Trusteeship - May/June 2020 - 14

COLLEGES AT A CROSSROADS: CLOSURES AND MERGERS

yses using public and some private sector data, notes AGB's Beyer.
Baldridge says that her book shows that the characteristics of
students at risk paints a picture of greater disadvantage for students who are African American and those with limited financial
resources. "If those are the schools most likely to close, we have to
ask where will these students go?" Baldridge asks.
Beyer says that many institutions, particularly private, not-forprofits, are weathering the current financial storm by underinvesting, a strategy that ultimately renders them uncompetitive and/or
unviable.
A good starting point for an institution is to perform a "quality
of earnings" analysis on the current operating budget, Beyer says.
The quality of earnings exercise-which can be accomplished over
a 30-day period of review-will quantify an institution's prosperity
gap, which is the distance between current financial performance
and a prosperous future. This
financial modeling exercise
When to Pursue Mergers
allows an institution to add
There has been a proliferaback expenses in areas where
tion of books and consultants
Institutions looking for a long-term partner
underinvestment is present
to help higher education
(such as new programming,
institutions and their leaders
usually start the process late in their life cycle
technology, people, marketing,
determine just how seriously
and thus have little to offer another institution,
support services, headcount
challenged their institutions are
whereas, if they had started 18 months earlier,
deficiencies, etc.). The output is
and evaluate options.
they
would
have
been
in
a
much
better
the quantification of additional
Baldridge's book, The College
annual operating margin necStress Test, contains analyses of
environment.
essary to fully invest in critical
market trends and a set of forareas.
mulas that boards, executives,
"I calculate their prosperity gap by reviewing under-investment
trustees, and institutions' quantitative staff can perform to deterin areas such as technology, staff wages, product development,
mine just how challenged their institutions are.
marketing, student success," Beyer says. "This leads to the quantifi"We've given a step-by-step methodology that allows schools to
calculate the scores we used in our market analyses for themselves," cation of annual investment and then revenue growth requirement.
I have not seen a prosperity gap that requires less than $10 million
says Baldridge, who also consults on strategic decision making.
of investment per year. The prosperity gap helps to tell you if an
"Based on the findings we report, they can get a sense of where
institution has a 20-mile journey or a 2,000-mile journey to prosthey are in the larger distribution. Our job was not to predict what
any particular institution's likelihood of closure is. Schools can take perity. From there the board can determine if a build, buy, merge,
or affiliate mode makes sense. This sets the context for the board
our methodology as a starting point and take into account factors
to examine its options."
important for their particular institution and include them. EveryBeyer says that strategic affiliations are vastly different from
thing an institution needs to run the model is in the book."
mergers. A private affiliation may make sense when higher educa"Most institutions should already have someone in house who
tion institutions have three to five years of financial runway from
can run the analysis, likely the person who generates the IPEDS
problems, but not if an institution is in the late stages of its life
data," says Baldridge, who was also provost at Middlebury when
cycle.
it acquired the Monterey (now Middlebury) Institute of InternaThe number of students can be a critical marker. "When there
tional Studies. She notes that one key measure for institutions is
are fewer than 1,000 students, it is more difficult to present a susthe retention rate. "The lowest cost student to get is the one you
tainable future," Azziz says, noting his book studied 100 mergers
already have. If you have a retention rate of less than 70 percent,
and featured interviews with 30 higher education leaders. "Some
that means that three of every 10 students you worked so hard to
institutions can continue at that enrollment level and be strong,
enroll are leaving within a year."
Third-party financial analysts also typically perform similar anal- but for the vast majority that is difficult."
Georgia State administration knows. If, after four weeks, they identify a student who is having problems, there will be outreach to the
student. Georgia State is remarkable because there are no large disparities between races and socioeconomic status. And the merger
cost savings allowed us to apply that to Perimeter College students
and to hire additional advisers to support that."
While planning for potential mergers ideally is part of general
planning, it sometimes takes new leadership to implement change.
"Former Chancellor Hank Huckaby was a new chancellor who
looked around and recognized that the state looked differently and
that there was an opportunity to improve the system through university consolidations," Fuchko says, noting the consolidation also
followed reduced state funding following the 2008 recession. "But
we did it because we wanted to better serve students and be good
stewards of the state's resources; not because we had to."

14 TRUSTEESHIP MAY. JUN. 2020

Trusteeship - May/June 2020

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