Business Transformation Strategies to Manage the COVID-19 Pandemic
SUMMARY: Colleges and universities have to accept that uncertainty will remain for the foreseeable future, highlighting the importance of strategic planning and nimbleness based on consistent and accurate business intelligence.
Author: Kobie Crowder on
COVID-19’s Impact on Higher Education
The COVID-19 pandemic has presented unprecedented challenges over the past year for colleges and universities. The nature of a global impact and disconnected response from federal and state governments has further exacerbated financial and administrative stress and forced campuses to develop independent strategies to deal with the impacts. Those campuses with resources and experience in crisis management quickly moved to develop strategies to withstand the pandemic, consisting of:
- Emergency management and leadership teams
- Working groups for strategic response and communication plans
- Task forces geared to support distinctive community groups
- Relief funds for unavoidable emergency expenses
- Support for community members disproportionately impacted
Budgetary impacts and cash flow shortages have materialized and are poised to adversely impact future budgets and traditional revenue sources. Unavoidable expenses have diverted campus funds to support COVID-19 response efforts and economic activity has slowed on campuses which transitioned to virtual learning. Additionally, vacant campuses mean lower auxiliary revenues and sunk costs due to cancelled programs and events. Liquidity concerns shifted funding from important initiatives, delayed projects, and forced some campuses to enact spending and hiring freezes. This is likely the beginning of greater fiscal challenges ahead with larger cuts forthcoming as state and federal spending adjusts downward based on high unemployment and a partial economic shutdown. The United States and global community should be applauded for the speed at which a vaccine was developed, however viral mutations and lax safety protocols continue to threaten prolonged transmission and global disruption.
New Problems and Exacerbation of Existing Uncertainty
Challenges Ahead for Higher Education
Higher ed has already felt the economic impacts with unexpected expenses and cash flow shortages are likely to continue with anticipated refunds, additional costs of virtual education and service delivery, and the potential for a continued downward decline in fall enrollments. In fact, colleges and universities were already feeling a decline in student enrollment and the change to a remote delivery model prevents student access to campus amenities, events, or facilities which are paid through tuition and fees.
Clarity and strategic planning is needed to prioritize spending and account for reduced revenues. Administrators and boards are reconsidering tuition and fee models and evaluating alternative revenue sources for near-term relief, including quasi-endowments and funds previously classified as restricted.
Further uncertainty surrounds the long-term impact of student behavior as remote learning may follow industry trends of increasing work from home policies and dislocation from more expensive urban areas. For poorer students, the decision to remain home to support struggling families due to high unemployment rates will also contribute to declines in enrollment. Forecasting enrollment and building budgets for future years will be challenging and require ingenuity and flexibility in design.
For institutions that were already financially stressed or operating from a deficit position prior to the pandemic, short-term unanticipated expenses and longer-term enrollment declines will likely threaten their solvency, potentially forcing campus closures and increased merger activity.
Strategies to Tackle New Problems Caused by COVID-19 and Strategic Planning for Sustained Excellence and Continuous Improvement
Innovate to Transform Campus to a Technology Enabled Virtual Community
Students’ needs and expectations are shifting to align with a tailored, personalized experience that breaks from large lecture-based classrooms and blends knowledge transfer with practical experience in a design that best suits individual learning methods. Financial aid and affordability play a major role in their decision to enroll in a university, as do convenience, flexibility, and career outcomes. Incoming students show more sophistication in estimating and evaluating the return on investment (ROI) rather than relying solely on the advice of counselors or other advisors.
Institutions that are not prepared to serve the new needs of “traditional” students face significant challenges meeting their enrollment and retention goals.
Today’s students have mobile platforms to communicate and consume information as they move between work, school, and home. Robust technology platforms can deliver the information, connection, and self-service support they need to feel a part of an institution’s community wherever they are. Students receive notifications in real time on course performance and predictive analytics enable Student Affairs departments to identify students who are struggling and in danger of failure or dropping out.
