Gray Associates CEO Robert Atkins was a presenter at NACUBO 2018, the annual meeting of the National Association of College and University Business Officers. He and co-panelist Karen Whitney, Chief Financial Officer of Northcentral University in San Diego, discussed “Using Financial and Market Data to Decide Which Programs to Start, Stop, Sustain, or Grow.”
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AUDIO START: [0:00.0]
Bob: Welcome to all of you, thank you so much for joining us this morning. We’ll be talking about program profitability and market analysis and how to use that to inform decisions, both about your current programs, as well as about new programs you may wish to start. This morning I’m lucky to have Karen with me, to talk what she did with work we’ve done and how she used it in order to inform their rollout decision. Karen
Karen: Good morning, everyone. Just to give you a little background about myself. I spent entire career in the service industry, I started off in public accounting, I have my CPA license and then I moved into hospitality, then real estate and then education and for the last five years I’ve been the CFO of Northcentral University, actually, my anniversary is on this Sunday, so you can wish me happy fives on Sunday. Just a few tidbits about Northcentral University and we’ll be talking more about my institution coming forward, we are all online, all graduate, we’re WASC credited and we’re headquartered in San Diego California. Our model is one on one, so one teacher to one student, that’s plays some interesting roles in program profitability when you hear me talk about it going forward.
Bob: Thank you very much, Karen. So, as we look at this, there are three broad topics that we think about when you’re considering program sustainability. I think that’s probably a topic many of you deal with. Certainly, in our experience it’s becoming more important with each passing day. As people begin to realize they’ve got to address enrollment issues, typically that’s not because they have too much of it but too little and also try to look at costs issues and find programs that they think are ready to sunset. But, economics and program markets are just two parts of the overall equations. The other part is in fact, you’re academic mission and the academic integrity of those programs. As we go forward today, we’ll focus on program economics in particular. We’ll provide a little bit of insight on how to analysis programs markets. We are not going to address the academic portion, not because it’s not important, it just isn’t the focus of today’s presentation but it is certainly a coequal with any of these others if not more important in fact. Most of you also have that pretty well under control.
A little but of background on me and on Gray, so you now why it is we’re talking about this. I’m a consultant forever after coming out of business school. In the last 10 yeas founded Gray and we focussed in on higher education as a speciality. We were doing strategy work initially and that strategy work kept having a theme, what program should we offer. The same reasons, can we grow by adding in some in particular? Are there any we need prune? Do we have ones that we already offer that could be more successful them they are? And, we were doing that all by hand of course in Excel and one day we decided that was just really too painful, when we had a client with 20 campuses and 40 programs. Excel was melting and the computers were overheating and it crashed and so we decided that was not the greatest way to do it. We actually built a system for ourselves and then subsequently have a lot of work with different clients on assessing their overall program portfolio.
One thing we’ll talk about, as we talk to people a little before the session, there’s an interest in sort of how to handle the politics? I don’t have a lot of charts on that but as we go through, I can talk through a methodology that we use that helps to deal with that. We’re happy to answer questions on that and as I say, we’ll talk about it a little, more or less chart free but it doesn’t really need charts to explain it anyway. That’s a little bit of background on us.
Program and Market Economics
In the last two years we’ve probably looked at 50 program portfolios for colleges of all sizes across the country and we facilitate sessions where the senior academic and institutional leadership get together and make decisions about what programs to stop, start, sustain or grow. The new topic in that is program economics but you need both. If you understand the market opportunity, that tells you whether students want to talk this program, whether employers have jobs for graduates, what students will get paid in they go into those jobs and who’s your competition? Is that field already saturated? That in turn flows over to your economic understanding, to say, “Well, if I can have students, then I can probably have some financial result that I like and I need to look at enrollment, costs and contribution out of that program, so I can get a sense of whether it’s going to make money or not.”
Now, making money isn’t what we’re all here for but most of us have a budget and it hasn’t gotten better in the last five years in most schools that I talked. You’ve got real financial constraints you need to address. The economic analysis is intended to help you understand which programs are contributing to your financial integrity and subsidizing other programs, which is fine. There are many programs you may choose to offer that are important to your mission, that may not be profitable but you need to have enough that are, to help flow the funds over so that you can pay for those other programs. That’s the concept here, we’re not arguing that you should all turn into for-profits or something like, it’s just obviously you need to know more or less what the economics are of your program, so you can make sure it’s all in balance. Once you understand that, you can really evaluation the potential of both your potential new programs and your current program portfolio. Karen will talk to how you use. Current information about current programs and markets to launch a new program and we’ll touch a little bit on how you can use it to assess your current portfolio as well. Before we do that, I thought we’d do a brief exercise so we can have a sense of how detailed to be during the rest of the presentation. I’m going to ask a series of questions, if the answer is ‘yes’ if you could stand for us, that would be great. For all of you in the audience, how many of you have already got a reliable program economic system and are just looking to tune it up? If you’re just looking to tune it up.
Karen: We have two seats.
Bob: Yes, we’ll be talking to you later about speaking opportunities. You’re working on it, how many people here are working on program profitability analysis? Pretty good group. Thank you. How many of you, it’s a glimmer in your eye? You want to know but haven’t started yet? Interesting, we’re at varying stages of maturity. Very few of you have got this sort of under control. We’ve got a lot of you how are working on it and we’re delighted to share our thoughts on it with you. For those of you who are beginners, this is a good place to start, so welcome.
Why Bother with Program Economics?
The question for all you, which is, why bother with program Economics? Before you spend an hour with us, probably a good to get grounded on what we think the value is of understanding this. First, rationalizing and improving your program portfolio is one of the few things you can do as school that both improves your top line and you cross structure. You can add new programs that increase enrollment. You can take existing programs if you understand there’s a bigger opportunity then you’ve gotten to and drive up enrollment in those programs and increase your revenue as a result. On the flip side, when you improve your portfolio, you can also find programs to cut and reduce cost, it’s not fun and frankly it’s not a lot of money but nonetheless, it can help fund growth, that’s the important part of tuning that part of the portfolio. But, as importantly, you can take programs you already offer, that may not be preforming as well as they could financially and do things like rationalize the number of courses offered, the schedule for those courses so that the courses run full and the economics het better. It’s a way that you can address both revenue growth and cost reduction.
