Description
Given the fallout of the financial crisis, including widespread and dramatic declines in university endowments, increased demand for financial aid.
F
O
R
U
M
F
O
R
T
H
E
F
U
T
U
R
E
O
F
H
I
G
H
E
R
E
D
U
C
A
T
I
O
N
It is appropriate that execu-
tive vice presidents and chief
fnancial offcers adopt a com-
prehensive view of the entire
university—one that encom-
passes the academic as well
as the business and fnance
side of their institution.
The frst step a president of
a university facing the need
for cost reduction should
take is to create a sense of
urgency about the crisis—
without instilling a feeling of
hopelessness.
There is a natural tendency
for costs to grow in any orga-
nization, and for those costs
to be defended and justifed
as necessary and prudent.
Leaders of troubled organi-
zations need to overcome
this natural inertia to cost
reduction.
Labor costs should not be
considered fxed over the
long run. For example, fnding
more productive tasks for less
active tenured faculty (so-
called “fxed cost” employees)
can enable reductions in other
labor categories.
In the end, most people
can accept layoffs, even
when they lose their jobs, if
they trust the organization’s
leadership and the layoffs are
done according to a plan that
is perceived as fair.
CASE STUDY: WINNINGTON UNIVERSITY
This case was written for the Master Class by William Massy, former chief ?nancial of?cer and associate
dean of the Stanford Graduate School of Business, and Professor Emeritus of Education and Business
Administration at Stanford, with assistance from Paul Marshall, Dean Curry, vice president for business
and ?nance at California Institute of Technology, and John Curry, former executive vice president at MIT.
Master Class participants were asked to consider three questions as they read the case:
• What are the major causes for the gap between costs and revenue at Winnington?
• What advice should Chuck Oversight give to the president of Winnington to
improve the university’s position?
• What specifc actions should the president take?
or several years, the Forum for the Future of Higher Education’s Annual Symposium has
been preceded by a Master Class that examines current management and fnancial issues.
Recent classes have addressed endowment spending policy, capital structure, and risk
management. Given the fallout of the fnancial crisis, including widespread and dramatic
declines in university endowments, increased demand for fnancial aid, and severe liquid-
ity problems—as well as steadily rising operating costs—it was ftting that the Master Class
focus on managing in turbulent times. The class began with a short case study, reproduced
here, followed by a discussion that highlighted the need for executive vice presidents and chief f-
nancial offcers to adopt a comprehensive view of the entire university—one that encompasses the
academic as well as the business and fnance side of their institution. This broadens the view typi-
cally taken by these offcers; yet such a perspective is crucial to their fulflling their roles as custodi-
ans of the overall university enterprise. Paul Marshall, MBA Class of 1960 Professor of Management
Practice at the Harvard Business School, led the case discussion. He also described important char-
acteristics of leaders in turbulent times and addressed the harsh realities of cost reduction—includ-
ing making the diffcult decisions that one must face when laying off employees. In the end, perhaps
the most important leadership skills are the ability to engender trust and a sense of integrity and
fairness throughout the diffcult times and the changes they demand.
65
PAuL MARSHALL And WILLIAM MASSy
HARvARd BuSInESS SCHooL And
STAnFoRd unIvERSITy, EMERITuS
Managing in Turbulent Times
F
O
R
U
M
F
O
R
T
H
E
F
U
T
U
R
E
O
F
H
I
G
H
E
R
E
D
U
C
A
T
I
O
N
66
F
o
R
u
M
F
u
T
u
R
E
S
2
0
1
0
The case:
Charles F. (“Chuck”) Oversight, Executive Vice President
at Winnington University, stared again at the latest admission
and ?nancial aid report.
At best the news was mixed. The applicant pool was almost
steady but yield was down again, more sharply than in prior
years, and the ?nancial aid budget was under heavy pressure
due to the economy’s effect on parental assets. Enrollment tar-
gets had been inched up in recent years and tuition boost-
ed faster than the competition in order to make ends meet,
but now that strategy appeared to
be reaching its limits. There would
be an immediate budget gap, which
would only get worse as the smaller
freshman cohort propagated to the
upper-class years.
The endowment also was in trou-
ble. Its market value was down 25%
and allocations to private equities
had produced major liquidity prob-
lems. And if that wasn’t enough,
working capital was dangerously
short because a substantial portion
of the Expendable Funds Pool had
been invested alongside the endow-
ment. (See Table 1.)
