Fiscal Retrenchment: Opportunity for Innovation in 4 Steps

There is no greater opportunity for leaders to demonstrate Commitment to the school, than during a time of financial crisis or restructuring. Matthew 6:21 (NASB) reads, “…for where your treasure is, there your heart will be also.” Stakeholders assess the Commitment level of their leaders, and extend trust to those leaders, dependent largely on how leaders direct financial resources. For example, if a leader publicly proclaims that teachers are the highest valued segment within the school, but has not secured a salary increase for them in years, then the leader’s proclamation is insincere and breeds distrust.

Step 1: Show Me Your Checkbook

The management of a couple’s combined income is one of the most telling indicators of a healthy marriage.[1] Therefore, as one of the early exercises in counseling sessions, couples are often asked to bring their checkbook registers or bank statements. Then together they categorize where their money was spent. Through this exercise, the counselor is able to identify where their collective heart is. Much can be learned about a couple, an individual, a business, a government, or a school leader when we see how and where they spend their treasure. Show me your checkbook register, and I will show you where your level of commitment is.

The significance of financial management in relationship to demonstrating Commitment grows in direct proportion to the decreasing amount of funds available to the school. In other words, when a school is in a time of financial challenge, stakeholders watch leaders closer than ever. Leaders who are Optimizers approach times of school economic challenge as opportunities for innovation.

Fiscal retrenchment is typically thought of in relationship to government overspending. It is the inevitable outcome of losing control of finances by continuing to provide social programs and services through debt. Government fiscal retrenchment has only a few options: (1) raise taxes, (2) slash spending, and/or (3) both. For independent schools, it is very much the same. When enrollments levels are down, or other income streams have slowed or stopped, private schools have the same basic options: (1) raise tuition, (2) reduce spending, and/or (3) both; and each of these comes with major pitfalls. These challenges test the Commitment level of school leaders and serve to either build or destroy trust.

Tuition increases must be made in slow, small amounts in pace with the local economy; otherwise the increase can result in decreased new and/or renewed enrollments. Cutting spending must also be made in slow, small amounts; otherwise services, programs, and the quality of the education provided suffers. This, too, has a direct connection to the success of new and/or renewed enrollments.

Step 2: Mind the Gap 

Obviously, the best way to avoid the pitfalls of fiscal retrenchment is managing school operations in such a way that it never becomes necessary. The key to avoiding the necessity of retrenchment is minding the gap. Nearly every private school in the world knows the reality of the gap between the funding tuition generates and the actual expenses incurred in operating a quality school. Thus, many schools rely on innovations such as an Annual Fund or a Share-a-thon Campaign seeking tax-deductible gifts to provide financial stability to the school, as well as fund major school improvement projects such as building or refitting facilities. Many independent schools are simply unable to close the gap without these campaigns.

However, the real secret to avoiding fiscal retrenchment, and at the same time ensuring school improvement and innovation of facilities, programs, and structures, is to operate within the budget. In other words, schools must first align operations with their current level of tuition income, and then maintain these on tuition alone. This is the advice and example of Dr. Richard J. Soghoian, who led the Columbia Grammar and Preparatory School in New York City from the brink of bankruptcy to being one of the nation’s premier private schools. Today they boast the ability to offer first-year teachers one of the highest pay packages in education, they are blessed with a $10 million endowment fund, and a physical plant valued at over $200 million – all without a single dollar of debt. How did they do this?

The short answer… is simply that we learned a very long time ago, out of necessity more than anything else, how to live on tuition alone. Tuition alone, you ask? Doesn’t everyone operate that way? Well, you might be surprised to learn that in fact no other private independent school does so, at least among those in New York City… All other private independent schools are dependent on annual giving to balance their operating budgets, and many, if not most, are dependent on substantial infusions of interest from endowment funds, as well.[2]

Soghoian brought the school to its current financial health and security by understanding that the annual operating budget may not go beyond the school’s current tuition income, and all capital projects can only be funded by voluntary giving. Therefore, living by the moto, “Tuition is for the present, voluntary giving for the future.”[3] This innovative approach was born out of his inspirational leadership as an Optimizer; demonstrating his Commitment to the financial health and well-being of the school, as well as to protecting essential school operations.

Step 3: Identify Waste and Duplication

Nevertheless, nearly every school leader will face a time when retrenchment is necessary. How do they approach the daunting task of raising tuition or cutting their spending? Before even considering a tuition increase, the first key to turn in financial innovation is identifying areas of waste and duplication. This is especially true of schools that have been operating for many years. It is part of the nature of schools, companies, organizations, and most-famously governments: the longer they operate the greater the waste and duplication.

