Performing Financial Assessments of Programs / Departments

One of the areas where a good deal of conversation has occurred of late is on the topic of program evaluation.  Specifically, leaders are wanting to understand how to review a program financially to determine whether it should be shuttered, maintained or invested in.  While there are no generally accepted mechanisms used to numerically and financially evaluate a program or department, let me wade into the conversation with a couple of ideas, recognizing that this could be the most controversial exercise any leader undertakes.

I start with the assumption that few, if any, fixed or non-related costs will disappear if a program is eliminated.  That is, the cost of buildings and various offices scattered about campus will continue at the same level with or without the program.  This is an important assumption because, too often, a program is burdened with the allocation of ALL the costs of the institution, even though non-direct costs will not go away if the program does.  I am thus looking at the direct financial contribution that is received from students either from: 1. taking courses from the department or, 2. from declaring a major.  We’ll start by considering a specific course.

1.    Identifying the marginal contribution for a specific course

Beginning with the revenue side, it is important to identify the net contribution per student that is gleaned.  Ideally, your institution’s administrative system is able to calculate net tuition revenue for each student, based on the hours they are taking and then apply those net tuition revenues to individual courses. Recognizing that this might not be a feature of your ERP system, you may want to use discount rate by class to determine how much net tuition revenue is generated per student. As you may have seen in my other postings and from a review of my comprehensive forecast, I am a proponent of discount by class.

a.  Calculating Gross tuition for the course

Begin with the flat rate for tuition and divide it by the average number of credits taken per year.  For most institutions, this is something less than the 31 semester hours that students need to take in order to progress toward a four year graduation.  I use 30 as a round number but the average course load is probably available for your institution.  In the example below, if your tuition rate is $22,500 per year, dividing that by 30 yields an effective rate per hour of $750. A four hour course thus generates $3,000 in gross tuition per student.  Of course, we all understand that few pay full price.

b. Factoring in tuition discounts

You then set up a grid with the average discount rate by class (freshman through senior) and enter the number of students who are taking the course for each class.  Let’s presume we are looking at an upper level course that has 2 sophomores, 7 juniors and 4 seniors in it, for a total of 13.  Then, presume that the discount rate is 40% for sophomores, 36% for juniors and 32% for seniors.

c. Faculty cost for the class

Take the faculty salary and benefit cost and divide it by the faculty member’s teaching load.  Teaching load is important because the faculty member may be given load credit for other assignments.  In general, most faculty have contracts to teach 24 semester hours in an academic year.  In that case, the total cost of the faculty member is divided by 24 to reach the net cost per hour taught.  A four hour course is four times that.

d. Departmental cost per class

Divide the budgeted departmental costs by the total annual classes taught by the department.  Presume for sake of ease that the department has two full-time faculty who each teach a 24 hour load, comprised of four hour courses.

e. The result is net tuition revenue (NTR) contribution for this course

Here, then, is the math for this course:

1a. and b. above – gross and net tuition by student classification

Soph              – 2 X $3,000 = $  6,000 – ($2,400) =    $ 3,600 NTR

Juniors           – 7 X $3,000 = $21,000 – ($7.560) =    $13,440

Seniors          – 4 X $3,000 = $12,000 – ($3,840) =    $  8,160

Net Tuition                                                                              $25,200

b. Faculty  – $60,000 + $20,000 = $80,000 / 6 courses =       (12,500)

faculty cost:   salary + benefits  = Tot Comp / load  

c. Departmental (non faculty) cost:  $18,000 / 12 courses =   ( 1,500)

d. Net marginal contribution for this course                            $11,200 

So, what does this tell us?

First of all, the cost per course appears to be $14,000, made up of ratable portions of the faculty cost and departmental direct costs.  With this profile of students generating about $2,000 apiece of net tuition revenue (NTR) per course, at least 7 students would be needed to not lose money.  Of course, this will depend on the student classification and discount rate.

Second, you can take the net contribution and multiply it by the number of courses offered by the institution.  Does the total cover all the other costs that the institution has to cover, beyond faculty salaries and departmental costs?  Chances are that it won’t.  That exercise would indicate whether this department is fully pulling its weight or is insufficient in providing for the overall costs of the institution.  If it does not pull its weight, this does not mean that you close it.  Again, if no indirect costs will be reduced from the closing of the department and the department is marginally contributory (more than covers its direct costs) other factors have to be considered before closing it down.