Chuck believed, based on a re-
cent Forum meeting at the Brook-
ings Institution, that this would not
be a V-shaped recession but rather a
U-shaped one (with a broad bottom) or maybe even L-shaped
(open-ended). Things seemed likely to bottom out by the end
of the year, but instead of an endowment bounce-back he’d
been told to expect “normal” 6-8 percent returns going for-
ward. Although it would be many years before the losses from
2008-09 worked their way through the smoothing formula, the
handwriting of a structural de?cit was on the wall.
Chuck doubted that Winnington could increase revenue
enough to “sell its way out” of the de?cit. The University expect-
ed to achieve some success from the Obama economic stimulus
package’s call for “beaker-ready” research projects, but to sustain
the extra volume in the face of growing competition would re-
quire substantial cost sharing. And while any new sponsored re-
search was welcome, there was no doubt that it would increase
the risk pro?le of Winnington’s operating revenues—a point
Chuck recalled vividly from the Forum Master Class of 2007.
Finally, gift receipts were more likely to slow than to accelerate,
and further enrollment hikes probably were not feasible.
Winnington had substantial borrowing capacity that could
be used to weather its short-term problems and provide gener-
ous phase-in time for solutions to the structural de?cit. How-
ever, because no one expected a sharp rise in revenue or asset
values to cover balloon payments, borrowing now would im-
pact the University’s budget for years to come.
So where might a long-term solution be found? Chuck
was reminded of two operating trends that might offer clues.
First, the ratio of administration and support cost to total
operating expenditures had been growing steadily. No sim-
ple cause could be assigned to the increases, but they were
troubling given the expectations for ef?ciencies following the
implementation of new enterprise administrative systems. He
worried further about the fact that lots of the administrative
growth had taken place in schools and academic departments
rather than in central offces. Could these costs be rolled back?
Second, teaching loads for research-inactive faculty were
down signi?cantly. Chuck harbored the uneasy feeling that,
given the absence of demonstrable quality improvements, this
represented a drain on productivity. Average class size was
down too as more professors taught their specialties, even
though some departments bucked the trend with ever-larger
lectures and fewer faculty-intensive assignments. The use of ad-
junct faculty was up as well—especially the kind that could be
hired cheaply for a course or two on the “spot market.” In other
words, unexamined trends on the academic side of the enter-
prise seemed inconsistent with the University’s ?nancial pros-
pects and might even threaten its position in the marketplace.
Chuck knew his concerns were less about speci?c practices
than about what appeared to be a myopic culture that accepted
or even celebrated the traditional ways of doing things. More-
over, no one had a clear view of the University’s overall business
model—how all the pieces ?t together into an economically vi-
able whole. He worried that the traditional model, which had
served most universities well since World War II, might have
become dangerously obsolete. He recalled from Forum meet-
ings, for example, that information technology and cognitive
science were transforming teaching and learning and that the
U.S. was losing its monopoly over global top-quality higher
education. Even without considering the recent ?nancial prob-
lems, business as usual seemed to be fraught with danger.
Whose job is it to develop and advocate a strategic busi-
ness model for the University, Chuck wondered? Should it be
his? But if so, how could his views about the model’s academic
elements gain traction? Recent conversations with the Presi-
dent and Provost suggested they were beginning to worry as
well—but that, as former professors in the arts and sciences,
how to conceive such a model lay outside their expertise. Just
yesterday the President had asked him for advice. How should
he respond?
Chuck Oversight…decides
to fag the president
on the risks he sees in
continuing to operate within
the traditional model of
higher education, which he
believes is unsustainable
in the long-run. He urges
the president to increase
productivity by adopting
new ways of teaching
and learning…
67
F
O
R
U
M
F
O
R
T
H
E
F
U
T
U
R
E
O
F
H
I
G
H
E
R
E
D
U
C
A
T
I
O
N
CASE DISCUSSION
The major causes for the gap between costs and revenue at
Winnington are clear: The endowment’s market value fell 25%
and, likewise, projected payouts are declining; current year
gifts are down, re?ecting declines in household wealth and
economic uncertainty; and fnancial aid is up, virtually erasing
tuition increases. And, ?nally, expenses continue to increase.
