Performance Measurement & Assessment Workshop

Michael K. Townsleymtown@dca.net

January 13, 2006

Tucson, Arizona

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Agenda - Morning

• 8:30 - 8:45 Welcome and Introduction

• 8:45 - 10:00 Financial Drivers

• 10:00 - 10:15 Break

• 10:15 - 11:15 Selecting Performance Measures & Participant Exercise

• 11:15 – 11:30 Myths About Performance Measure

• 11:30 - 1:00 Lunch

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Agenda - Afternoon

• Lunch Break from 11:30 to 1 pm.• Afternoon: • 1:00 - 2:15 Performance Indicators & Assessing Outcomes

• 2:15 - 2:30 Break

• 2:30 – 3:15 Group Exercise – Select Financial Performance Indicators

• 3:15 - 4:00 Communicating Results

• 4:00 - 4:45 Performance Management & Revisions

• 4:45 - 5:00 Wrap-Up & Evaluation

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Workshop Biographies

• Michael K. Townsley • Email: mtown@dca.net ; phone: 302 593-2221

• Dr. Michael K. Townsley is a Professor of Business at Becker College in Worcester, Massachusetts and Senior Consultant at Stevens Strategy. He is the former President of the Pennsylvania Institute of Technology, Senior Vice President for Finance and Administration for Wilmington College. Dr. Townsley holds a Ph.D. from the University of Pennsylvania. His dissertation analyzed the impact of market share on pricing policies. NACUBO published his book The Small College Guide to Financial Health Beating the Odds. They also published - The Financial Toolbox for Colleges and Universities.

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What Shaped the Financial Condition of Higher Education Since 2000?

• Government Support for Higher Education

• Stock Market Crash – 2000 to 2001

• Spiking Utility Rates – 2005

• Continuing Angst over FASB/GASB rules

• Sarbanes – Oxley

• Financial Aid; Savings & Disposable Income of Parents

• Demographics and Skills of Undergraduates

• Competition

• Construction Costs

• Internet Delivery of Education

• Cost and benefit of athletics

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Private InstitutionsRevenue & Expenses 1998-2002

70,00080,00090,000

100,000110,000120,000130,000140,000150,000160,000

1998 1999 2000 2001 2002

Revenue with gains/losses

Revenue no gains/losses

Expenses

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Private Institutions Net to Revenue-Gains/Losses: 1998-02

-20%

-10%

0%

10%

20%

30%

40%

1998 1999 2000 2001 2002

all institutions net / revenue (gains/losses)

tuit dep > 0.6 net / revenue (gains/losses)

tuit dep < 0.6 net / revenue (gains/losses)

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Private Institutions Net to Revenue - No Gains/Losses 1998-02

-20%

-10%

0%

10%

20%

30%

40%

1998 1999 2000 2001 2002

all institutions net / revenue (no gains/losses)

tuit dep > 0.6 net / revenue (no gains/losses)

tuit dep < 0.6 net / revenue (no gains/losses)

9

Private Institutions by Tuition DependencyNet to Revenue 1998-02

-20%

-10%

0%

10%

20%

30%

40%

1998 1999 2000 2001 2002

all institutions net / revenue (gains/losses) all institutions net / revenue (no gains/losses)tuit dep > 0.6 net / revenue (gains/losses) tuit dep > 0.6 net / revenue (no gains/losses)tuit dep < 0.6 net / revenue (gains/losses) tuit dep < 0.6 net / revenue (no gains/losses)

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Private Institutions Net Assets 1997-01

$19,000,000

$20,000,000

$21,000,000

$22,000,000

$23,000,000

$24,000,000

$25,000,000

$26,000,000

1997 1998 1999 2000 2001

Net

Assets

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Public Institutions: Tuition & Fees v. State Appropriations 1980-01

0

510

1520

25

3035

4045

50

1980-81

1985-86

1990-91

1995-96

1996-97

1997-98

1998-01

1999-00

2000-01

Per

cen

t o

f T

ota

l R

even

ue

Tuition & Fees

State Appropriations

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Managing Financial Drivers

• Key leaders should manage the financial condition of the institution through its financial drivers.

• Key leaders must:– Identify the financial drivers of the institution.

– Understand how these drivers have shaped and continue to shape the financial condition of the institution.

– Recognize the factors that control the financial drivers.

– Pinpoint responsibility for managing each driver.

– Build plans, policies, and procedures to manage the financial drivers.