Purpose of Program Economics
Is there a significant opportunity to do this? In our view there really is. Let’s start with the good news. On the left-hand side of this chart, what you see is the percentage of program in the United States that have over 99 completions a year. Now, those are completions not students. For a four-year college you’d multiple that number by about six, so that would be 600 students in the program and that sis is four years of school plus some attrition. The good news is that we have about 6% of all our programs that are of that size and they produce 45% of all completions in the US, are produced by 6% of programs. The upside here, if you can find one new program like that, it can have a very material impact on your enrollment and your tuition revenue.
The other side of that coin is not quite as pretty. We’ve got some 48% of programs that produce a whooping 7% of our graduates and have less then 10 completions each. There is a lot of cost imbedded in teaching very small programs to a handful of students.
Now, if we can take some of that money on the right-hand side and redirect to the left, there’s a real opportunity here to make a difference to the economics of your institution.
Has this ever worked? Karen will talk about this in more depth but in our work with them, we helped them assess markets, look at the potential economics of new programs and they launched 10 programs about three years ago and a whole bunch since actually. Those 10 programs alone, are now producing over 500 students at their institution. For them, it’s a very material uptake in enrollment out of a handful of good program choice. The value of having better data, understanding the market and understanding the economics of your programs is really quite significant.
What is a Program?
We’ve gone this far without actually what is a program? It may seem obvious but before we go into the economics it’s probably worth pausing and saying, what do you we really mean? A program is not a department. It’s obviously not a course. Most programs cut across departments and students have been enrolled in those programs are taking their gen eds and other degree requirements actually outside of the department for a good chunk of their education. When you go to do this, we believe a program is the sum of the courses taken by the students enrolled in that major, regardless of which school those courses occurred in. Does that make sense? I think this makes a different from RCM which many of you may use, in the sense that it’s a cut across metric. By the way, it doesn’t mean RCM is bad, I think these are mutually compatible systems, they just shed a slightly different light the equation.
Very distinct financial entities, I mention they cut across. You’ll find that the revenue for student credit hour varies significantly across programs and you’ll also find that the cost per student hour varies significantly across programs.
Now, before I go much further, let’s do some obvious arithmetic here. What is a student credit hour? That is the number of credit hours in a course times the number of students in the course. We like the metric because it’s a lowest common denominator that can get everything on a parity basis if you will, you make comparisons across the institution. What happens, often you’ll find is courses that look inexpensive to say the professor doesn’t cost much or look expensive because the professor does cost a lot, when you adjust for student credit hours, you may find you get a very different answer about what it costs you to teach each individual student and deliver that credit hour.
Distinct Financial Entities
What we do is add up revenues and cost by student credit hour and then carry that forward to drive the program economics. Let’s talk about that in a little more dept. What I’m going to do here is share a case study with you from a client our ours, a small community college. They happen to offer a nursing program and the data has all be disguised but it’s directionally correct. First thing is, about 4% of all the credit hours in their nursing program come from courses outside the department. As you would expect, the lion share of courses are within the department. Now, when I looked at this I was like, “Well, do we really need to bother to calculate the financials for 4% of the course?” And what I found when we started to dig into it, is that actually it was worth while because the cost per credit hour is substantially different for the non-departmental courses and the departmental course.
Now, before I go any further I should probably tell you, the hypothesis I walked into this case study with. Number one, what clients had always told me is, nursing is a very expensive program to run. Number two, nursing courses are capped by the regulator, the creditor more specifically. In a clinical course, you’re often limited to eight students per instructor. In non-clinical course many of them carry a limit of 14 and others it’s not governed. So, I was looking at something where you have expensive instructors, limited class size, labs, this is going to be a money loser. I’m going to have high cost per student on the student credit hour and I’m going to have relatively low or normal revenue.
As you can see here, the premise that we’re going to have high cost per student credit hour wasn’t quite right. The cost for our non-departmental program is about 40% higher then the cost of the departmental programs for nursing on a student credit hour basis.
QUESTION: What cost did you figure [inaudible - 00:14:16] cost?
This is direct instructional costs and we’ll come back to that. So, this the cost of the instructor, their wages and benefits. We’ll talk a little bit about why we don’t do allocations in just a moment. We will in the future. I think it’s not the right metric when you’re looking at program decisions.
But the first premise, the basic understanding of what cost is likely to be on a per credit hour basis is not what I expected.
Karen: Can I also add Bob, going back to that pervious slide for a second. As some of you are starting off in this program costing journey, we’re going to take you through the entire process but there are insights you can get at every step in the process. Just completing the first slide, gives you some new insights and it can give you things that you can go and do differently back in your schools by just completing one step. For example, you look at the psychology 100 program, that is the highest cost class. Well, then you can start asking the questions why? Is it the numerator, the cost of the faculty? Is it the denominator, how many students are in that class? Let’s say it’s denominator, how many students are in that class, can you work on class size? Can you offer it less frequently? Can you group it with another class? Can you have a substitute course instead of students having to take that? There’s value in every step of this process and here’s already where you can reach some value in just completing the very first step.
Bob: I look at that as a community college, PSY is a program all sorts of people would like to take and 100 is going to be your interim course. You open that up online and I’m not sure how many people in the local community might come in and take that program online and start to drive down that cost per student credit hour, which would then benefit the nursing program and other programs that may have that course involved in their curriculum. I think that’s exactly right Karen, at each step you can learn something and make steady progress to understanding the full equation.