In giving advice to the president, Chuck Oversight dis-
tinguishes between what the institution can control and the
external causes of the problems they face. Broadly speaking,
the ?nancial crisis and the recession were beyond the con-
trol of the institution, and the pace of the endowment’s re-
covery largely will depend upon the pace of recovery in the
wider economy and the ?nancial markets. Declines in gifts are
largely externally driven as well. (While one could argue that
changes in endowment management practices and fund rais-
ing efforts could increase the endowment and level of giving,
changes in these revenue sources were overwhelming exter-
nally driven and likely will continue to be so.)
It would, of course, be possible to increase the endowment
spending rate in order to compensate for the losses. Many in-
stitutions had done exactly this, but Oversight was wary of
this strategy and knew the trustees were too. Everyone ac-
knowledged that one purpose of the endowment was to buffer
the institution from the effects of rainy days—and it certainly
was raining! However, raising the rate could not compensate
for Winnington’s structural de?cit. So doing would draw out
more money than could be expected from investment return
and thus, eventually, spend down the endowment. Oversight
believed the trustees might authorize a higher rate for a lim-
ited time to aid in a transition to solvency, but only after a
detailed plan for eliminating the structural de?cit had been
proposed and approved.
One possibility for eliminating the structural defcit was
to make Winnington’s ?nancial aid policies less generous.
However, cutting need-based aid would con?ict with the in-
stitution’s mission and efforts to recruit more students from
lower-income families—and thus bring on even more outside
pressure to serve a more representative student body. Cutting
merit aid would affect the institution’s ability to recruit high-
achieving students and raise fundamental concerns about
quality. In the same vein, accepting more students to counter
the previous year’s lower yield could negatively affect Win-
nington’s reputation.
Perhaps Winnington could delay capital projects to cut
costs in the short-term, but Oversight is well aware that in
project management, time is cost. Instead, Winnington could
cancel capital projects but, again, concerns about quality and
reputation would have to be taken into account.
Winnington could tweak its business model and generate
new sources of revenue by charging students in higher cost
or higher demand programs more: for example, engineering
students would pay higher tuition than English majors. Win-
nington could also increase its offerings for nontraditional stu-
dents, including retirees and alumni, both during the academ-
ic year and through summer programming. Not surprisingly,
concerns about quality and reputation come into play in this
realm as well, and complicate such efforts to increase revenue.
The reality, Oversight acknowledges, is that 60% of Win-
nington’s total expenses are labor costs. The ratio of adminis-
tration and support staff to total operating expenditures has
been steadily growing and, at the same time, teaching loads
for research-inactive faculty have been declining signi?cantly.
Moreover, the use of adjunct faculty is up, undermining Win-
nington’s reputation at the least, and very likely affecting its
quality too.
Oversight takes a comprehensive view of the entire univer-
sity—including these issues on the academic side of the enter-
prise in addition to his usual focus on the business and ?nance
side—and decides to ?ag the president on the risks he sees in
continuing to operate within the traditional model of higher ed-
ucation, which he believes is unsustainable in the long-run. He
urges the president to increase productivity by adopting new
ways of teaching and learning: methods that use technology to
customize learning, for example, have been shown to be more
Revenues 2009 2010 (est) 2011 (proj)
Student Income
Tuition and fees 317,684 335,157 346,887
Less fnancial aid (128,662) (137,813) (147,615)
Total Student Income 189,022 197,344 199,272
Sponsored Research Support
Direct costs 133,734 138,414 146,719
Indirect costs 40,120 41,524 42,978
Total Sponsored Research 173,854 179,938 189,697
Current year Gifts in Support of operations 27,698 24,375 17,062
Investment Income distributed for operations 198,496 173,684 138,947
Special Program Fees and other Income 106,617 110,349 114,211
Total Revenue 695,687 685,689 659,189
Expenses
Salaries and benefts 415,407 429,946 444,994
Other operating expenditures 223,681 231,509 239,612
Depreciation 55,573 56,129 56,690
Total Expenses 694,660 717,584 741,296
Excess of Revenue Over Expenditures 1,027 (31,895) (82,107)
Table 1. Winnington University Estimated Financial Results
For the years ended June 30, 2009 through 2011 (in thousands of dollars)
68
F
o
R
u
M
F
u
T
u
R
E
S
2
0
1
0
effective than traditional pedagogical approaches—both in the
short-term and in long-term retention testing. And they are
more cost effective, particularly for teaching students introduc-
tory-level material. Oversight points out that advances in the
cognitive sciences have the potential to transform teaching and
learning, making it more productive and effective. He urges the
president to support and embrace new pedagogical methods
informed by such discoveries, which will enable far more stu-
dents to be educated with the same labor force that Winning-
ton currently employs. Greater ef?ciency, for example, could
lead students to earn their undergraduate degrees in three years
rather than the traditional four or more years.
