" or even "preferred" format. A recent sampling by this reviewer of college and university financial reports for NACUBO, especially those addressed by presidents to alumni and the general public, suggests that many institutions, public and private, are and have for some time been using approaches similar to and perhaps even more innovative than those recommended by Scott and Winston.

In a similar vein, received financial indicators and ratios used in the Peterson/ AGB and similar survey questionnaires (see Massy) may be the current convention, but many fall short of providing precise information about an institution's financial condition. There is considerable inconsistency between the Scott and Winston recommendations, on the one hand, and many of the indicators listed in the Peterson/ AGB survey instrument, on the other. The traditional revenue contribution (toward expenditures) ratios that are implied in the survey are a case in point. Whereas Scott refers to "revenues used" (pp. 20-23), the survey seems to call attention to the "reported revenues" found in conventional audit reports (pp. 48-49). "Revenues used" in the current period are not necessarily the same thing as "reported revenues," and the respective "revenue contribution ratios" can be quite different. I prefer and would recommend Scott's approach.[4]

Traditional revenue contribution ratios are based on gross revenue reports contained in the annual audit report. For instance, revenues from tuition and fees are recorded as if there were no discounts in the form of unrestricted (and restricted) student aid grants. The latter are reported as "expenditures." A portion of student aid grants derives from a student's room and board budget but is charged to educational operations. To say the least, these practices are rather primitive and paint at best a superficial financial picture. Increasingly, institutions are experimenting with financial reports that get behind this veil of "gross" aggregates. In addition, many higher education financial reports are concentrating on annual gross and net "cashflow" (before and after borrowing) -- which pays the bills -- rather than on revenues -- some of which may never be realized.

Scott's reference to "revenues used," is most appropriate for modern, heavily endowed institutions. What matters there is not current revenues from long-term investments, the conventional indicator, but the actual endowment payout. If one looks only at official year-end audit reports, the "payout" proper must be pieced together, if one can, from information provided here and there in the financial tables. (And this is true for every other major revenue source). The key question is: how much direct net support in the current period are endowments, gifts and grants, government appropriations, and students providing toward operating budgets; how much of this support, if any, comes from prior years' income; and how much of it must come from borrowed funds in the absence of current cashflow? Many of the conventional financial indicators implicit in the Peterson/AGB example must therefore be adapted for greater analytical precision, a fact Scott recognizes. Many financial reports published by colleges and universities have recently begun to address these issues, often in innovative ways.

This criticism should be seen in the proper perspective. My remarks notwithstanding, the two volumes make a helpful contribution to executives and others interested and/or engaged in strategic long-range planning. But -- and this is a big "but" -- you must have the right kinds of information on which to base your plans!

Notes

(1) Frances, C. Strategic Decision Making: Key Questions and Indicators for Trustees. Washington , D.C. : Association of Governing Boards, 1987.

(2) For three examples of earlier efforts, in chronological order, please see the following: Wynn, G. R. "Analyzing the Financial Health of Small Colleges: The Importance of the Balance Sheet." Montreal : Association of Institutional Research, Annual Meeting, 9 May 1977. Jenny, H. H. The Consolidated Net Worth: Recommendation of a Model. Wooster , Ohio : The College of Wooster , 1978. Presented at a National Center for Educational Statistics Workshop, Washington , D.C. , 1978. Jenny, H. H. HangGliding or Looking for an Updraft: A Study of College and University Finance in the 1980s -- The Capital Margin. Wooster , Ohio : The College of Wooster and John Minter Associates; An Exxon Education Foundation sponsored Study, 1981. The "Preface," signed by four major higher education associations (ACE, NACUBO, AGB, and APPA) stated that this study would help shape the research agenda for financial analysis in the 1980s (p. v).

(3) Statement of Financial Accounting Standards No. 117, Financial Statements of Non-Profit Organizations. Norwalk , Conn. : Financial Accounting Standards Board, June 1993 (see especially pp. 31ff).

(4) Jenny, H. H. Managerial Financial Reporting. Washington , D.C. : National Association of College and University Business Officers, 1993. (See especially, "The Chief Executive's Annual Financial Report," pp. 33-54, and "Supplementary and Modified Financial Ratios" pp. 221-48).

Hans H. Jenny is Professor Emeritus of the College of Wooster and of Chapman University .

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