In early August, I met with school leaders at NAIS’s inaugural School Leadership Team Experience Institute. This yearlong program, created in partnership with George Mason University’s Education Leadership faculty, focuses on building leadership capacity to support school improvement.
In the program’s first segment, nine school teams worked together to understand and enhance their leadership styles and team dynamics, and to pinpoint challenges they wish to address as a group. They identified issues ranging from school identity to market challenges and opportunities to human dynamics. The teams left the program paired with other schools to collaborate around challenges through the school year and to develop individual school action plans.
Fleshing out these challenges required school leaders to engage in root cause analysis. This analysis ensured that they accurately identified the problem to solve. In listening to their deliberations, I began to consider that the independent school business model may be the root cause of so many challenges we face today — achieving sustainability in the market, retaining high-quality faculty and staff, etc. NAIS has been analyzing and writing about this model for decades, but changes to the model have been evolutionary, not revolutionary.
The Four Sides of a School’s Financial Box
In 2003, NAIS convened a Financing Schools Symposium, in partnership with the National Business Officers Association (NBOA), to explore groundbreaking ideas for schools to become less dependent on tuition. The driving force for this work was access — how do we make schools more affordable to a larger segment of the school-age population— and long-term health. Although schools generally had long waiting lists at the time, concern was mounting about rising tuitions and whether the rate of increase was in step with the economic and demographic conditions of the United States.
At the symposium, then NBOA executive director Sarah Daignault described the four sides of the financial box keeping schools from being financially sustainable:
1. Keeping classes small. Schools rely on the competitive advantage that personal, individualized attention brings in nurturing a student’s personal, social, and intellectual growth. Although no research suggests that a 9:1 ratio of students to faculty results in a better education than 10:1 or 11:1, schools may be wary of increasing class size because of the perception of decreased advantage in the marketplace.
2. Extending financial aid. Schools recognize that offering financial aid serves a dual purpose of
expanding access to schools and for improving student quality. The full-pay students are not always the best students, and the best students may often need financial assistance to be part of the school community. But schools may be wary of extending more assistance if they can fill seats with more full-paying students.
3. Keeping tuition affordable. Few schools charge tuition at a rate that reflects the actual cost of educating a student. As such, all families at nearly all schools receive some level of subsidy. Schools rely on annual fund and/or other charitable giving so as not to charge what it costs. Real annual giving is up 28 percent in the last 10 years for day schools and 18.1 percent for boarding schools.
At the symposium, we discussed that this side of the box was being pressured by a sagging economy, poor stock market performance, and competition for donor dollars. We asked whether schools expected to fund the future based on continued increases in giving.
4. Using endowment income. Schools use endowment income to keep the “lid” on the box. Schools also use capital campaigns to cover their deferred maintenance and to build new buildings. A lagging economic environment can have deleterious effects on the ability of schools to use income from investments or fundraising to achieve certain goals. Additionally, many schools, particularly newer schools, have very little or no endowments that provide the luxury of having the endowment management challenge.
Recommendations to Lower Costs, Boost Brand, and More
What emerged from the symposium were five recommendations for schools:
- Reduce costs or the scale of school operations. Eliminate non-performing programs, collaborate with other schools on infrastructure operations, and embrace technology to reduce costs.
- Identify alternative revenue streams. Explore adjacencies, or those services or programs that are highly related to a school’s core business to augment revenue streams. This could be packaging current curriculum in an online format and offering it to homeschoolers.
- Expand on what schools are already doing. Extend summer programs, rentals, etc.
- Enhance the school’s brand. Specialize in one area to capitalize on new markets; expand a school’s brand to other geographic markets.
- Develop partnerships. Find partners or sponsors who bring value or open new markets and opportunities for a school.
In the years following the symposium, many schools dabbled in one or more of these arenas, but only a few have had success in forever altering the DNA of their operations. For example, some schools have partnered with local organizations, such as hospitals or research facilities, to get new programs off the ground, or have established international campuses.
Schools’ Responses to the Great Recession
The need for a new business model intensified with the recession, which shone a spotlight on the vulnerabilities of the model. In studying the recession’s effects on independent schools, school administrators and Vanderbilt University graduate students Matt Rush and Barry Gilmore identified where schools stayed the course and where they made changes to ensure financial sustainability.
Where Schools Stayed the Course
- Made few or no cuts in academic programming.
- Made small cuts in operations across the board.
- Continued to meet the same or slightly increased annual giving goals.
- Continued or initiated capital campaigns and expansion projects.
- Did not ignore endowment or its importance, but did not make it a top priority.
Where Schools Made Adjustments
- Increased financial aid.
- Raised faculty salaries cautiously.
- Continued to increase tuition, but at a more modest rate.
- Deferred physical plant maintenance.
- Increased online services.
- Reexamined marketing efforts.
- Sought new constituencies for enrollment.
- Held themselves more accountable for connecting expenses to missions and programs.
Continuing Worries About Cutting Costs
Post-recession, many schools are still struggling financially and more aggressively questioning whether the current business model can sustain independent education. With enrollments down and costs up, some of the arenas explored in 2003 are now taking center stage.
And we are starting to see real innovation in some schools. For example, some are expanding programming through online consortia, instead of increasing faculty. However, a recent study by school administrators and Vanderbilt graduate students, William Daughtrey, William Hester, and Kevin Weatherill, on tuition perceptions at independent schools uncovered mixed data about attitudes regarding cost-cutting and alternative revenue sources.
Overall, they found that school leaders are very concerned that cutting costs will impact their program and the school’s perceived value in the market. As a result, school leaders expressed only moderate interest in employing measures such as increasing teaching loads, increasing class size, changing compensation structures, or restructuring administrative roles. On the revenue side, the researchers found that, although administrators reported great interest in finding alternative sources, outside of after-school and summer programs, schools note little impact from auxiliary revenue sources.
Key Elements for Innovation Success
While there is clearly a yearning for a more sustainable business model, no silver bullet will solve these complex financial issues. Many argue that we need to reframe the problem altogether, saying it is not about creating a new business model, but rather a new educational model. I agree that independent schools need an agile educational model to ensure that they thrive into the future. And I know this work is challenging.
In the book The Other Side of Innovation, authors Vijay Govindarajan and Chris Trimble discuss why such innovation is difficult. They make the point that it is very hard to put those in charge of today also in charge of tomorrow. They suggest following these steps to move innovation efforts forward:
- Bring in a dedicated team to execute on innovation, but build bridges with the in-house team.
- Populate the dedicated team with outsiders — they are in a natural position to recognize and challenge long-standing, second-nature, instinctive assumptions.
- Carefully manage innovation, with a well-developed plan, performance metrics, and processes.
- Make exceptions to standard policies to allow the team to operate in the culture it needs.
NAIS’s Commitment to Nurture Innovation
NAIS has just begun building a dedicated innovation team in service to this cause. Our plan is to double-down on our data and research efforts and to create ways for schools to collaborate and innovate around school challenges and opportunities. I’ll be writing more about this in the months ahead.
Meanwhile, the nine schools that attended the School Leadership Team Experience Institute are off and running, looking at intractable problems through a new lens. Throughout the year, our faculty will touch base with them to spur that work and offer an outside perspective. We will learn and grow from this inaugural institute, but stay tuned for other opportunities. NAIS believes that by working together, our schools can innovate and light a path toward a bright future for our children.
- A variation on this blog appears in Donna Orem’s epilogue to the 2016–2017 NAIS Trendbook, due out in September.