Now, we found cost was different, now we’re going to look at revenue per credit hour. I would have expected this to more or less the same but there’s fees in nursing and it turns our they’re fairly material. The revenue per credit hour for a nursing student is about 30% higher at this school then it is for the average course. We’ve got a significant up take in revenue and we’re running at a lower cost. My inbound expectations about the economics of nursing weren’t quite panning out.
Let’s shift gears and talk a little bit about we’re got a sense that a program is different, it is not a course and you need to understand at this level because it’s going to carry forward a set of numbers that are somewhat unpredictable and not exactly the same counting up courses or looking to departments.
Market Analysis Methodology
You asked about What we do with allocations? What we’re going to talk about today is direct variable instructional expense. We do that for a reason. Most of our work and what we’re talking about here is providing information that will be helpful to the institution in making program specific decisions. Most of those decisions will have no impact on your overhead. You’re not going to shut down your department or probably right size it because you shut down one individual program in that department. For better, for worse, you’re probably not going to change the president’s pay. All those overheads, you’re not probably going to shut a building. Most of those are going to stay the same if you make an individual program change. Now, obviously if you take out 10 programs, that becomes different and you’ll want to look at some of those overheads. But, for this analysis we tend to stay at the direct instructional cross level.
There’s another reason, which is, it’s pretty hard to argue with direct instructional cross. From a pure political standpoint, it’s a relatively simple, unambiguous indicator. Now, you get into overheads and you enter a whole mew realm of politics. I can allocate that cost per student, well why would I allocate HR on a per student basis? I really should allocate that per employee. Do I allocate the president’s salary based on department or do I allocate it based on students? Each one of those will slightly change which programs look good and which don’t and trust me, if your faculty don’t understand how to play that game, they will really quickly. By standing aside from the allocation question, you can take a whole level of politics out of it. The other thing, it’s much easier. There’s a whole set of analytics you’ll have to do in order to do overhead allocations. If you’re starting out here, I would stay away from it and get to that later. This is also for the people in the institution, I think this is a metric that’s easier to understand and so again, it’s a good starting place, not just for you but for the others who will be consuming the information, so they can understand it and they won’t get caught up in a bunch of what end up being fairly arbitrary allocations of costs and costs that are very material.
Question: You established a contribution margin target then, so that they don’t think a dollar profitability isn’t good for the institution.
That’s a very good question. I think you end up at very interesting place once you start looking at this and seeing first of all, most of your program is going to be contribution positive, which is an interesting insight in itself. Just being contribution positive to your point, isn’t sufficient to be an attractive program. Now, if you’re not, it is sufficient to say, “You better have a darn hard look at it.” You’re not excusing on profitable programs. What you’re going to find is most of your programs are profitable. Then, you’re going to find, if it’s like the school we’re looking at and it’s a community college and the revenue per student is relatively low, that actually most of those programs are contribution positive, we’re talking 50%, 60%. Now, if you’re a corporation and you’re 50%, 60% gross margins, most businesses, that’s pretty good, better than Amazon. So, why is your budget so tight? Oddly enough, I think one of the biproducts of this, is it’s going to put a real squeeze on administrative overheads because you’re going to get I think to some degree and appropriate push back that says, “Wait a second.” In the phone business they use to say, “Trouble okay leaving here.” My switch is working, if your calls not going through, the problem is someplace else. Now, I don’t think that’s completely true but I think you’re going to find that when get a clear understanding of what your margins are at the program level, it will force you into a dialog that says, “Why can’t we break even when we’re producing that much margin on a per student basis?”
Karen: I would also add, it’s also helpful when you do all of your programs, you look at them on a contribution margin relative to each other. So, it doesn’t even almost matter in the absolute, what your ultimate profitability is, you’re able to see the winners and losers on that same definition.
Bob: That’s a good point Karen. Actually, in the system that we developed for this, we cortile everything, we color code everything. You can see the programs that are in the bottom 40%, the middle and so forth at a glance just by looking at the color. I’m sure that color scheme will get close scrutiny within an organization because you don’t really one in the red in that structure. That’s why we’re going to talk direct variable economics. It’s not the end of the road but it a great place to start and then you can start layering the other things on as your system matures and actually the organization gets a better understanding of the economics.
How do you student revenue? For many of you it’s going to be pretty obvious but we start with tuition and again, we’re doing everything here on a student credit hour basis. Then we add in general fees, this might be a library fee or something like that that everybody has to pay. Then you’re going to add on the course specific fees for the courses that student actually takes. Then for most schools that are in the publics, you’re going to have some sort of state level subsidy that’s on a per student basis and I would add that as well. But I wouldn’t add state subsidies that are not given out on a per student basis and that’s a big chunk in Massachusetts of the overall grants, you don’t want to include that because if you add more students it won’t go, it’s not impacting us. Then, you’re going to subtract out grants and other discounts and scholarships offered by your institution. Now, what you don’t want to subtract out are grants and scholarships offered by somebody else that show up for you in tuition revenue, that’s still revenue. But, if you’re for example offering athletic scholarships, those should be deducted from your revenue to get to a net revenue per credit hour basis for that individual student. Once you know the net revenue per credit hour, it’s sort of a magic number, you can carry it through across their courses and most of the time that doesn’t change too much by course, except for those course specific fees.
Next you want to look at your instructional costs. Here, what you want to do is take obviously the cost of your professors and adjuncts and such, you got to add back their benefits and then divide by student credit hours. What this gives you, is a way of taking that cost and tagging it to a student within that course. Each student is going to inherit that cost per credit hour for that individual course. Here we just did an illustration of what it looks like and what you would expect and what you mostly see, is as the number of credit hours increased the cost increased with those but at a slightly slower pace.
Audience Question: Do you adjust the salary by the fact the allocations by either academic service or resource?
Bob: Let’s break that into two parts. In our view, if that person is being paid for by grant income to do that work, I would take that out.
Audience Question: What about their community responsibility?