Nest,  as a further exercise, count only the net revenue from students who are taking this course for major credit.  Ignore minors and those taking it for elective credits.  This will decrement your revenues – maybe by a lot.  You may find that majors, by themselves, are not carrying the cost of faculty or the departmental costs.  The idea here is that students have a much higher propensity to choose an institution for a major level program than for a minor.  It also extracts all of those who are taking a class for general education or elective credit.  These students are also unlikely to choose an institution for those purposes.

This is one approach but is generally the easiest to perform, provided you capture discount rates by class.

2.    Calculating departmental / program revenues apart from individual courses

This may be a more common approach to assigning revenues and costs to a department or program.  It uses some of the methodology seen above but applies it to the net tuition revenues that those who have declared a major in the department or program bring to the institution.

a. Calculating the gross tuition that the institution receives from declared majors

Multiply the number of declared majors by the annual tuition rate for the institution.

b. Factoring in tuition discounts

Create a grid that breaks down declared majors by classification, applying the class-average discount rate to the calculated gross tuition eg. (# of sophomores times gross tuition minus the average discount for sophomores equals net tuition contributed from sophomore declared majors).  The same is done for all classes where there are declared majors.

c. Faculty and departmental costs

These are calculated together, based on budgeted amounts for the department.

d.  Net contribution (deficit) for a department

Net tuition from declared majors minus total departmental costs, including faculty costs.

The math

Presuming the same discount structure above, I will add a 44% discount for Freshmen to the list.  We now have Freshmen at 44%, Sophomores at 40%, Juniors at 36% and Seniors at 32%.  The calculations follow:

2a and b – Net tuition contribution from declared majors

Classification     No.*  Tuition  =     GTR    –  (Discounts)  =   NTR

Freshmen:         2 @ $22,500 = $  45,000 – ($  19,800)  =  $ 25,200

Sophomores:     5 @ $22,500 = $112,500 – ($  45,000)  =  $ 67,500

Juniors:             4 @ $22,500 = $  90,000 – ($  32,400)  =  $  57,600

Seniors:             3 @ $22,500 = $  67,500 – ($  21,600)  =  $  25,900

Total                14 @ $22,500 = $315,000 – ($118,800)  =        $196,200

2c – Departmental cost, including faculty:

Faculty salary and benefits:           2 @ $80,000  =  $160,000

Departmental costs                                                  $  18,000  ($178,000)

Net Departmental Contribution                                                   $  18,200

3. Are we done yet?

No approach to assigning contribution from a program or department is 100% spot on.  And, even if a positive number is the result, it may be so meager that it is worth considering a new program to replace such a small contribution.  I would suggest that the analysis above suggests just that.  A mere 14 declared majors supporting two full-time professors could not possibly be extrapolated across the campus successfully.  It may be that the program is put on watch and strategies developed to enhance it over a period of time.  If those efforts fail, a department with such a small contribution may have to be curtailed.

Some will argue that their program attracts students but that the students fall away as they succumb to the rigors of the discipline.  While this has been demonstrated to be true, it generally applies to larger majors and the resultant calculation of major contribution remains strong, in spite of those who wind up majoring in something else. Rarely does a program attract fifty freshmen and wind up with three seniors, unless it’s a chemistry program with a good deal of sampling going on.

Another argument is that non-declared majors should be added to this list. I counter that major level courses tend to be taken by students in their second through fourth years.  By that time, most have declared a major so that they can have preference in scheduling more popular courses (we can only wish that this is the case at all institutions).  Students also want an advisor in their major and the only way to be assured of that is to declare the major.  For most institutions, holdouts who declare in their junior or senior years are somewhat rare and the subject of campus lore.

Then, there are those who believe that some allowance for teaching general education courses should be made.  Indeed, the first analysis does that, at least before pulling out non-majors. I am not inclined to support the evaluation of a department or program based on numbers in general education classes.  Students rarely, if ever, choose an institution because they can take a specific general education course.  If a specific course is popular, the major will likely be popular as well.

Added to all of this are a number of institutional factors including the complementary nature of one struggling department with another healthy one.  The historic mission of the institution is also at play, as is the interest of major donors in retaining programs that they majored in back in the day. Probably the overriding factor is how truly difficult the times are and what needs to be trimmed in order to remain in business.  Sadly, some institutions are facing that very situation at this time.

In the end, understand that eliminating majors, programs or departments is a defensive strategy.  It is calculated to result in fewer students and the institution must adjust its forecasting to accommodate for that.  This is not a growth strategy unless one program is forfeited in favor of another, more popular one.

At any rate, I wish you well.