When identifying areas of waste and duplication, typically the first impulse is to look at Human Resources. The major portion of any school’s operating budget is payroll and employee benefits. Therefore, if leaders are looking for ways to cut spending, this is the fastest way to make the deepest cuts; but retrenchment that starts with laying off faculty and staff is shortsighted, demoralizing, and a sure way to diminish levels of trust. Cuts in the numbers of personnel may be needed to bring the operation in line with the budget, but it should never be the first place to identify waste and duplication.

Departments within schools, and even individual classrooms, frequently operate as little isolated kingdoms – almost blind to what other areas or divisions within the school are doing. This factor tends to feed the problems of waste and duplication. Each area, largely for their own convenience, desires to have dedicated resources to serve their needs; yet if those same resources are shared across classrooms or departments, operating costs go down.

For example, a few years ago, I was in a situation in which we needed to trim nearly $80,000 from the budget to bring the school in line with an unexpected drop in enrollments. One summer an economic and political crisis hit our community in Ecuador, which affected those working in the import industry, and many of those families simply left the country to seek better financial stability elsewhere. Over 10% of our pre-registered students did not show up on the first day of school. It was too late to recruit replacement students since the school year had already begun. All we could do was identify which operational areas to trim expenses. This crisis turned out to be a blessing and opportunity for innovation. It forced us to scrutinize our operation in a way that we had not done for years.

One example identified was the use of classroom printers and copy machines. It may sound like a small expense, but an analysis of spending on replacement ink cartridges, replacement classroom printers, and paper ran into the tens of thousands of dollars. In the weeks following that analysis, we moved away from classroom printers, to leased, centralized commercial-quality printers and copy machines.

Although the initial expense of a contract with the vendor was not a part of the budget, by the end of that school year we had an overall savings of nearly $10,000. In just that one line-item of the budget, we gained a significant savings simply by consolidating the school’s printing and copying needs. At first, the faculty and staff did not like it. They lost the convenience of printing and copying within their rooms or workplace. However, they soon appreciated the higher quality and speed of the centralized machines. Additionally, there was a reduction in paper costs. Having to send a print job to the centralized printer brought paper consumption down; another big line-item savings to the school’s operating budget.

Therefore, a sound strategy for addressing retrenchment is to first identify areas of waste and duplication. Then, move on to the area of personnel. As mentioned, the older a school is, the more likely duplication in roles and functions takes place. These are certainly the harder changes to make. Personnel changes impact the lives of people we care about – but being diligent in identifying and managing that all faculty and staff members work efficiently in their areas of responsibility, and then making the necessary cuts where redundancy is present, will make significant strides in the school’s financial health and stability.

Step 4: Align People and Programs with Top Priorities

So where do you begin to determine if and where cuts should be made within the personnel of the school? By ensuring that every department, program, and all personnel directly support the school’s current top priorities. Trusted school leaders who are committed to the school’s mission, vision, and values identify, communicate, and inspire stakeholders to rally around no more than two or three priorities toward accomplishing the school’s mission.

When processing the hard decisions of where to make cuts in HR, work through the organizational chart and programming of the school, identifying whether or not every position and/or program is directly linked to supporting and accomplishing those top priorities. If not, then positions and/or programs that are not essential have been identified. In addition, these positions and/or programs most likely distract from accomplishing priorities.

Remember Jim Collins’ saying, “good is the enemy of great” – and schools, especially schools operating for decades, tend to develop and add on to their operations many good programs.[4] If those good programs are not directly supporting the top priorities, then they are actually the enemy.

By weeding out those elements of the school that are taking resources away from the school’s essential mission and top priorities, optimizing school leaders demonstrate their Commitment to what the school is essentially about. Although leading through fiscal retrenchment is certainly one of the most difficult challenges for those optimizers, it is also one of the most powerful ways to demonstrate Commitment and build trust with all stakeholders.

©2018 Toby A. Travis, Ed.D.

[1] Betsey Stevenson and Justin Wolfers, “Marriage and Divorce: Changes and their Driving Forces,” Journal of Economic Perspectives 21, no. 2 (2007): 27-52.

[2] Richard Soghoian, Mind the Gap! An Insider’s Irreverent Look at Private School Finances and Management—with a Lesson for Government and Industry, Too! (New York: CGPS, 2012), 209-214, Kindle.

[3] Ibid., 219, Kindle.

[4] Jim Collins, “Good is the Enemy of Great,” accessed 1 July 2016, http://jimcollins.com.

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