Bob: Now we’re talking about essentially a group of overheads that I would allocate because the cost of having a faculty member in that room includes the cost of the other work they have to do. Does that make sense? We just went through that with a client and initially had it out and then we decided that didn’t make a lot of sense because it’s the cost of having a faculty member, so it is appropriately born by the courses they teach.
Research you get into an interesting and ambiguous space but I think to some extent, depending a little bit on the mix, that’s probably a cost of having a teaching faculty member as well. I think when you get into that level, you may want to have break points and somebody who is doing 60% of their time on research that’s not related directly to what they’re teaching, you may want to extract that but certainly your adjunct should be 100% here and your teaching faulty should be largely, almost entirely allocated. Deans, would probably would not allocate unless they’re teaching.
Then, you just take that cost and run it out to all the students in the course. Does that make sense? So, each student inherits $158 in this case, of cost because they attended that course. Now, part of that also means the cost of that course was shared with other departments, not just nursing because every student who took that health course, is sharing part of that cost. Does that make sense?
Then you add it all up. What we’ve really done here is taken cost and revenue, tied it to students at a per course level and then run those students through to add them up. You can see…
[0:26:45.6 INAUDIBLE AUDIENCE QUESTION]
Bob: In this case we didn’t but I think you should. I would do that on a per student base as an allocator. Chances are you don’t really have great track of it. If you have it by course, great and I would directly do it through the course, otherwise you’re going to end up with some sort of allocation.
Fundamentally, at this point its addition, all be it in a large database. You add up all the costs for each course that student took. All the student credit hour revenue for that student and roll that forward to understand and obviously you can understand the cost and the revenue that’s associated with that and the contribution margin that you’ve got.
This is a bit to trick. When we started this, I thought we were going to end up with course as sort of the back bone of the economic analysis and everything would tie to courses. We found that didn’t work and what you have to do is actually use student as the core metric and then carry students forward with their costs and revenues in order to get the numbers right. Again, does that make sense?
There are other things you can do with this but first I was surprised. Nursing for this particular college is a very profitable program. That makes sense when you step back and say, “Well, there a whole lot of schools that don’t teach anything but nursing and many of them are for profit and they wouldn’t be there if they couldn’t make money at it.” It does make sense at some crude level you can do a cross check and say, “Yeah, that probably is right, it does make money.” Bu certainly, when I talk to colleges, not what they talk about with nursing. It’s often viewed as very expensive, we’ve got labs and so forth, so we were actually surprised. Most of that if you again ask me what my inbound assumption was, I would have said that nursing is going to get subsidized by the nursing portions that make money. Not real. It’s almost the opposite, nursing is making enough money to subsidize other courses in other programs.
Audience Question: Can you just go back one slide? Just a question for clarification. Would every student in health science, HEA200 have a revenue cost of those amounts and a contribution of $361.61 or not?
Bob: Not. Yes, the cost would be the same but the revenue could be all over the place. I think when you get into again, schools where there is substantial grant or scholarship, you could get very different outcomes if a certain type student clusters in a certain set of course. So, I apologize to the athletes in the room but this is an important course at Harvard, where I graduated from, brocks for jocks and of course this is actually back in the stone age when I was in school but there were courses that the athletes took because they could get through them. I don’t know if that happens in your schools but typically they’re going to be clusters of interest that may come with different levels of subsidy to the institution and that’s going to mean your revenue per student in a given course could be quite different and it’s different at the per student level. Does that make sense?
Audience Question: How are you looking at an individual student that might have accommodations that you have to adhere to like hearing impairment that have to have a signer with that student, where do those costs show up? How do you figure that in?
Bob: That’s a very good question. We have not encountered that yet. I don’t know if it would be better to net the cost out of the revenue for that student. I’m not sure exactly how I would handle that to be honest. If anybody’s dealt with that in room, Robert, have you ever run across that?
Robert: No, but I think that’s really an overhead in the sense it’s the university’s responsibility to provide that. They don’t know where that student’s going to go. My campus has spent $80,000 to modify a dorm room to help a student, am I going to charge that out to the program that he or she is going to?
Bob: That makes sense and I should thank Robert, he’s been helping us work on this, he’s a CFO at a Canadian College. He has been helping us work through this.
Audience Question: Just one curious question when I was looking at this example, between students one and two in the same nursing course as student one the disparity of revenue per student because I thought I had this figured out, understanding that student one and two are nursing majors in that course, which specialized program and to your point, you get specialized fees which are likely to drive the course revenue up but then I’m seeing student N is a nursing major in the same course and your revenue at that course has dropped by half.
Bob: Scholarship and it’s the discounts that drive the differences in the per student revenue.
Question: Can you take this [0:32:00 INAUDIBLE]?
Bob: We actually take it again, per student. We’ll take the instructors specific to a section and those costs will go to those students.
Audience Question: You end up with different costs that sum up the [INAUDIBLE -- 0:32:19].
Bob: Yes, absolutely. Now, I’m going to keep moving. We’ll have more time for questions but I don’t want to burn up Karen’s entire presentation time. I’m famous for it, so I should probably resist.
We talked about program economics. Many other analytics you can do once you have the per student credit hour information, one is student lifetime value. It’s essentially the accumulation of the credits and revenues and so forth for each student, to tell you what a nursing student’s worth. Well, why do you care? Let me turn it to Karen to answer that question because they were the first people that really started using this that I was aware of.
Karen: To answer the question of how often do you do this? We really look at across a lifetime of a student. We’re trying to predict out how long is a student going to stay? How many courses are they going to take? Because, at least where I work, the cost to acquire a student, to bring them in, is where your most costly effort happens and then as you’re teaching the students, obviously that costs money but it’s not nearly as much as the upfront costs. For us, we’re always trying to predict how long? What percentage of the students are going to graduate? How many of them are going to go on and get their next degree? Being able to look at it on a full lifetime profitability verses on a monthly or quarterly or semester-based system, is really the decision level that we make because we want to see out 10 years, what is it going to mean to us?