Oversight’s key point to the president is that labor costs
need not be considered ?xed in the long run. Productivity
increases from tenured faculty (“?xed cost” employees) can
allow reduction in other labor categories. Meanwhile, though,
Oversight knows that labor costs need to be reduced quickly.
Hiring freezes can help prevent costs from rising and could
slowly reduce tenured faculty positions (and others), but
those savings are not enough to address the projected $82
million shortfall within the next couple years.
It is time for the president to take the lead, communicate a
sense of urgency, and put forth a plan for layoffs.
LEADERSHIP STYLE AND SKILLS
The ?rst step a president of any university facing the need
for cost reduction should take is to create a sense of urgency
about the crisis. While it’s easy to scare people, the aim is to at
the same time present a plan about how, by doing things dif-
ferently, the university can break the momentum taking it in
the wrong direction and work its way out of the problem. The
key is to create a sense of urgency without instilling a feeling
of hopelessness.
There is a natural tendency for costs to grow in any orga-
nization, and for those costs to be defended and justifed as
necessary and prudent. Leaders of troubled organizations need
to overcome this natural inertia to cost reduction. The best
method is to convince employees—in this case, faculty, admin-
istration and staff—that the crisis is a threat to the institution’s
future survival if some action is not taken. Crises are very use-
ful as motivators for action, and leaders should view them as an
opportunity to create a sense of urgency within their organiza-
tion. With a sense of urgency and some fear of future survival it
is possible to develop cost reductions plans that would, in more
normal times, be dif?cult to envision. Further, the fact that the
current crisis on campus is a result of external issues and threats
presents the opportunity to implement changes while avoiding
the complications of internal blaming and ?nger pointing.
The skill needed by leaders to create an environment con-
ducive to change and cost reduction is the ability to articulate
the problem being faced and to bring the organization to an
understanding of the seriousness of the threat, while at the
same time offering a plan or at least a short-term agenda that
will guide the organization towards a solution to the problem.
Further, leaders must be both candid about the problem
and optimistic about its resolution. They need to be energetic
and willing to put in the long hours necessary to understand
just what needs to be done, and in contact and communica-
tion with employees. Now is the time to dig down into the de-
tails that otherwise would be ?ltered up by deans, vice presi-
dents, and the like.
Now is not the time for leaders to delegate. They need to
be informed and decisive, and build trust in their leadership.
Trust is built by increasing the perception of the leader’s abil-
ity, benevolence and integrity. Ability, of course, needs to be
proven—and is best done at this point by achieving success-
ful outcomes of decisions that are evident in the short-term.
Perceptions of benevolence ?ow from displays of understand-
ing employees’ concerns and by acting fairly. Integrity is evi-
denced by acting with openness, honesty, consistency and de-
pendability, and by the willingness to admit mistakes. Trust
in leadership makes the dif?cult task of cost reduction less
painful for all.
COST REDUCTION
As previously mentioned, no cost is ?xed in the long run:
productivity increases from tenured faculty (“?xed cost” em-
ployees) can allow reductions in other labor categories. In any
case, when labor cost reductions are necessary, ?rst ?nd out
what matters most to employees. Often, they prefer that wag-
es, bene?ts and hours be changed so as to avoid at least some
layoffs. Turning to part-time or job sharing arrangements can
be risky, though, and not as effective as one might think be-
cause bene?t costs tend to remain high.
So now it’s time to face layoffs. Layoffs fall into three pri-
mary areas: voluntary; non-voluntary, but without a plan; and
non-voluntary with a plan.
Voluntary layoffs are the least desirable route to take simply
because most often the worst people who don’t have options
stay, and the best people leave. Voluntary layoffs effectively
lower the average skill level of the workforce. Moreover, it’s
rare that voluntary layoffs achieve the end reduction goal and
so involuntary layoffs need to follow. Further, a hiring freeze
needs to be put in place so that those who left voluntarily
aren’t simply replaced, negating cost reductions. And ?nally,
it’s not uncommon that people who take voluntary layoffs get
69
F
O
R
U
M
F
O
R
T
H
E
F
U
T
U
R
E
O
F
H
I
G
H
E
R
E
D
U
C
A
T
I
O
N
hired back as consultants to do their old jobs—and you’ve
just spent money getting them to leave. Voluntary layoffs are
tempting because they’re not as hard to do, nor is the institu-
tion vulnerable to lawsuits claiming discrimination of many
types. But to ensure the long-term viability of the institution,
hard steps must be taken.