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Financial Drivers

• Financial drivers shape the financial condition of an institution.

• Financial drivers – Are influenced by external and internal conditions.

– Are found at junctions in the financial system governing the flow of funds and at junctions where institutional reserves are held.

– Work like switches determining scale and direction of an institution’s financial condition.

– Location depends on the institutional type.

– Examples include: enrollment, personnel, financial aid, grants, endowments, net income, cash, debt, and net assets.

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Performance Measures Shaped by Institutional Types

Financial conditions vary by institutional type.

Institutional Types• Private: Tuition Driven

– Tuition Revenue and Fees >= 60%

• Private: Non-Tuition Driven– Tuition Revenue and Fees < 60%

• State Institutions– Community Colleges, Flagships, Regional, Others

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Characteristics of Private Tuition Driven Institutions

• Characteristics:– Tuition greater than 60% of revenue

– Total student revenue greater than 80% of revenue

– Net tuition pressured by financial aid

– Enrollment must grow to keep tuition in check

– Other income must be stable

– Total revenue must grow faster than expenses

– Large number of very small colleges

– Deficits rare among larger tuition driven institutions

– Greater chance of deficits and closure for colleges enrolling less than 500 students

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Typical Financial Drivers for- Private Tuition Driven Institutions -

• Enrollment by Category• Yield Rates• Tuition Rates • Tuition Revenue• Unfunded Tuition Discount• Net Tuition• Unrealized Gains/Losses• Instructional Expenses• Auxiliary Net Income

• Net from Student Revenue Sources

• Compensation• Plant Operations• Net Income• Cash Flow and Receivables• Debt – Short and Long Term• Net Assets• Financial Drivers Identified

by Participants

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Characteristics of Private Non-Tuition Driven Institutions

• Characteristics:– Gifts, grants, endowment draws, and investment returns

provide greatest proportion of income

– Substantial endowment funds

– Net tuition grows slowly or is static

– Net price is less than cost of education

– Selective entrance standards

– Larger net asset base

– Greater chance of deficit for larger institutions

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Typical Financial Drivers for- Private Non-Tuition Driven Institutions -

• Enrollment

• Yield Rates

• Endowment Fund

• Payout Rates

• Unrealized Gains/Losses

• Gifts and Grants

• Indirect Cost Rate

• Tuition Discount Rate

• Support and Administrative Expenses

• Compensation

• Debt

• Credit Rating

• Financial Drivers Identified by Participants

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Characteristics of Public Institutions

• Characteristics:– State Appropriations are critical to financial stability and

mission

– Tuition and Fees grow are substitutes for lost governmental revenue

– Unions limit personnel cost flexibility

– Net price is less than cost of education

– Upper middle and middle income students are moving to public institutions

– Significant property holdings

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Typical Financial Drivers for- Private Non-Tuition Driven Institutions -

• Enrollment

• Yield Rates

• State Appropriations

• Gifts and Grants

• Indirect Cost Rate

• Auxiliaries

• Support and Administrative Expenses

• Compensation

• Debt

• Net Assets

• Credit Rating

• Financial Drivers Identified by Participants

Typical Financial Drivers for- Public Institutions -

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Four Steps to Clarifying State of Financial Drivers

• Step #1: What is the financial condition of your institution?

– Use CFI (Composite Financial Index)

– Use standard financial analytic procedures to measure financial condition.

– Use marginal analysis to identify which financial drivers are having the largest changes. (Marginal Change = dollar difference between two years)

• Step #2: Sketch the financial flows through the drivers.

• Step #3: What internal or external factors have had an impact on the financial drivers?

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Step #1: Measuring Financial Condition

• CFI as tool to measure financial condition– CFI Tool: CFI Worksheet .xls

– CFI Scoring Rage: CFI Scoring Range.xls

• Standard Analytic Procedures– Annual Trend Analysis - Rates of Change Trends.xls

– Ratio Analysis: Annual Ratio Analysis.xls

• Marginal Analysis - Marginal Analysis.xls

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• Use CFI to find – The general financial condition of the institution – Strengths and weaknesses arising from its four key ratios

• Use trend analysis to find– Strengths and weaknesses within the financial structure

– Direction and scale of change

• Use Ratio Analysis to compare – Performance between two financial drivers– Performance with benchmarks for standard financial ratios

• Use Marginal Analysis to identify – Where new money is generated and how it is used.– If marginal changes fit strategic priorities.– If multi-year marginal changes are balanced or not.