Bob: And that also help to decide how much to spend on marketing and admissions. If you’re spending $7,350 on marketing and admissions, you may as well not have this student financially. You spent their entire lifetime value acquiring them. For those of you in public institutions that may sound like an outlandish number but online, $5,000 to acquire a student is not unusual and you need to cross check and make sure that that actually is worth the money because you maybe using online to subsidize on ground and if you’re spending more then they’re worth to get them, not a good idea. Conversely, if you have a very profitable program, you can spend a little bit more and bring those students. Again, they went through this with their MBA program where when they did this, they realized they were barely break even if not losing money per student and they restructured their marketing costs to bring that into line, actually bring in more higher quality students at a somewhat lower cost.
Other things once you get through the basics, obviously you probably can and should assign your overhead and deal with the allocations, just remember you’re going to have many, many allocators and they’ll vary by the costable you’re after. HR probably goes with staff and admissions should probably go with students as an example.
One thing almost no one takes into account and we’re working on some methods to get at but every student is not incremental. You got a lot cannibalization that goes on, especially when you launch new programs because take me, I’m a history major but if you told me there was no history and I had to take English when I was in college, I probably would have just taken English. You didn’t get me to come to your program just because you had a history program. There are many of these cross substitutions within departments and even across departments. There are also programs that have overflow, nursing’s one of them, medicine’s another, where people come in wanting to be doctors and they hit organic chemistry and they decide they want to do something else. Those programs are actually contributing well beyond the enrollment you’ll see in those programs to the university. That’s something you want to figure out how to take into account.
Finally, you want make this a regular part of program reviews. They’re typically focussed more on the academic content of it but if you think of program sustainability, you not only need sound academic content, you need to have enough students to pay the bills. It should be an integrated part of that, not to replace but to inform it.
Let me turn it over to Karen, she’ll talk to you about how they did this and used it at NCU.
Karen: Well, just to give you a tad more background about Northcentral University, just so you understand the context for our presentation. I mentioned earlier we have about 10,000 students, all online and in graduate programs. Some of you might have seen in the press last week as a national university agreed to acquire Northcentral University. We’re going to accreditation and regulatory reviews and look to be acquired by the end of this year, which is a really exciting opportunity for both parties in terms or increasing the portfolios. Maybe I’ll be back next year and talking about M&A and not just program profitability.
We are for profit currently and I know that has a stigma associated with it but I feel that it’s because of our for-profit capability set, we were able to put together all of this new program rigger and methodology that I hope all of you will benefit from here today. We did a major journey in terms of growth over the last few years. To just give you a sense of size, in 2015 we have 22 programs in three schools, your typical ones, business, education, social and behavioral sciences. We through this new program journey and we have in the last three years added two new schools and over 30 programs. We had to do a lot of rigger because adding programs is not cheap and so you have to figure out what are you costs? Are these good ideas? So, what we’re going to talk through is the methodology we followed.
Since all of us are practitioners here, I wanted to give you a step by step process that we followed to help you as you go out and do this yourselves. We’re going to discuss the context. Who are the parties and the process that you need to have in there? Then we look at the market opportunity, this is as you’re trying to decide new programs, what market should you go after? Then you go through the creating analysis. This is where you take the ideas from the market side, plus all the program profitability that Bob just discussed and put it together. Then you make you decisions and then you’re constantly looking at, how did your results turn out? What can you do to improve?
This process took us months to develop and we’re constantly refining. There’s two caveats for each of you here in the room as you think about this. First of all, I want to show you our process but each institution needs to make the process their own because you have your own politics, your own reasons and so this is just what worked for us and we’re always looking to improve our own processes as well. Secondly, the numbers in the upcoming slides are a lessertive, so don’t spend the time trying to say, “Okay, the numbers from slide one did equal the numbers from slide two.” We’re just trying to show the theme of how to go about this.
Who were the key people involved? The finance team under me, I’ll say kind of managed the process in terms of the return on investment models but we had significant involvement from our marketing department and our marketing department hired Gray to help us with analysis, as well as our academic teams. Our academic teams also were highly involved in working with our accreditors, both our regional accreditor who’s WASC as well as potential programmatic accreditors to understanding what kind of requirements would these programs need. Then of course, our board had significant interest in all of this because this was going to be a huge investment journey for us and wanted to make sure that we had the rigger in making these decisions.
New Program Development Process
We had a new multi step new program process and I’m not going to walk through every part of the process here today. But, I’m sure all of you have probably encountered situations where you have a faculty member that comes us to you and says, “I want a new program.” And what we did, is we took in insights from our entire academic community, plus insights from the marketplace, to then determine what new programs we wanted to roll out. It was very helpful to have both the market level insights as well as the ground up insights that came from our faculty, our program advisory councils, other alumni, in term of where should we be going?
We turned to Gray, to help us with some of our market analysis because they just had access to a whole sort of industry databases that would have been very expensive for us to acquire and it also was helpful to kind of have their processing power to help us through all of this. Bob, you want to talk them through just quickly what we looked at from a market standpoint.
Bob: We basically looked at four elements. First is student demand and there we keep two or three datasets. We keep multiple datasets because they all stink. It’s an overstatement to get your attention but they all have their issues. We keep bipeds as many of you do and that has our completion data so you can see how big a program is really. How many students are in it at other schools and at the industry at large and your local market. We also keep data on Google search volumes for the top 200 programs in the US at a local level, so you can see how many people are actually searching for that program in your market. The beauty of that, it’s very current because IPED’s is a little stale. Then, we also keep something called Inquires, which come from aggregators and agencies across the web who are recruiting students on behalf of colleges. We have about 70 million of those going back a few years, so that you see who’s actually looking for a program right now in the marketplace by degree level, by location and whether they want it on ground or online. That’s student demand. Obviously important when you’re trying to understand, if we launch this program, how many students will there be? Or if I’m looking at current program, look at it and say, “Well, should it be bigger?” We really maxed out this opportunity in our local market. The next question is, if I brought people into this program or for my current students, are there any jobs out there? Do employers want graduates of this program and if they do, how much are they going to pay them and are they going to be able to repay those student loans? Can I offer this program without being embarrassed at the results my graduates are likely to achieve?” That’s another important component and to some extent, growth and employment tends to drive growth and student volume but it’s not very tightly correlated. It’s not a substitute for understanding student demand itself.