Institutions have an opportunity to create a student-centric support system both on and off campus through online communities, chat tools, and text reminders. This type of support not only helps students succeed, but it also fuels their sense of belonging and connection to community.
To better support students, institutions are more motivated than ever to embrace digital transformation, reaching students on the channels they prefer.
Higher education institutions are realizing that the only way to keep up with students is through a digital-first strategy. Advanced technologies such as video chat, chatbots, and virtual reality will soon be the norm for staff and students to discuss academics and career advice.
Institutions are looking to technology to foster deeper connections between staff and students, especially for those interactions when a student cannot be on campus to meet in person.
Strategies for Maintaining Financial Profile
Recurrent Liquidity Measurement
While the CARES Act provided much needed fiscal relief to higher education institutions, it was not designed to solve all the fiscal challenges incurred. Additional support is anticipated as the global nature of this crisis and unprecedented speed of economic decline could persist into future years. Permanent changes in human behavior will change spending patterns and shift the economy, despite the commercial release of a vaccine. Some states have already indicated decreases in funding for higher education and the rapid nature of the allocation of federal funds and urgent need to quickly spend, carries risk of mismanagement, fraud, waste, and abuse.
In addition, numerous risk factors of revenue uncertainty, cost volatility, and asymmetric risk such as debt structure, management, legal and regulatory, and response framework, will threaten working capital, reduce cash flows, and create operating stress. As institutions lose parking fees, dining outlet sales, and other auxiliary revenues, they also face unexpected expenses, including partial refunds on fees, room, and board, and the need to scale virtual instruction and administration capability. Working capital is the "lifeblood" of an organization, as it is essential to keeping the organization healthy and viable. To ensure continuity in the short term, some institutions will likely need to rapidly restructure their operations.
Colleges and universities must establish guidelines for liquidity measures and define new benchmarks to better gauge and predict deficiencies in working capital. These include daily measurements of monthly days cash on hand (defined by major rating agency standards), unrestricted cash and short-term investments, quick ratios, and more frequent tracking of operating expenses.
Included in these measurements should be all unrestricted funds, including quasi-endowments and/or funds functioning as endowments that can be reallocated to working capital. Business intelligence and KPI management should be transparent and widely disseminated via dashboard reporting from collaborative platforms such as Tableau or Microsoft’s Power BI (provided as examples).
Leverage Best Practices and Enterprise Reporting Capability
To ensure consistency and capture a holistic view of financial operations, enterprise systems should be designed to capture financial activity from all cost centers. A single source of truth better captures anomalies, savings opportunities, and adherence to policies.
Colleges and universities should align with GASB-based, Statement of revenues, expenses, and changes in net assets (SRECNA) financial statements. The statement presents the results of annual operations in a natural accounting classification, “income statement” format that highlights operating margins and dependency on prior year fund balances. The SRECNA presentation, long in use by private (FASB) institutions, helps public organizations communicate unanticipated revenue shortfalls and overspending to their stakeholders early enough in the fiscal year to reduce expenses accordingly.
In this format, there is no distinction between “recurring” and “non-recurring/one-time” funds, only a single annual operating budget with separate schedules for the consolidated operating units, supported by more detailed schedules for major operating units. Narrative elements discuss prior year and anticipated operational outcomes and may also include statements of efforts to grow external revenues (e.g., sales and service, auxiliary operations, philanthropy, etc.) as well as realize efficiencies and reprioritize funding toward the organization’s highest priorities.
Additional elements of best practices include formal capital plans; multi-year driver-based income statement projections highlighting structural surplus/(deficits) and use of fund balances; and a flexible strategic financial plan that can provide sensitivity analysis on the impact of key drivers on financial performance or more advanced, multivariate, or initiative-based scenarios.
