Performance Measurement & Assessment Workshop

1. Performance Measurement & Assessment Workshop Michael K. Townsley mtown@dca.net January 13, 2006 Tucson, Arizona

2. Agenda - Morning • 8:30 - 8:45 Welcome and Introduction • 8:45 - 10:00 Financial Drivers • 10:00 - 10:15 Break • 10:15 - 11:15 Selecting Performance Measures &Participant Exercise • 11:15 – 11:30 Myths About Performance Measure • 11:30 - 1:00 Lunch

3. Agenda - Afternoon • Lunch Break from 11:30 to 1 pm. • Afternoon: • 1:00 - 2:15 Performance Indicators & Assessing Outcomes • 2:15 - 2:30 Break • 2:30 – 3:15 Group Exercise – Select Financial Performance Indicators • 3:15 - 4:00 Communicating Results • 4:00 - 4:45 Performance Management & Revisions • 4:45 - 5:00 Wrap-Up & Evaluation

4. Workshop Biographies • Michael K. Townsley • Email: mtown@dca.net ; phone: 302 593-2221 • Dr. Michael K. Townsley is a Professor of Business at Becker College in Worcester, Massachusetts and Senior Consultant at Stevens Strategy. He is the former President of the Pennsylvania Institute of Technology, Senior Vice President for Finance and Administration for Wilmington College. Dr. Townsley holds a Ph.D. from the University of Pennsylvania. His dissertation analyzed the impact of market share on pricing policies. NACUBO published his book The Small College Guide to Financial Health Beating the Odds. They also published - The Financial Toolbox for Colleges and Universities.

5. What Shaped the Financial Condition of Higher Education Since 2000? • Government Support for Higher Education • Stock Market Crash – 2000 to 2001 • Spiking Utility Rates – 2005 • Continuing Angst over FASB/GASB rules • Sarbanes – Oxley • Financial Aid; Savings & Disposable Income of Parents • Demographics and Skills of Undergraduates • Competition • Construction Costs • Internet Delivery of Education • Cost and benefit of athletics

6. Private InstitutionsRevenue & Expenses 1998-2002

7. Private Institutions Net to Revenue-Gains/Losses: 1998-02

8. Private Institutions Net to Revenue - No Gains/Losses 1998-02

9. Private Institutions by Tuition DependencyNet to Revenue 1998-02

10. Private InstitutionsNet Assets 1997-01

11. Public Institutions: Tuition & Fees v. State Appropriations 1980-01

12. Managing Financial Drivers • Key leaders should manage the financial condition of the institution through its financial drivers. • Key leaders must: • Identify the financial drivers of the institution. • Understand how these drivers have shaped and continue to shape the financial condition of the institution. • Recognize the factors that control the financial drivers. • Pinpoint responsibility for managing each driver. • Build plans, policies, and procedures to manage the financial drivers.

13. Financial Drivers • Financial drivers shape the financial condition of an institution. • Financial drivers • Are influenced by external and internal conditions. • Are found at junctions in the financial system governing the flow of funds and at junctions where institutional reserves are held. • Work like switches determining scale and direction of an institution’s financial condition. • Location depends on the institutional type. • Examples include: enrollment, personnel, financial aid, grants, endowments, net income, cash, debt, and net assets.

14. Performance Measures Shaped by Institutional Types Financial conditionsvary by institutional type. Institutional Types • Private: Tuition Driven • Tuition Revenue and Fees >= 60% • Private: Non-Tuition Driven • Tuition Revenue and Fees < 60% • State Institutions • Community Colleges, Flagships, Regional, Others

15. Characteristics of Private Tuition Driven Institutions • Characteristics: • Tuition greater than 60% of revenue • Total student revenue greater than 80% of revenue • Net tuition pressured by financial aid • Enrollment must grow to keep tuition in check • Other income must be stable • Total revenue must grow faster than expenses • Large number of very small colleges • Deficits rare among larger tuition driven institutions • Greater chance of deficits and closure for colleges enrolling less than 500 students