Then we look at BLS. But cautionary note, 85% of BLS forecasts are off by 50% or more. If you believe that’s the bible, it’s a little troublesome. It’s not that shouldn’t look at it. Thank god somebody forecasts this stuff but don’t take it in as god’s truth.
Then we also keep data on job posting from Burning Glass which is much more current when you can see how many jobs there are right now for somebody coming out of this program. It also gives you wage data.
One other thing I should say is, we get in trouble doing this at home, is crosswalks. One of the most tedious subjects you encounter in analytics but a program is not a job. A sip, a classification is not a soc, a standard occupation code. Fundamentally jobs are classified in a different structure then academic programs and you have to go and thread it across. If you take your business degree, every job in management is accessible to that business graduate which is hundreds of occupation codes potentially. Then you have to remember but there are also hundreds of other programs that maybe competing for those same jobs, that have to be cross threaded and de duped. This is not fun. There are 1400 programs and 800 jobs codes that you got match. It makes not a 10% difference in getting it right, it makes a 100-fold difference. You can get this answer totally wrong if you don’t get your crosswalks right. That’s what we do in the background.
Karen: We also looked at strategic fit. Does that type of program work for our model? Then also competitive intensity. I was talking with an individual over here in advance and he telling me about a situation in his school, where it’s a very high student demand program, great employment outcomes but the competitive intensity in his local market is huge. It might not be the right fit for that institution at the current time given the competitive environment. Those are all the different components. We approached this from a new program process but as Bob mentioned earlier, you can also apply this to your current programs. When you go and do the program profitability that Bob just talked about, you’re talking your actual revenue streams. How do you know that you’re maximizing your opportunity? If you’re able to go out and see the marketplace, you have a master’s in accountancy and you have four students enrolled but you look at the student demand for accountancy is gigantic, there’s no competitors in your marketplace, wait, you should have more than four students. What do you do differently to gain a greater market share of that huge marketplace? That’s just an example of how you can use this to look at new programs, as well as to look at your current program structure.
One of the challenges we had when evaluating a program was to know is it good our bad? This goes to the question we had earlier, even about contribution margin. Even though your contribution margin is high, is it good enough? The way we solved for that, is we looked at the proposed program verses a benchmark. The benchmark is a program we had in our current portfolio and we knew the economics of that program. When you’re comparing your proposed program verses the benchmark, you’re able to get some pluses and minuses verses what you already know. When you look at this in terms of the proposed program and this program we ultimately did launch and you’re going to see some of the results coming out. Some of the things that were very attractive about this proposed program, when you look at the market insights, for use was, a small number of competitors, 18 competitors.
Bob: Nationwide, right Karen?
Karen: Nationwide. Even though it’s a relatively small program, it had good job growth and good wages. Obviously, you care about that for what your student is going to incur.
That’s at a high level, when you dig into some more, you’re able to look at employment at a greater level of detail. Employment overall for this category was 0.9% growth. However, the program we were looking was a master’s program. The master’s growth is 10%, double digits, so that changed our thought process to make it an even more attractive program because we wanted to go into the master’s space. Then also, we have doctoral programs, we don’t have a doctoral program in this area yet but, looking at the size of the doctoral programs could also mean that we ultimately extend our portfolio up.
Then focusing again on competitors. I mentioned the bad word, we’re for profit, so you look at the proprietary sector and the proprietary sector, which is your bottom blue line here, isn’t big in this space, that means that we weren’t going probably encounter a lot of for profit competition, so that made the program more attracted to it and it’s also a growing problem which shows there’s probably growth in this overall industry.
Then looking at competitors, so digging into even more, is there a strong, competitive intensity or not for this program? The green line on this is the one for profit. All the rest are public or not for profits. You’ll notice that there isn’t massive competitive intensity for this program, that made it seem like a place that we would be good to enter into.
Once we completed our market analysis and went through in the entire process with our academic teams on what are the programs we want to go after, we then had to turn into analysis.
Question: You only considered competitors to be private or for-profit entities, and so why would that be?
Karen: The question was, is why were exclusively only looking at for profits in terms of competition in making our decisions? We do survey of what we call our cancel. It’s students who apply but decide to never come to our university and we look to see where they went. Essentially the majority of students that never come to us, all go to for profits. There is maybe about 10% of our entire applicants that went to not for profits and essentially the counts are like -- the maximum number to any one place was like five students and so we look at who our current competitors, we’re pretty much focussed on that area. That doesn’t apply -- other people might have different situations in their specific schools.
Once you decide what your program is, you have to then go and do your program analysis. I’m going to now transition, how do you put the numbers into the spreadsheet.
Calculating New Students
The first thing was, how do you calculate the number of students? We’ve been talking all about completions, which is graduates at the industry level. Well, then you have to say, “How many are mine going to be?” We took our market share percentage, our expected market share for that type of program, to translate industry competition into Northcentral University competition. In this example, we thought our market share was going to 2.75% of the entire market and we would get 265 completions.
Bob: And Karen, that’s about normal share in the programs you offer, is that right?
Karen: At this level. We made different choices on market share, depending on the type of program. Then you say, “How many active students?” Those are students who are in your enrollment model today are we going to have because completions take a while. Then we had a multiplying factor of 240% for this example, to get to the number of active students. An industry completion of 9,600 is equal to 600 active students, is how you get through to the math.
Bob: Does that make sense to everybody.