In addition to cash flow, resourcing needs will require increased scrutiny to identify areas of savings or possibly allow for shifting non-core work and functions that can be either deferred or eliminated. Clear definition of resourcing needs of specific activities or projects at an FTE/role level or similar granularity should be conveyed. Include sensitivities that drive variation in results and gain consensus on the likely impact on performance. Reductions in workload, headcount, and complexity can directly impact cash flow and help rationalize existing programs and assets.
Historically low interest rates have exhausted many opportunities to refinance existing debt obligations at lower rates. However, there are other options to restructure debt and push principal payments further out for near term relief.
Balance sheets with long-term obligations with multiple credits should look to consolidate under a general revenue pledge, particularly if a higher rating is achieved, reducing interest costs and administrative overhead.
Additionally, institutions should continue to monitor state and federal legislation for other potential sources of liquidity. Under the CARES Act, for example, smaller colleges and universities may be eligible for loans from the Small Business Administration.
As always, debt affordability and capacity measures should always be considered and measured with established targets to maintain credit ratings and long-term financial profile. These include -
- Debt Burden Ratio: Examines dependence on borrowed funds as a source of financing mission and the relative cost of borrowing to overall expenditures. Shows all financial decisions made by an institution have an impact on its ability to make other choices.
- Debt Service Coverage Ratio: Helpful to examine debt affordability and capacity. Important to interpret together with fixed-variable portfolio allocation.
- Viability Ratio: One of the most basic determinants of clear financial health. The availability of expendable net assets to cover debt should the institution need to settle its obligations as of the balance sheet date.
- Leverage Ratio: Private institutions depend exclusively on own net assets for debt repayment and therefore have relatively higher thresholds. Considering continued pressures on government budgets, public institutions are discovering that a higher threshold provides greater internal operating flexibility and self-reliance.
Endowments are another potential source of funding that institutions may be able to tap to shore up their liquidity. In most cases, endowment funds are not fungible and considered restricted from discretionary or operating expenditures based on donor requirements. Institutions could pursue a legal opinion or waiver that allows for limited borrowing covenants or reclassification of fund restrictions based on extenuating circumstances.
Institutions may also consider reaching out to donors who have made restricted gifts in the past and seeking their permission to release restricted funds to shore up the institution’s operating budget to help deal with the current crisis.
Drawing on endowment funds carries additional risk and should be carefully evaluated as reductions in the corpus, couple with a market downturn in earnings, would negatively impact ratings and future costs of capital. Furthermore, endowment payouts that constitute a significant portion of the operating budget could increase financial risk profile and lead to further operational stress in subsequent years.
Procurement and Supply Chain Management
Supply chain decisions have a direct impact on working capital which directly impacts the financial viability and performance of colleges and universities. This is particularly relevant for colleges and universities with robust research capability. Typically, those that lack adequate working capital will have to borrow funds to meet working capital needs. Conversely, campuses with excess working capital will not experience disruption and possibly fund expansion without increasing borrowings.
Inventory Management (COVID-19 - related)
Colleges and universities are at risk of experiencing supply chain disruptions due to shortages in raw material and component parts. Inventory safety stock parameters will most likely need to be updated to reflect the increased demand and supply-side volatility, which will have the effect of increasing overall inventory levels, if it is possible.
Sustainable savings will most likely require fundamental improvements in end-to-end supply chain inventory visibility, demand planning, inventory and safety stock policies, production planning and scheduling, lead-time compression, network-wide available-to-promise, and SKU (stock keeping unit) rationalization.
Universities will be thinking about securing additional inventory, or strategic stock (i.e., PPE, essential goods, etc.), as a further buffer against the potential impact of a prolonged or much broader supply chain disruption.