Step #1: Measurement (continued)

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Step #2: Sketch the Flow Network through the Financial Drivers

• Purpose – Understand the direction, scale, and factors that influence the financial drivers.

• Sketch Suggestions:– Identify the critical flows through revenue, expenses and

follow through net income, expenses, net income, assets, liabilities, and net assets.

– Label the financial drivers.

– Identify external factors that determine the source and scale of revenue, expenses, assets, liabilities, and net assets.

– List internal policies that affect the flow network.

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Step #3: What Internal or External Factors Are Shaping the Financial Drivers?

• Use an analytic group to identify what is shaping the financial drivers.– Identify sources of data for the internal and external

factors.

– Create tables showing the data.

– Describe conditions in the immediate past that have influenced these internal and external factors.

– Describe conditions in the near term that may influence these internal and external factors.

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Break

• Return at 10:15• Next Session:

– Participant Exercise & Performance Measures

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Group ProjectIdentifying Your Financial Drivers

Instructions for Group Exercise 10:15 to 11:30

1. Assign small groups – common institutional types.

2. Identify typical institutional drivers for your type of institution.

3. What internal or external factors change or distort each financial driver.

4. At 11 - Report back on group findings on financial drivers.

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Lunch Break

• Lunch Break from 11:30 to 1 pm.• Afternoon: • 1:00 - 2:15 Performance Indicators & Assessing Outcomes

• 2:15 - 2:30 Break

• 2:30 – 3:15 Group Exercise – Select Financial Performance Indicators

• 3:15 - 4:00 Communicating Results

• 4:00 - 4:45 Performance Management & Revisions

• 4:45 - 5:00 Wrap-Up & Evaluation

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Key Performance IndicatorsAgenda

• What is an effective performance measure?

• What is a Key Performance Indicator?

• Sample Key Performance Indicators

• Key Performance Indicators for Private and Public Institutions.

• Benchmarking Key Performance Indicators

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What Is An Effective Performance Indicator?

• Key Performance Indicators1 are: – Related to strategic or operational goals

– Nationally available

– Readily benchmarked

– Subject to trend analysis

– Easily Compiled

– Meaningful to Board, Key Administrators and the community.

(1. NACUBO Accounting Principles Council)

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What Is a Key Performance Indicator for Finance?

• It targets critical financial drivers by tracking

– Inputs to the financial system.

– Operational performance.

– Plant, Investments, and Debt

– Financial reserves.

– Cost Performance.

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Key Performance Indicators - Inputs

• Market Share = enrollment / competitors enrollment• Selectivity = acceptances / applications1

• Matriculation = admissions / acceptances1

• Enrollment = enrolled in classes / admissions1

• Tuition Discount = financial aid / total tuition & fees1

• Unfunded Discount = unfunded financial aid / total tuition & fees

• Net Tuition = net tuition / total tuition & fees1

• Gifts = total gifts / student

• Government Funds = total government funds / total revenue1. Moody Investor Service Ratios

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Inputs for Public Institutions

• State Support Resident Students =

state support per resident student / median household income.

• Resident Tuition to Income =

annual resident tuition rate / median household income.

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Key Performance Indicators Operational Performance

• Compensation Ratio = compensation / total expenses

• Revenue Expense Ratio = revenue / expenses

• Maintenance Ratio = maintenance of plant / total plant

• Net Student Revenue Ratio = (tuition & fees – discount – instruction + auxiliary net) / total revenue

• Net Income Ratio = change in unrestricted net assets / total unrestricted income

• Net Auxiliary Income Ratio = net income auxiliaries / total income

• Net Development Ratio = gifts and grants / development costs

• Cash Income Ratio = cash from operating activities / (total income – gains or losses)

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Key Performance Indicators Plant, Investments, and Debt

• Age of Facilities Ratio = accumulated depreciation / depreciation expense.

• Deferred Maintenance Ratio = maintenance needs / expendable net assets

• Investment Return = total return / investments (long-term)

• Viability Ratio = expendable net assets / long term debt

• Debt Burden Ratio = debt service / total expenditures

• Debt Coverage Ratio = change in net assets / debt service

• Debt Covenant Ratios – use any debt ratios listed in debt covenants.