Karen: That was actually a surprise for us in the process. We were like, “Oh, we have completion, we are done, we have numbers to put in the spreadsheet.” And then we’re like, “No, we don’t. We got to figure out something to do here.” Take it from a lesson learned.
Audience Question: Let me ask you just to make sure I understand this. Essentially, we can target what your completion needs to be based on your competitor but I guess the flip side becomes really what your recruitment is? What sustainability target is. Recruiting, retention and everything else, plus or minus, you need an active base of 700 students give or take.
Karen: Yup, nicely said. I would say our board wasn’t satisfied with just one approach to these figures. So, we did four approaches. Essentially, we did three what I consider top down approaches to estimating the size of programs. One is this market share we just talked about. The other is looking at peer programs and how did they perform and also how did competitors who might have just recently introduced these programs, how did they perform? Those are our top down, more market-based look. We also did a bottoms up process, where we went out to all of our marketing agencies and said, “We’re wanting to introduce a program in the next few months in this area, can you tell us what kind of inquiry volume you can get us?” That was essentially the many number we typically used in our analysis because it was the freshest look from the people who we would be turning to actually generate these students for us. Most of the times they came in pretty close to each other but when they didn’t, we went back and pushed our agency, “Hey, the market place say you should be able to get more, why can’t you?” Or we went back and looked at the market, was there something else we hadn’t considered in our analysis. It was helpful to have both the top down look as well as the bottom up look.
Enrollment and Revenue
Now we’re ready for the revenue side of the model. We’ve talked all about, how do you get to your new student volume but we haven’t talked about timing. My institution, we enroll students evert single week. The students can start every single Monday. But, that doesn’t mean the day you start your program, all of a sudden, you’re at your 636 students. It’s going to take time to build it up. What is the time from the first time you get inquiry and you spend your money, till the time the student actually starts? We had to really think about the timing of how long was it going to take to ramp? As well as, how we are going to price it? Our marketing teams did a really robust, competitive analysis to help us understand what kind of tuition and fees should look for programs. Then our academic community helped us in understanding our graduation rate and attrition assumptions. Since these are new programs, sometimes we had similar programs we could benchmark off it or we had to go with what we can see out there, in terms of some of our competitors and what they’ve done.
Question: How do you protect yourself from not double counting students?
Karen: The question was, how do you protect yourself from not double counting students? Bob made the point earlier about cannibalization and we were very concerned about that in some of our new program. Some of our new programs were in two new schools, so there wouldn’t be really any cannibalization because it’s a whole new vertical for us. Our new schools are health sciences and technology, so there really wasn’t overlap. But in some of our new programs, they were more spinoffs of our current programs and so we were looking at it essentially at that degree level for that area overall, to see what we were going to be able to do. Results have come in that essentially even though were doing some more specializations of degrees, turning them into degrees, we’ve grown the overall category. I think when you look at the market and you’re able to see how large the market is and realize you’re not at the level of the market you could be at, you can say, “It’s not all going to be cannibalization.”
Key Program Expenses
I’m not going to spend a lot time on program expenses because that was -- Bob gave you the framework of how to put that through. I would say, just when you think about new programs, there’s additional expenses to consider. There’s obviously all the expenses associated with program development. The personnel you might have to hire because it might be a whole new area. The curriculum you have to develop. The any of the up-front type of marketing costs or what not to launch new areas. Then, we also looked at how we serve our students and there might be some program specific costs that you have to add in based off of that new area.
ROI Results: How a Program Grows
Put it all together and you have your results. In this example program we did all of our analysis over 10 years, which might seem like a long-time horizon for a master’s program but we wanted to show how investing today can really help us, not just in the next few years but over a long period of time. In this example the expectation for this program in the first year was 30 students in terms of ending enrollment and then growing, at the end of 10 years up to 148 students. The reason why you almost hit a plateau is because you’re adding students but then you’re graduating students. You have that nice ramp at the beginning and then it kind of levels off.
We also looked at this on a contribution margin basis. Back to the question from the room earlier. On a revenue basis, from day one you’re earning revenue but on a contribution margin, our expectation was to lose about $300,000 in the first year of this program. By year four, you’ve caught up on all your investment and are going to be profitable there after on a contribution margin basis.
Approve and Launch
We took this information to our internal governance structures as well as to our board and the board approved this program. So, we launched, what happened? Did it work?
Analyze and Improve Results Post-Launch
This program turned out to be really terrific. We had results in our models by month and we track our results on a monthly basis. This program launched in December of 2016, by the end of April two months ago, we expect to be 36 students, a little past our year one numbers, we’re at 80. This program has really hit it out of the park. This was a program we were worried about cannibalization on and so we probably tampered down our expectations for this program, thinking about the category as a whole. We also look at the results every single month, to see if there’s any kind of anomalies on a monthly basis that we need to be doing something about.
But not every program works as well as you thought it was going to. In this example, a different program, we launched and we got greater then our expected amount of inquiry volume, so we got 1,115 inquiries on this program. At the beginning of our launch we beat our plan but yet the next step in the process, which is turning it into an application, we lost out, we only came in at 60% of the plan. We started digging into why? We were looking at what were our inquiries telling us that they wanted in this program and why weren’t they turning into applicants? Turns out, we had made a choice in developing this program, to not set it up for lice insure. We felt that there was a lot of competitors in the market that had lice insure programs and ours could be differentiated and offer it for non-lice insure. Well, our inquiries were telling us no, we want the lice insure potential in there. We went back with our academic teams, revised the curriculum, added in the lice insure components and the story totally turned around from there and we’re now we’re hitting our new student projections on a monthly basis because now we’re able to react with what the market was telling us.
