High-Risk Crises in Higher Education | Gray Rhino Events

Gray Rhino Events in Higher Education

Higher ed finance leaders are tasked with safeguarding their institution against impending crises of all kinds. Understanding and planning for these high-risk crises helps to reduce their impact and turn the mountain of an issue into a speedbump that is met with efficiency and handled with expertise. One type of event that stands out as high impact, but certainly avoidable are “gray rhino” events.

These events have a higher likelihood to occur and happen slower than their counterpart “black swan” events. Finance teams, CFOs, and even boards are often aware of these events, but too often are not proactive enough to mitigate their effects. They can impact every part of the higher ed business; from revenue to student retention, even reputation. To avoid that – planning is key. Today we’ll cover these plans and go over strategies for mitigating these risks from both an operational and financial planning perspective. Let’s jump in!

Example of a Gray Rhino Event

“Gray rhino” events are more probable, and even predictable. The dangerous element of these events is that they are often ignored until it is too late. The enrollment cliff is the perfect example of a gray rhino event. Demographic shifts do not happen overnight.

Trend data shows that post-secondary enrollment across the nation is down almost 6% from the span of 2017-20221. Combine this with the known drop in birth rates during and after the great recession, and it is plain to see the warning signs have been here for quite some time.

Sample Impact Analysis

Planning for gray rhino events means keeping the finance department on their toes. While they are slower to realize, their effects can be just as challenging as “black swan” events. Let’s say your institution is noticing a trend in stagnation or slight decline in state funding.

While this may not impact your immediate future, preparing for these trends to continue is an actionable way to secure long-term sustainability for your institution.

Higher Ed Financial Impacts

Direct Financial Impacts

• Budget Shortfalls: Lower state funding makes covering operational costs harder, impacts cash reserves as they may be used to fill the gaps, and may even impact short-term obligations like debt.

• Deferred Maintenance and Capital Projects: Lack of funds can cause institutions to postpone renewal spending necessary to maintain health of their facilities, leading to worsening conditions and higher repair costs as minor issues become major issues. Facility conditions may have a larger impact down the road. Poorly maintained facilities can hurt the student experience, institutional reputation and ultimately, the ability to attract and retain students.

Operational Challenges

• Staffing and Workforce: Funding constraints may force a college or university to implement a hiring freeze or eliminate positions, leading to increased workloads and decreased morale among faculty. Institutions may have to look at cuts to salary and benefit packages to compensate, but run the risk of hurting their employee retention, and staff effectiveness.

• Student Services: Funding shortages can impact student services like counseling, career services, and academic advising. This may extend to extracurriculars such as clubs or student groups, and campus life and student engagement metrics may suffer as a result, which will come into the financial picture more in our last point.

Student Retention and Enrollment

• Tuition Revenue: To offset funding losses institutions may need to look at increased tuition. This becomes an even larger issue for public colleges and universities as tuition price, and in-state vs out-of-state student ratios are often regulated.

• Retention: Compromises to student services, campus life, and academic excellence may all play a role in retention rates. The impact of a drop in retention will mean lost revenue for two, three, or five years depending on the program, and may even impact new enrollment, leading to missed future targets. For many universities this could mean millions of dollars in lost revenue. From a long-term perspective, losses to retention could mean lost revenue in the form of future enrollment, gifts, and alumni relations stretching out to a decade or further.

These aren’t the only areas that could be affected by a drop in funding, federal or otherwise. It is plain to see that there is a holistic impact to “gray rhino” events. The key to securing future financial sustainability through these events are planning for them through strategies like alternative revenue generation initiatives.

The resources dedicated to planning for sustainability will certainly pay off when one comes to fruition, as your university has an action plan in place to navigate these challenges with confidence. Here’s how you can protect your institution’s financial health with a proper, FP&A-based contingency plan.

Financial Planning Around “Gray Rhino" Events for Colleges and Universities

Planning for “gray rhino” events has some similarities to planning for black swan events. One major difference is they are often ignored until it is too late. Being that these events are slower, and take time to fully come to fruition, there is more opportunity to work proactively using data analysis to catch trends early and inform your approach.

Ongoing Risk Assessment Monitoring

The main difference between risk assessment for “gray rhino” events and “black swan” events is that you will need to continuously monitor for foreseeable threats to your college or university’s financial health.

One strategy you can implement is developing Key risk indicators (KRIs) to track the progression of these events, and help you evaluate whether a proactive response is needed. If you need some additional information on identifying and analyzing risks, here is a great resource.

An example of a key risk indicator and what it could mean for your institution:

• KRI:
  Changes in state funding allocation over time.

• Impact:
  Changes in state funding levels impact public institution's budgets and should be a KRI. Changes to legislative trends may require alternative funding sources to be explored.