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Key Performance Measures - Reserves

• Primary Reserve Ratio = expendable net assets / total expenses

• Return on Net Assets Ratio = change in net assets / total net assets

• Composition Ratio = financial assets / physical assets

• Capitalization Ratio = net assets / total assets

• Total Financial Resources = total net assets less net plant / fte students

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Key Performance MeasuresCost Performance

• Cost per Student Ratios (FTE)– Instruction

– Student Services

– Academic Services

– Institutional Services

– Plant Maintenance

– Compensation by major categories; ex. Faculty

– Unrestricted (general) fund expenditures

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Selected Performance Measures per NACUBO

• Students Inputs & Outputs– High School Ranks– Acceptance Rates– Graduation Rates– Graduate School Admission Test Scores

• Instructional and Research Productivity– Student / Faculty Ratios– Graduation with 150% of expected graduation– Attrition Rate– Sponsored or External Grants & Awards / Faculty FTE

• Affordable Access = financial aid / fte student• Financial Strength

– Endowment Value– Financial Resources per student– Operating Margin– Total Financial Resources to Debt– Capital Expenses and Gifts to Depreciation

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Benchmarking Financial Performance

• Benchmarking Criteria– Data for performance indicator elements must be readily

available from external sources.

– Data for indicator elements should be consistent with the institutions definition of the indicator.

– Comparison groups should have characteristics that are common to the institution. Wide discrepancies in the definition of the group can render the benchmark meaningless.

– Benchmarks can reference external or internal standards.

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Performance Measures Benchmarking Data Sources

• Association of Governing Boards - AGB.org

• IPEDS - http://nces.ed.gov/ipeds/

• I 990 - http://www.guidestar.org/

• John Minter & Associates - http://www.jma-inc.net/

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Selected Operating Indicators

• Critical Condition Indicators– Net tuition ratio is falling,– Student revenue ratio is falling– Gift contribution ratio is falling– Grants contribution ratio is falling – Other revenue contribution ratio is falling– Total compensation ratio is increasing– Net income ratio is falling coupled with a string of

deficits– Cash income ratio is falling coupled with declining value

of cash assets

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Selected Reserve Benchmarks

Ratio Benchmark Notes

Debt Service Coverage 2.4 to 4.6 High ratio is preferred.

Viability Ratio > 1 to1 Ratio less than 1 to1 is risky.

Capitalization Ratio 50% to 85% These are preferred boundaries.

Return on Net Assets 3% to 4% +CPI Large investment returns distort the ratio.

Return on Invested Assets Market IndexesMarket indexes should reflect

investments;

Physical Reinvestment < 1 to 1< 1 to 1 indicates underinvestment in

plant.

Primary Ratio 0.4 Ratios below .10 or .15 are risky

Net Income Ratio 2 to 4% Sustain net income over several years.

Cash Ratio .75 to 175 cents of current assets to $1 in current

liabilities

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Using CFI To Assess Outcomes

• CFI can be used as a tool to deconstruct financial factors critical to the financial condition of the institution.– CFI Tool: CFI Worksheet .xls– CFI Scoring Rage: CFI Scoring Range.xls

• Steps to Deconstructing Low CFI Scores– #1: Which ratios are causing the low CFI score?– #2: Which elements in a ratio negatively driving its

value?– #3: What internal or external factors are affecting the

value of the ratio element?

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Use CFI Scores to Build Strategy

• CFI ratios can be used as levers to change the score.• Steps to using CFI as a lever:

– #1 Build a financial model of the institution.

– #2 Incorporate CFI into the model.

– #3 Select a strategic goal for the CFI score.

– #4 Based on the Deconstruction Analysis identify where to target changes.

– #5 Test changes with the model and evaluate the CFI score.

– #6 Build a strategic plan around changes that attain the CFI score goal.

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Break and Next Stages of the Workshop

• 2:15 – 2: 30 Break

• 2:30 – 3:15 Group Exercise

• 3:15 - 4:00 Communicating Results

• 4:00 - 4:45 Performance Measurement Revisions

• 4:45 - 5:00 Wrap-Up & Evaluation

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Group Exercise Selecting Financial Performance Indicators

• Time: 2:30 pm to 3:15 pm.• Assign Groups• Identify Financial Performance Indicators for your

institution.• Give the reason for choosing the Indicators• At 3 pm - Report Indicators and reasons back to the

Workshop.