Bob: Thank you, Karen. To wrap up, as you think about this, I’ll take advantage of Karen’s for profit, for those of you who aren’t, the challenge here is, the market for higher education is changing, it’s changing very rapidly online if it hasn’t already in effect changed. You’re up against very sophisticated actors. Roll in your own, do it at home kind of analytics, you are going to lose. The people that are in this game are very sophisticated. Southern New Hampshire University is spending 100 million dollars a year on marketing. They have rooms like this that run for an entire building, an old mill building, just full of people doing marketing analytics and such. It’s a very sophisticated game out there now and if you don’t have a really good understanding of your markets and you don’t understand your economics, there are people who do and I don’t think that it’s a healthy place to be for you. That’s sort of the down side. I think the upside when you do this work, you’d be surprised how much opportunity you’re going to find. I haven’t been with a school yet of any size, that couldn’t find a program as big as -- probably not as it’s biggest program, it’s always business or nursing, two or three that are just enormous but you look at that next tier and they’re almost programs at the fifth program and down size, that they haven’t offered that they can offer without it being exorbitantly expensive and a reasonable expectation that they can significantly increase the enrollment in their institution.
As I mentioned, there’s almost always that shaggy tag on the back, where there’s some costs that can be cut and you can save some money. If you don’t have the budget to roll out a new program, you can actually create that budget within the finances that you already have as an institution.
I really think there’s a lot of money here at stake, both at risk and also as opportunity if you can take advantage of it. That’s our message. If you can just advance it one more. Welcome you all at our booth. We’re downstairs and booth 544. Anybody who’d like to speak to us and take some time, we actually have a pod, which I believe over in the 400 range, there’s some tables back there. Please come down, we’ll be happy to show you the system. Pete Starit’s in the back of the room. Pete built our program profitability system, you can come down and beat him up. I was going to say, “Good luck with that. He very nearly played in the NHL.” Finally, you can always download this. The charts today are slightly different, I don’t think there’s any material from what you have if you download it from the site. If you’d like the absolute current version, just get in touch, we’ll be happy to give it to you. Let’s take any other questions. I think we’re still good for time, if I’m correct.
The question is, do you all have the data readily available to do this? The answer actual is yeah. It’s a relatively simple set of data requests that dump things out of your student information system and so forth. We’re taking pretty raw data, so it’s not very hard to get at. It’s literally for this student, give me these four fields. That has not been a huge problem. Getting those numbers to cross foot, that’s a problem.
Bob: The question is, are people starting to change their financial aid decisions based on profitability of the program? I would say this isn’t mature enough to know the answer to that yet. But I think what you’re going to find, is people are going to start to look at all sorts of things, differently as they understand program profitability. If I were doing it, I’d be looking upstream at that physiology program, saying, “What are you doing? You’re hurting my profitability over here in nursing because it costs $400 a credit hour to teach physiology, you know, fix it. I think it can change a lot of behaviors, you have to make sure it’s productive.
Karen: I didn’t spend a lot time on the expense side of the return on invest analysis, but what we did is we took the drivers from our program profitability work, our drivers are, how much does it cost for a library? How much does it cost for financial aid? How much does it cost academic advising? All of those types of support structures and those are added into the cost structure. Sometimes the academic teams came back and said, “The normal library cost isn’t good enough because this program requires all these new databases, it needs a whole new specialized librarian.” You can’t just put in the extra few dollars per student, you have to put in an entire body. Based off of the type of program we changed the cost economics accordingly.
Bob: General comment too. People at the beginning were talking to us a little bit about politics. I think there’s an important aspect to your question which is, do you call it political or you can just call it sensible. If you don’t have the people who are involved in those programs, actively involved in these decisions, if somehow somebody decides at the administrative level they’re going to make program decisions, many bad things happen. One of which might be that you don’t in fact understand what’s required to launch, so you put a bunch of bad numbers in a financial model and you forget that nursing needs four specific databases in order to run a nursing program and get accredited. A well-run process, is a very participant process. I think many of you would be concerned, how do I roll out program profitability? I think the first thing is to roll out in a process that’s about making decisions, it’s not for fun, the decisions are program decision. What we’ve found is that if you do that in a workshop environment, with the senior academics and the seniors administrators, it works really well. You set the premise that everybody’s coming and they’re acting as steward of the institution, not just a keeper of their own department. If you do that, people actually step up to that challenge. We do this quite often now to my surprise in schools that are heavily unionized. It is not a problem, they’ve cut programs. We were in one where we were specifically not to even bring up what we call stop, cutting programs and the faculty came back and recommended 10 programs to cut on their own. I think if you set the standard, you bring the data and explain to people how to use it, you’d be surprised what you can get your institution to do and you can take the decision-making process I think is quite lengthily in most schools and fairly contentious and really bring it down into a relatively civilized discussion. What I wouldn’t recommend is as analysists, recommending programs to the institution, you’ve got to let that come out organically. You start pushing this top down, we use to this right, we’d come in and we’d recommend programs based on our analysis. I have body parts left over the United States to prove that. Not what you want to do, this has to be an organic effort and people have to be involved. Really, in fairness, not just for political reasons, every time we do one of these workshops, we learn something new about program or market that we have no way of knowing and you need that knowledge in the room, you need your people’s judgement to make good decisions with this. But, you can give them better information to make those decisions.
Karen: We had a really fun day with Bob and his team. We had our entire academic leadership and administrative leadership together. It was really empowering kind of day. One, you’re working collaboratively, I was enjoying the data. We were able to get through a lot of work and come up with some really results in a very short period of time. I highly recommend the workshop.
Karen: Yeah, we did all of our work on a contribution margin basis. It was specific to that program. So, to the question earlier, it would include what extra program specific costs we would expect to have but it didn’t include overhead, like having to add a dean because you’re adding a new school.
Karen: Yes, to both. The question was, is did we have the right resources to build programs? We had a core size instructional design team but given all of the growth that we were going to do, our current teams couldn’t handle the workload and so we added capacity to the teams to be able to support it. Hired more people.
Bob: We’re pretty much at the end of our time. We’d be delighted to take more questions if you want to come up or stop by our booth but I don’t want to make you run late to your next session. Thank you, very much.
Karen: Thank you.
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