I love to teach. Each December I look at last year’s course materials and think about how I approached last semester and what I will change for the next one.
Last semester, my students built a sustainability plan for the college. As I reviewed the outcome of our business and innovation project, I thought of its relevance to finance in higher education today. At one point, we received feedback from stakeholders about cost sensitivity. We learned the institution may not adopt our recommendations if they had a significant cost. This was disheartening to students because sustainability is important to them.
Approaching the problem
Using our typical design thinking methodology, we approached the problem with no limitations and developed recommendations using our discovery process. An important part of our procedure related to ROI (return on investment) and how we would fund our recommendations. Through our journey, we identified cost savings that far exceeded the cost of any recommendations for new activities.
The students gave their final pitch to a group of decision-makers at the institution, including the vice president of finance and the provost. Before reaching the cost and savings sections, the VPF was interested and engaged in the presentation and recommendations. By the nature of his and others questions it was clear that there was an interest in sustainability and an understanding of the intangible aspect of ROI.
ROI can be tangible or intangible
This led me to realize the importance of shifting our finance conversations away from cost and toward ROI. This ROI could be tangible or intangible. Often, as we try to solve problems and make changes, we find new initiatives bring new costs, but current offerings offer new opportunities to save.
If we had not been looking for an opportunity to save, we would not have found one. By digging into the entirety of the recycling and trash process and understanding the actual cost, we realized there was an opportunity to save money by shifting away from trash and toward recycling. We could leverage the savings from that shift to augment staffing, education, and awareness for students and faculty about our recycling protocols.
Our ROI was not only the annual cash savings but also the students who had become better environmental stewards. Also, the non-business students in this capstone learned the importance of ROI when solving any business problem.
5-year modeling
How does this apply to today’s challenges? We do a lot of work to help institutions model out the next 5 years. Much of that modeling includes overlaying the strategic plan on top of the baseline. When looking at the initiatives, we can’t help but understand the relationship between activities. For example, investing in freshman student retention initiatives at $50,000 per year should have a related goal of increasing freshman retention by some specific amount, let’s say from .5% up to 2% over the 4 years. That means for every 100 new students, we retain two more over 4 years. If we assume a net revenue of $30,000 per student, this is $180,000 over 3 years. After compounding, this becomes about $200,000 per year. This is not only a financial ROI of $150,000, but also a reputational ROI. Students, families, accreditors, and news publications look at our retention rates when judging the “value” of our education.
Project planning and ROI
Conversely, I have another client planning to launch eight new programs for about $500,000 per year per program, for a total cost of $4M. The plan reflects an increase of 200 students at $30,000 each, or $6M. The net is $2M. That seems like a great ROI, but for any program to break even at most small institutions, it needs to graduate 20 students per year. It takes about 100 students enrolled to graduate 20 per year. By launching 2 new programs over 5 years, we should achieve the goal of 200 new students at a net margin of $5M, rather than $2M. It is important to understand the individual components of each initiative to properly evaluate the ROI.
I love to talk about this. Feel free to reach out if you are trying to evaluate ROI.
Photo by the blowup on Unsplash