16. Enrollment by Category Yield Rates Tuition Rates Tuition Revenue Unfunded Tuition Discount Net Tuition Unrealized Gains/Losses Instructional Expenses Auxiliary Net Income Net from Student Revenue Sources Compensation Plant Operations Net Income Cash Flow and Receivables Debt – Short and Long Term Net Assets Financial Drivers Identified by Participants Typical Financial Drivers for- Private Tuition Driven Institutions -

17. Characteristics of Private Non-Tuition Driven Institutions • Characteristics: • Gifts, grants, endowment draws, and investment returns provide greatest proportion of income • Substantial endowment funds • Net tuition grows slowly or is static • Net price is less than cost of education • Selective entrance standards • Larger net asset base • Greater chance of deficit for larger institutions

18. Enrollment Yield Rates Endowment Fund Payout Rates Unrealized Gains/Losses Gifts and Grants Indirect Cost Rate Tuition Discount Rate Support and Administrative Expenses Compensation Debt Credit Rating Financial Drivers Identified by Participants Typical Financial Drivers for- Private Non-Tuition Driven Institutions -

19. Characteristics of Public Institutions • Characteristics: • State Appropriations are critical to financial stability and mission • Tuition and Fees grow are substitutes for lost governmental revenue • Unions limit personnel cost flexibility • Net price is less than cost of education • Upper middle and middle income students are moving to public institutions • Significant property holdings

20. Enrollment Yield Rates State Appropriations Gifts and Grants Indirect Cost Rate Auxiliaries Support and Administrative Expenses Compensation Debt Net Assets Credit Rating Financial Drivers Identified by Participants Typical Financial Drivers for- Public Institutions - Typical Financial Drivers for- Private Non-Tuition Driven Institutions -

21. Four Steps to Clarifying State of Financial Drivers • Step #1: What is the financial condition of your institution? • Use CFI (Composite Financial Index) • Use standard financial analytic procedures to measure financial condition. • Use marginal analysis to identify which financial drivers are having the largest changes. (Marginal Change = dollar difference between two years) • Step #2: Sketch the financial flows through the drivers. • Step #3: What internal or external factors have had an impact on the financial drivers?

22. Step #1: Measuring Financial Condition • CFI as tool to measure financial condition • CFI Tool:CFI Worksheet .xls • CFI Scoring Rage:CFI Scoring Range.xls • Standard Analytic Procedures • Annual Trend Analysis - Rates of Change Trends.xls • Ratio Analysis: Annual Ratio Analysis.xls • Marginal Analysis - Marginal Analysis.xls

23. Step #1: Measurement (continued) • Use CFI to find • The general financial condition of the institution • Strengths and weaknesses arising from its four key ratios • Use trend analysis to find • Strengths and weaknesses within the financial structure • Direction and scale of change • Use Ratio Analysis to compare • Performance between two financial drivers • Performance with benchmarks for standard financial ratios • Use Marginal Analysis toidentify • Where new money is generated and how it is used. • If marginal changes fit strategic priorities. • If multi-year marginal changes are balanced or not.

24. Step #2: Sketch the Flow Network through the Financial Drivers • Purpose – Understand the direction, scale, and factors that influence the financial drivers. • Sketch Suggestions: • Identify the critical flows through revenue, expenses and follow through net income, expenses, net income, assets, liabilities, and net assets. • Label the financial drivers. • Identify external factors that determine the source and scale of revenue, expenses, assets, liabilities, and net assets. • List internal policies that affect the flow network.

25. Step #3: What Internal or External Factors Are Shaping the Financial Drivers? • Use an analytic group to identify what is shaping the financial drivers. • Identify sources of data for the internal and external factors. • Create tables showing the data. • Describe conditions in the immediate past that have influenced these internal and external factors. • Describe conditions in the near term that may influence these internal and external factors.