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Communicating Results

• Incorporate Performance Indicator with Benchmarks in Dashboards to:– President and presidential cabinet– Board of Trustees

• Use Indicators and Benchmarking in Reports to:– President and Board of Trustees– State Agencies– Legislative Committees– Federal Agency Reports– Accrediting Agencies

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Communicating Results (Part II)

• Communicating Results should consider these rules:– Design measures to follow rule of the 3 Cs → clear,

concise, and coherent.– Focus on indicators that show

• Financial Health• State of Strategic Goals• Debt Covenants

– Design reports to• Identify strengths and weaknesses• Suggest strategies to build on strengths are reduce or

eliminate weaknesses.

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Sample Monthly Dashboard Indicators

• Monthly Dashboard (compares year-to-date actual to prior year performance and budget goals)– Admitted Students

– Enrollment

– Class Size

– Net Tuition/Tuition

– Net Income/Total Revenue

– Cash/Total Expenses

– Receivables/Tuition

– Investments and Returns

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Dashboard Examples - Internet

• http://www.iexecutivedashboard.com/overview.htm

• http://www.infommersion.com/Examples/swfs/Banking%20Dashboard.swf

• http://www.infommersion.com/Examples/Overview.html

• http://infommersion.com/affiliate/offers/freewhitepaper.htm?kbid=1036

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Sample End of Academic PeriodDashboard Indicators

• End of Academic Period – Part 1 of Dashboard focuses only on performance for the

academic period and compares it to the same academic period for the prior year and also compares it to budget goals for the period.

– Part 2 of Dashboard compares year-to-date actual to prior year performance and budget goals.

• Indicators for this dashboard are similar to monthly dashboard and it adds these indicators:– Debt covenant ratios

– Expendable Net Asset Ratios

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Sample Annual Report President and Board of Trustees

• Purpose of the annual report should be to inform the President and the Board of Trustees of the financial condition of the institution.

• Typical Report Design includes:– Five year trend for enrollment, personnel, and major

categories of the statements of activities, financial position, and cash position.

– Comparison of one and five year rates of growth.

– Major market, financial, and debt covenant ratios.

– Composite Financial Index trend.

– Benchmark trend analysis.

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Suggestions for External Reports

• Include a statement of institutional goals – Related to the mission.

– Financial goals.

• Show progress against the institutional mission and financial goals.

• Provide a simple statement on how weaknesses are being resolved.

• Suggestions are subject to the guidelines required by external governing agencies.

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Performance Management

• Main purpose of performance indicators is to give insight into financial performance and indicate where change is needed.

• Performance Management requires:– Continuous diagnosis

– Identification of strengths and weaknesses

– Testing of strategies to support strength and eliminated weaknesses

– Development of action plans

– Key leadership taking action and monitoring performance.

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Performance Management (Part II)

• Performance Management needs a– Team approach to diagnosis: the team should include key

players in the financial condition of the institution besides the CFO; example – CAO, heads of marketing, marketing, and plant.

– Forum for monitoring performance: diagnosis must have a vehicle for regular review with the President; this calls for a scheduled meetings devoted solely to performance management.

– Disciplined approach to action plans: key leaders should be assigned responsibility to develop plans that include goals, action steps, and benchmarks. Planning without detail turns into planning to plan.

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Using Benchmarks

• Sample Benchmark Charts– HW RATIOS.ppt

– Netasset -theolog.Xls

• Purpose of Charts:– Show relative standing within the group.

– Visualize trends within the benchmark group.

• Supporting Tables – use tables to provide detail insight into the relationships.

• Test operational plans against benchmarks to see if relative position changes.

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Revision of Performance Indicators

• Conduct annual review of performance indicators to determine if:– Performance indicators are valid and reliable.

– Conditions require revisions to the indicator or are new indicators needed.

– Measures still follow the rule of the 3 Cs → clear, concise, and coherent.

– Values provide both prima facie evidence of performance and also offer means of leveraging change.

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Comments on Performance Metrics

• Performance metrics – Must fit into the broader scope of strategic planning

– Should not narrow strategic planning to the immediate structure of a set of performance metrics.

– Leadership must and should step beyond the bounds imposed by operational performance. Otherwise key leaders may miss important strategic changes shaping the institution.

– Performance metrics must involve more than the CFO. In reality financial performance is only a financial tally card for the successes and failures of the institution.

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Workshop Evaluation

• Please complete your workshop evaluations before you leave.

• Thanks for the Opportunity to Meet and Work with You!

Michael Townsley and Debra Murphy