• Strategic financial modeling:
  Being that “gray rhino” events occur over time, they are a risk that is a great use case for strategic financial modeling. Having powerful financial modeling software will help you realize, and forecast trends in enrollment, tuition revenue, operating costs, and more. Through this, you can identify these “gray rhino” events early, and ensure contingency plans are in place. As an example, we will take a look at trends in healthcare degrees awarded across the nation. Bachelor’s degrees awarded to “health professions and related programs” rose by an average of 5.7% year-over-year from 2011 to 20212. This rise averaged roughly 8.7% year-over-year from 2011-2015. From 2016 on, degrees awarded to “health professions and related programs” stagnated in growth, but still hovered around 3-4%.

  Finally, in the 2021-2022 academic year, degrees awarded to “health professions and related programs” saw their first loss in a decade of -1%. Your job during analysis is not to speculate as to why, at least not yet. It is to build out your model so that you can identify these trends and be able to see things like the stagnation in growth to health professional degrees and build your KRIs based on trend data. The next steps would be to monitor this trend, while preparing for potential futures. This trend specifically would most impact colleges and universities that have health professional programs as a lynchpin contributor to its student revenue, but the example is applicable to any institution.

  This analysis will help bring to light the trends your institution should be focusing on, and modeling around.

Data is taken from The National Center for Education Statistics COE – Undergraduate Degree Fields

“Gray Rhino” events should undergo simulation. Using scenario analysis tools will help you see a complete picture of what your financial future could look like during one of these events. Having multiple scenarios, where you model your institution’s level of strain brought on by the event to varying degrees, will help you plan beyond the best, worst, and base cases. Additionally, your scenario analysis should paint different, but all-encompassing pictures of your financial future during these events. What would your financial reports look like during a “gray rhino” event, when the university has also missed its gift funding targets, or how sustainable is a future where an unrelated event comes to fruition in the middle of demographic enrollment decline?

Scenario analysis is an invaluable tool that helps you find the best financial future, making it essential for long-term planning and sustainability in higher education. The power of evaluating different futures can be seen in the model made by the UCLA treasury department, where they used scenario analysis to analyze different financial futures in order to aid in bolstering their liquidity as a response to the pandemic.

Budget and resource allocation:

When preparing for a situation of financial hardship, think about what you can accomplish today, to make tomorrow easier. Allocate resources in the current and future budgets to begin to address identified risks. This may include upgrading IT and security systems or enhancing student support services to improve retention. In addition to setting plans in motion, consider what’s already in place, should the master capital plan be reevaluated to allow more ‘buffer’ based on these potential outcomes? The goal here is to make strategic allocations that will work to mitigate the potential fallout from your identified “gray rhino” events.

As trends unfold over time, new priorities may arise. Building a flexible budget that can be adjusted quickly can be an asset when responding to changing conditions and emerging risks. Make sure your tech stack is enabling your budgeting process and is easy to manipulate. While these events are less immediate than “black swan” events, the quicker you can respond and prepare without wrangling data or fixing broken links, the more time you will have to actionably respond and prepare.

Stakeholder engagement and communication:

Communicating your assessment on potential risks, as well as your analysis on their impacts will be key. Involve stakeholders from deans, to CXOs, board members and other leadership in these conversations. Having a prepared scenario analysis as well as accompanying visuals will help to tell your financial story. Remember, you are trying to communicate the financial implications of risks that have not come to fruition, so telling a story, with assets to show stakeholders will be key. This will encourage buy-in and illustrate the need for necessary changes to the budget or resource allocation. Your goal for this communication is to make the information on the risk and impacts as digestible as possible, so your constituents know you are working in your college or university’s best interests.

It’s important to have an action plan in place for situations like these, so we’ve put together a chart to represent what the steps look like when you’re deciding whether or not it’s time to assemble the team and take action against a “gray rhino” event.

Keep your lines of communication open. It is unlikely that you have identified every potential threat and developed every KRI associated with them. Leaving lines of communication open for both initial feedback and continued dialogue can bring new risks to light that may not have been considered. Additionally, report on the currently identified risks regularly, this will either put stakeholders mind at ease about potential threats or inspire productive movement about the more concerning insights your data analysis has provided.

You have every opportunity today, to make tomorrow sustainable.

The slow nature of “gray rhino” events can be used to your advantage if you act on them. They are lumbering, masses of trouble which makes them avoidable – but a real problem if you’re caught in their tracks. From student retention to capital plans, the fallout can impact your college or university at every level.

The analysis needed to truly see these impacts on a holistic scale, from a long-term perspective, is complicated. To truly plan for these events and thrive a tool like Synario is the leader in helping your institution carve out a future that’s not only sustainable but thriving. If you want to self-explore the other ways an upgrade to your planning process could help, you may want to give our whitepaper “Using FP&A Technology to Solve Higher Ed’s Biggest Challenges” a look.