Benchmarking in Higher Education Should Take the Long View
At six months old, my daughter is in the 95th percentile for height. If I were to focus too much on this fact, I would probably call to reserve her a spot in the WNBA. But I know that her height in infancy is not a solid predictor of where she will be at 16. I will be able to make a better judgment over time, so I’m not buying season tickets just yet.
Benchmarking for higher education institutions is very similar. To be effective, it must compare meaningful categories of information over time, and lead to action based on careful analysis.
Benchmarking in higher education
In a sector where funders want to know that their hard-earned dollars are going to a good organization and that students are getting what they paid for, benchmarking is an essential tool in the strategic planning arsenal. If an institution doesn’t benchmark itself, there is probably an oversight agency that will do it for them.
Most institutions look at various ratios throughout the year. A college may be concerned with the number of days of expenses it has in cash, the amount of tuition in collections, or a trend in the number of cohorts in graduate programs. Schools use benchmarking analysis to uncover business processes and strategies, provide a baseline for improvement, and make data-informed decisions. Much of the information used to calculate key ratios with other organizations can be found in Form 990, which is publicly available.
Measuring financial health
A great way of measuring the health of a higher education institution is to look at a combination of critical indicators over a period of time and compare them with other colleges. For example, a college may want to look at the number of months of estimated, unrestricted liquid net assets. Here is how the data might look.
|Months in Reserve|
The data can usually be visualized graphically to better illustrate the relationships between years.
If the institution had looked at the numbers for 2011 alone, it may have concluded that its reserves were lacking compared to its peers. However, when looking at the data over a three-year period, there is a trend that may indicate a rise in unrestricted reserves.
Simplifying the complex
Higher education institutions are facing increasing pressure to contain costs while remaining on the cutting edge of service offerings. Administrative response to these pressures should be based on the school’s unique circumstances, but more effective decision making often results from a comparison of facts and figures from similar institutions.
In 2013, Forbes graded institutions across the United States. The grades were assigned by calculating a number of ratios, including four that are known as the composite financial index: primary reserve, viability, return on net assets, and net operating revenues. When calculating the index, the ratios were weighted to come up with the complete score. Each ratio was measured on a scale of - 4 to 10. The great thing about this calculation is that it is a holistic view of the institution and can easily be compared to others.
The primary reserve and viability ratios in the composite financial index are balance sheet numbers, while the net assets and net operating revenues ratios are from income statements. The analysis is meant to be reviewed over a period of three to five years. If a calculation was done after 2008, most institutions would have seen a terrible result due to the economy and investment results. This is where a long-term analysis and comparison to other organizations is critical.
Benchmarking is much more exciting when you can look at a picture to interpret the data. The graphic below illustrates the kind of image you might get if an institution calculated its composite financial index for three years and compared it to the industry threshold of three for each of the ratios.
This institution has maintained a strong balance sheet, which you can see on the north and south axis. It has increased the value of these ratios over the three years that were reviewed and maintained values above the industry threshold. The net operating revenues ratio on the right collapsed over the same period. In this example, the institution may want to look at its programs to see if changes are needed to make them sustainable.
Make it meaningful and consistent
Faulty or inconsistent benchmarking results are worse than no results at all. In fact, bad numbers can actually be harmful and lead to poor planning and decision making. Here are a few tips to get the most from the exercise.
- Pick key ratios and critical indicators that make sense for your institution
- Choose more than two indicators but fewer than 10
- Measure at a specific point in time and over a period of time
- Benchmark against carefully selected peers
- Report fully, regardless of the results
- Present data to stakeholders in a clear but interesting manner
In case you were wondering, my daughter’s head circumference, weight, and weight-to-height ratios are average. So it’s OK if I don’t have the next great basketball star. Maybe she’ll play hockey instead.