26. Break • Return at 10:15 • Next Session: • Participant Exercise & Performance Measures

27. Group ProjectIdentifying Your Financial Drivers Instructions for Group Exercise 10:15 to 11:30 • Assign small groups – common institutional types. • Identify typical institutional drivers for your type of institution. • What internal or external factors change or distort each financial driver. • At 11 - Report back on group findings on financial drivers.

28. Lunch Break • Lunch Break from 11:30 to 1 pm. • Afternoon: • 1:00 - 2:15 Performance Indicators & Assessing Outcomes • 2:15 - 2:30 Break • 2:30 – 3:15 Group Exercise – Select Financial Performance Indicators • 3:15 - 4:00 Communicating Results • 4:00 - 4:45 Performance Management & Revisions • 4:45 - 5:00 Wrap-Up & Evaluation

29. Key Performance IndicatorsAgenda • What is an effective performance measure? • What is a Key Performance Indicator? • Sample Key Performance Indicators • Key Performance Indicators for Private and Public Institutions. • Benchmarking Key Performance Indicators

30. What Is An Effective Performance Indicator? • Key Performance Indicators1 are: • Related to strategic or operational goals • Nationally available • Readily benchmarked • Subject to trend analysis • Easily Compiled • Meaningful to Board, Key Administrators and the community. (1. NACUBO Accounting Principles Council)

31. What Is a Key Performance Indicator for Finance? • It targets critical financial drivers by tracking • Inputs to the financial system. • Operational performance. • Plant, Investments, and Debt • Financial reserves. • Cost Performance.

32. Key Performance Indicators - Inputs • Market Share = enrollment / competitors enrollment • Selectivity = acceptances / applications1 • Matriculation = admissions / acceptances1 • Enrollment = enrolled in classes / admissions1 • Tuition Discount = financial aid / total tuition & fees1 • Unfunded Discount = unfunded financial aid / total tuition & fees • Net Tuition = net tuition / total tuition & fees1 • Gifts = total gifts / student • Government Funds = total government funds / total revenue 1. Moody Investor Service Ratios

33. Inputs for Public Institutions • State Support Resident Students= state support per resident student / median household income. • Resident Tuition to Income = annual resident tuition rate / median household income.

34. Key Performance Indicators Operational Performance • Compensation Ratio = compensation / total expenses • Revenue Expense Ratio = revenue / expenses • Maintenance Ratio = maintenance of plant / total plant • Net Student Revenue Ratio = (tuition & fees – discount – instruction + auxiliary net) / total revenue • Net Income Ratio = change in unrestricted net assets / total unrestricted income • Net Auxiliary Income Ratio = net income auxiliaries / total income • Net Development Ratio = gifts and grants / development costs • Cash Income Ratio = cash from operating activities / (total income – gains or losses)

35. Key Performance Indicators Plant, Investments, and Debt • Age of Facilities Ratio = accumulated depreciation / depreciation expense. • Deferred Maintenance Ratio = maintenance needs / expendable net assets • Investment Return = total return / investments (long-term) • Viability Ratio = expendable net assets / long term debt • Debt Burden Ratio = debt service / total expenditures • Debt Coverage Ratio = change in net assets / debt service • Debt Covenant Ratios – use any debt ratios listed in debt covenants.

36. Key Performance Measures - Reserves • Primary Reserve Ratio = expendable net assets / total expenses • Return on Net Assets Ratio = change in net assets / total net assets • Composition Ratio = financial assets / physical assets • Capitalization Ratio = net assets / total assets • Total Financial Resources = total net assets less net plant / fte students

37. Key Performance MeasuresCost Performance • Cost per Student Ratios (FTE) • Instruction • Student Services • Academic Services • Institutional Services • Plant Maintenance • Compensation by major categories; ex. Faculty • Unrestricted (general) fund expenditures

38. Selected Performance Measures per NACUBO • Students Inputs & Outputs • High School Ranks • Acceptance Rates • Graduation Rates • Graduate School Admission Test Scores • Instructional and Research Productivity • Student / Faculty Ratios • Graduation with 150% of expected graduation • Attrition Rate • Sponsored or External Grants & Awards / Faculty FTE • Affordable Access = financial aid / fte student • Financial Strength • Endowment Value • Financial Resources per student • Operating Margin • Total Financial Resources to Debt • Capital Expenses and Gifts to Depreciation

39. Benchmarking Financial Performance • Benchmarking Criteria • Data for performance indicator elements must be readily available from external sources. • Data for indicator elements should be consistent with the institutions definition of the indicator. • Comparison groups should have characteristics that are common to the institution. Wide discrepancies in the definition of the group can render the benchmark meaningless. • Benchmarks can reference external or internal standards.