From a cash flow perspective, universities may be considering actions to reduce inventories, especially in perishable products, where waste is an important consideration and markets remain difficult to access. Other considerations for quick-wins include the following, although they may be temporary solutions in some cases -
- Judiciously Extend Payables
One way to preserve working capital is to take longer to pay your suppliers. Some companies may unilaterally decide to delay their payments and force the extension on their suppliers, especially when stuck with inventory they cannot deliver into impacted margins. Of course, such an approach is likely to damage your supply relationships. Even worse, it might deprive supply chain partners of the cash they need to maintain their operations, which could lead to late deliveries and quality problems, never mind the added strain to supply relationships. Campuses should work with suppliers to establish an agreement that all parties can live with.
Conversely, colleges and universities may accelerate payables for a critical supplier that is on the brink of failure to preserve the integrity of their supply chain and prevent a critical disruption.
- Manage and Expedite Receivables
Colleges and universities tend to get lax about receivables when the economy is booming, interest rates are relatively low, and cash flow is not a concern. But, as supply chains are affected and managing cash flow becomes more important, it is worth taking a hard look at how your receivables are being managed.
- Ensure a Rigorous Process for Collections
Focus on customer-specific payment performance and identify companies that may be changing their payment practices. Also, get the basics right, such as timely and accurate invoicing. Any errors in your billing process can lead to costly delays in receiving payment.
- Consider Alternate Supply Chain Financing Options
Aggressive techniques such as factoring your receivables, although relatively expensive, may be your best option to improve cash flow quickly. Colleges and universities may also consider working with various purchasers to offer dynamic discounting solutions for those that are able to pay more quickly (e.g., discount terms can be defined in advance, and the purchaser calculates the appropriate discount based on a defined payment schedule).
Scenario Planning Using Machine Learning Techniques
According to recent surveys, the current financial crisis is prompting prospective and returning students to rethink their college plans for the fall. At the same time, history shows that colleges and universities often see enrollment rise during periods of economic distress. Institutions will need to account for both of those possibilities in their financial planning.
These types of scenarios may have many attributes and require a significant amount of data to increase accuracy. Machine Learning offers many powerful applications for modeling complex problems with data and are increasingly used in higher education for targeted analytics including predicting student enrollment, segmenting student populations to facilitate marketing and academic support, forecasting revenues, and sentiment analysis.
Machine Learning improves operations, can automate workflows, and manage processes to attract the right students for admissions and accurately forecast enrollment to optimize capacity. Algorithms such as Support Vector Machines (SVMs) and Principal Component Analysis (PCA) can be used for anomaly detection to prevent fraud and protect student and staff safety both online and offline. Manage facilities and equipment more effectively through ML-powered predictive-maintenance.
Operational efficiencies can be identified based on generic qualifiers whereby Machine Learning techniques (i.e., k-nearest neighbor) can then take the qualifiers and look for specific causes based on input and circumstances.
One likely scenario is that parents will not be able to contribute as much toward their children’s education expenses as they would have before the pandemic. Traditional models used to forecast “melt” for admitted students and retention for returning students are not likely to be as predictive in the current cycle, or for several cycles to come. As a result, institutions will need to repackage financial aid for incoming and returning students and be prepared to alter their aid strategies in real time. They may want to consider offering incoming students more flexible scheduling, staggered starts, or reduced course load requirements to ease the transition for students who want to spend more time with their families, or who need to earn money to support themselves and/or their families.
Of particular concern is the immediate enrollment of students from low-income high schools. According to a new report from the National Student Clearinghouse Research Center, this year 21.7 percent fewer high-school graduates went straight to college compared with 2019. The research provides an early indication on how hard the pandemic hit lower income students entering college right after high school which fell 29.2 percent across all types of institutions, compared with 16.9 percent for graduates of higher-income schools.
Uncertainties about yield and retention rates will likely exacerbate the situation for schools that were already forecast to miss their enrollment targets. Those schools will need to think critically about how to aggressively reduce costs in scenarios that assume marked reductions in enrollment and the need to provide more direct institutional aid.
Even if the current crisis leads to a surge in enrollment for certain institutions, that influx of students may not necessarily put them in a strong financial position. That is because the financial aid that universities will have to provide could exceed the additional revenue received from extra matriculants. These institutions may have to serve larger student bodies with fewer resources.
Universities with large numbers of face-to-face students who are eligible for Pell Grants are most likely to get help from the CARES Act. Universities that depend heavily on tuition, have seen their endowments shrink, and have lower percentages of Pell-eligible students will be especially challenged.
Any institution that anticipates a bump in enrollment needs a plan for how it will scale up student services—without significantly more revenue—to maintain retention and graduation rates.
Forecasting is hard in normal times, and in this environment, it is downright difficult. Even so, you must build out a handful of realistic scenarios and assume a wide range of outcomes. Every organization must review its forecast for sales, expenses and cash flow and retest its assumptions. These scenarios should include modeling cash flow, burn rate and liquidity under multiple scenarios - if revenue declines 20% for the rest of the year; or 30%; or 50%. Model the impact if revenue does not recover swiftly and stays at depressed levels well into 2021.
Scenario Planning Checklist
- Run sensitivity analysis on federal and state funding, tuition, fees, and donor forecast, accounting for multiple downward scenarios. Pay particular attention to the levers that have an outsized impact. Is there one student segment or donor category that has an outsized impact?
- Determine your institution’s stance on future hiring. If there is a hiring freeze, which metric(s) will dictate lifting the freeze? Which positions can be eliminated or replaced with automation capability?
- Analyze procurement spend and strategic sourcing contracts. Negotiate favorable terms for new and existing contracts up for renewal. Reduce spend fragmentation and evaluate ramifications of blanket spending freezes versus targeting specific cost centers.
- Prepare for cyber risks and plan for responses in the event of an attack. Define standard operating procedures and communication protocols to limit damage and increase chances for recovery.
- Have a plan for rapid restructuring if liquidity is in danger of becoming insufficient and identify short-term continuity plans and untapped emergency relief funds. What are the prospects for long-term solvency? What programs should be prioritized? Is there a plan for a merger?
- Examine working capital, payable, receivable and all cash flow related assumptions. Have customers revised their payment terms?
- For many research-intensive institutions, supply chain disruptions have been problematic. Factor into your plans continued interruptions and potentially increased costs, which will require modeling alternative scenarios and associated costs and delays. Where possible, look for second source suppliers, especially in long lead time components.
- Make sure your scenario planning includes building in further risks, including employees getting sick, supply chain interruptions, loyal customers going out of business and even secondary health outbreaks. Your models are only as realistic as your risk assessment.
- Improve the connectivity between databases to leverage data and its analysis; and improve reporting capabilities to optimize assessment tools that will enable the colleges and universities to evaluate existing programs and strategize for future programs.
Scenario Planning Strategic Design Considerations
A discerning outcome of the pandemic has been an increase in cyberattacks as an increase in digital presence has presented more opportunities for cyber criminals to use deceptive and sophisticated methods such as risky domains with coronavirus themes, interactive dashboards showing COVID-19 infection rates, and unofficial emails indicating Economic Impact Payments or CARES Act relief. The result is an increase in phishing and ransomware attacks, with potentially devastating consequences. Campuses should recognize and look for vulnerabilities, apply the latest cybersecurity software, and apply multi-factor authentication across the campus. Regular backup of systems should be performed by IT professionals to establish redundancy and restoration in the case of a ransomware attack.
- Maintain a Proper Balance of Curriculum and Enrollment
Colleges and universities typically shy away from prioritizing academic curriculums based on ROI. However, subsidizing costly programs may no longer be financially feasible if net tuition revenues are insufficient to cover the costs. Alternatively, differential tuition pricing might be achievable for colleges and universities who have demonstrated an ROI based on previous graduates to justify the investment.