40. Performance Measures Benchmarking Data Sources • Association of Governing Boards - AGB.org • IPEDS - http://nces.ed.gov/ipeds/ • I 990 - http://www.guidestar.org/ • John Minter & Associates - http://www.jma-inc.net/

41. Selected Operating Indicators • Critical Condition Indicators • Net tuition ratio is falling, • Student revenue ratio is falling • Gift contribution ratio is falling • Grants contribution ratio is falling • Other revenue contribution ratio is falling • Total compensation ratio is increasing • Net income ratio is falling coupled with a string of deficits • Cash income ratio is falling coupled with declining value of cash assets

42. Selected Reserve Benchmarks

43. Using CFI To Assess Outcomes • CFI can be used as a tool to deconstruct financial factors critical to the financial condition of the institution. • CFI Tool: CFI Worksheet .xls • CFI Scoring Rage: CFI Scoring Range.xls • Steps to Deconstructing Low CFI Scores • #1: Which ratios are causing the low CFI score? • #2: Which elements in a ratio negatively driving its value? • #3: What internal or external factors are affecting the value of the ratio element?

44. Use CFI Scores to Build Strategy • CFI ratios can be used as levers to change the score. • Steps to using CFI as a lever: • #1 Build a financial model of the institution. • #2 Incorporate CFI into the model. • #3 Select a strategic goal for the CFI score. • #4 Based on the Deconstruction Analysis identify where to target changes. • #5 Test changes with the model and evaluate the CFI score. • #6 Build a strategic plan around changes that attain the CFI score goal.

45. Break and Next Stages of the Workshop • 2:15 – 2: 30 Break • 2:30 – 3:15 Group Exercise • 3:15 - 4:00 Communicating Results • 4:00 - 4:45 Performance Measurement Revisions • 4:45 - 5:00 Wrap-Up & Evaluation

46. Group Exercise Selecting Financial Performance Indicators • Time: 2:30 pm to 3:15 pm. • Assign Groups • Identify Financial Performance Indicators for your institution. • Give the reason for choosing the Indicators • At 3 pm - Report Indicators and reasons back to the Workshop.

47. Communicating Results • Incorporate Performance Indicator with Benchmarks in Dashboards to: • President and presidential cabinet • Board of Trustees • Use Indicators and Benchmarking in Reports to: • President and Board of Trustees • State Agencies • Legislative Committees • Federal Agency Reports • Accrediting Agencies

48. Communicating Results (Part II) • Communicating Results should consider these rules: • Design measures to follow rule of the 3 Cs → clear, concise, and coherent. • Focus on indicatorsthat show • Financial Health • State of Strategic Goals • Debt Covenants • Design reports to • Identify strengths and weaknesses • Suggest strategies to build on strengths are reduce or eliminate weaknesses.

49. Sample Monthly Dashboard Indicators • Monthly Dashboard (compares year-to-date actual to prior year performance and budget goals) • Admitted Students • Enrollment • Class Size • Net Tuition/Tuition • Net Income/Total Revenue • Cash/Total Expenses • Receivables/Tuition • Investments and Returns

50. Dashboard Examples - Internet • http://www.iexecutivedashboard.com/overview.htm • http://www.infommersion.com/Examples/swfs/Banking%20Dashboard.swf • http://www.infommersion.com/Examples/Overview.html • http://infommersion.com/affiliate/offers/freewhitepaper.htm?kbid=1036