Another major challenge colleges and universities face is how to balance their enrollment and net tuition targets. Many offer substantial subsidies for students whose family income falls under a certain threshold. For net tuition models where the subsidy for those students comes from out of state tuition, international students, or students who pay full price, a reduction in enrollment may result in insufficient subsidies to maintain the discounted tuition for needy families. Colleges and universities will need to identify levers on both sides of the balance sheet to address these and other uncertainties.
Even for those institutions that are not in pure survival mode, difficult trade-offs will likely need to be made between mission and financial well-being. In such cases, it is important to communicate with everyone about the minimum amount of net tuition required to stay viable. Based on that number, colleges and universities should assess whether it is it necessary to modify any current enrollment goals and, if so, to help ensure that any adjustments are achievable. They should strive to find a realistic balance between expectations for tuition and enrollment and avoid the temptation to use financial distress as an excuse for setting an unrealistic enrollment number.
In these unprecedented times, colleges and universities may need to modify some core elements of their traditional strategies. Even highly ranked universities are increasing their acceptance rates, reaching further into the applicant pool to hit their enrollment numbers. As universities consider modifying their enrollment goals for financial reasons, they should think carefully about overarching guiding principles that are central to the institution’s mission. Sacrificing achievements in equity and access, for example, could produce long-lasting societal impacts.
- Look to Partner with Other Campuses
Campuses have benefited from innovative models of partnering with other campuses to deliver programs. The shift to virtual classrooms makes the partnerships more feasible and Registrar’s should consider how digital transcripts can be implemented.
If transferring credits is not feasible, campuses can still pursue partnerships for cost sharing arrangements, specifically if virtually delivered curriculums utilize similar materials and vendors. A consortium may be regionally based or linked by other synergies to help foster collaboration.
- Positioning for a Post-COVID-19 Future
While the pandemic has thrust many colleges and universities into a precarious position, it also offers some valuable lessons that they can use to better position themselves for a post–COVID-19 world. The first is that colleges and universities should focus on becoming more data driven. With so many activities taking place online today, it becomes easier to capture data for analysis.
Second, the higher education community has long discussed the need for colleges and universities to enhance their digital operations. The current experience should serve to catalyze that movement, prompting colleges and universities to improve their digital interactions with students and other stakeholders.
Third, more colleges and universities will come to understand the value of diversifying their student populations and academic programs. As a result, more universities may pursue the historically underserved adult learner market and place more emphasis on online learning.
- Reassess Campus Footprint and Facilities Requirements
The primary goal should be to implement an integrated comprehensive data management system to maximize effectiveness and efficiencies in capital program planning, monitoring, assessment, and reporting. A secondary goal is to maximize the opportunities for direct input of data by campuses with review and verification as needed by key stakeholders to reduce duplicative effort and redundancy.
In recent years, campuses have invested heavily in physical infrastructure driven by competition for students and faculty, aging infrastructure, and low cost of capital. Alternative development models increased investor interest in public-private partnerships as more experience and efficiency has led to many successful development projects. Campus Facilities Managers generate a significant quantity of data in the areas of space management; construction budgets and schedules; space allocation and utilization; as well as energy usage and sustainability. Often, this information is collected in disparate databases of varying quality.
A capital data system, integrated with existing corporate/campus systems, would reduce duplication of effort, facilitate automated data population, leverage common data links and information across information systems, and improve quality of data. This will enhance information exchange across the organization and elevate planning and reporting capabilities for capital programs.
Plans include linking integrated data management to finance databases for bond data by project/facility. Such data linking will address and facilitate current significant campus compliance efforts. Future applications may include development of space utilization standards.
There are encouraging signs of reducing the horrible costs of human life with extraordinarily swift breakthroughs in vaccines to combat COVID-19. Ensuring access and equitable distribution of the vaccine is a critical priority for campuses. However, colleges and universities will have to accept the fact that uncertainty will remain for the foreseeable future, highlighting the importance of strategic planning and nimbleness based on consistent and accurate business intelligence.Copyright © 2021, Crowder Strategies, LLC. All Rights Reserved.