Non-voluntary layoffs without a plan are based on criteria
such as seniority, across-the-board reductions, and personal
relationships with the person making the decisions. These
methods say to those in the organization that the leadership
doesn’t know what to do. Across the board cuts, for example,
mean that no assessment has been made regarding the rela-
tive value of each of?ce, department or school to the institu-
tion and its mission. This approach also fosters deal-making
that could well lead to lawsuits as people talk to each other
throughout the ordeal. Worse, it conveys a lack of leadership
precisely when it is most needed.
The best approach to reducing labor costs is to under-
take non-voluntary layoffs with a plan. First, a reduction
goal should be set for the entire institution based on ?nancial
exigencies. The goal should be signi?cantly higher than one
might think, because all the pressure will be to do less, not
more, when it comes to cutting jobs. Each offce, department,
center, etc., should be reviewed and a reduction goal set for
each. Goals will vary and, in fact, it may be that some units
will not need to make any cuts. The sum of these cuts may
exceed the total goal but, again, that is desirable given the
considerable pressure to do less.
Once goals are decided upon, the managers of each unit
should evaluate and rank their employees along two dimen-
sions, value and commitment, as shown in Figure 1.
The set of people in the lower left quadrant, low value and
low commitment, are the ?rst to layoff. Any well-run organi-
zation won’t have many of these employees, and so will need
to look further to meet reduction goals. At the other end of the
spectrum, the set of people in the upper right quadrant, high
value and high commitment, need immediate attention. They
need to be reassured and even given incentives to stay. Yet
it’s the group in the upper left quadrant, high value but low
commitment, who often (in better times) are given the best
deals to stay—which in the long run simply encourages lack
of commitment. Further, the high value and high commitment
people are those to whom across-the-board reductions and
“sharing the pain” approaches seem most unfair.
Figure 2 shows the personnel actions associated with each
quadrant.
The high value but low commitment group includes peo-
ple who could leave anytime. They should be closely super-
vised so that someone else can replicate what they do, and
backup plans should be developed in case they leave. The aim
is to avoid losing a valuable person doing an important job
that no one else knows how to do.
The most dif?cult set of people to handle is the low value
and high commitment group. How they are treated is viewed
by the rest of the employees as indicative of your humanity
and fairness. It is very hard because some of these people are
going to have be laid off, and you need to be as fair and con-
sistent as possible with them.
Once each unit has produced a prioritized list for layoffs,
the institution’s president and senior management conduct
a comprehensive review of the lists, and make trade-offs be-
tween units as appropriate. The terms of severance should be
developed based on laws, contracts and standards of fairness,
and then the layoffs should be implemented quickly and si-
multaneously. The president should communicate with the
Figure 1. Layoff Ranking Matrix
Commitment to Organization
High value
Low Commitment
High value
High Commitment
Low value
Low Commitment
Low value
High Commitment
Value to
Organization
Source: Paul W. Marshall.
Figure 2. Personnel Action Turnaround
Commitment to Organization
develop Backup
Supervise Closely
don’t “overcompensate”
develop Incentive to Retain
Act Quickly to Reassure
never give a better deal
to others
First Choice for
Layoff
diffcult Personnel decision
Treatment of these people
gives signal to organization
Value to
Organization
Source: Paul W. Marshall.
Low
High
Low High
70
F
o
R
u
M
F
u
T
u
R
E
S
2
0
1
0
remaining employees to explain the process and clear up mis-
understandings. Although tempting, the president should not
make any promises that there will be no more layoffs.
In the end, most people can accept layoffs, even when they
lose their jobs, if they trust the organization’s leadership and
the layoffs are done according to a plan that is perceived as fair.
CONCLUSION
One of the benefts of a comprehensive and formal review of
any organization’s labor force is that it reveals marginal ac-
tivities. For decades, colleges and universities have engaged
in mission creep, expanding their activities and efforts and
spreading resources among them. Now, in a time of drastically
reduced endowments, declining revenues and budget short-
falls, not only do labor costs need to be reviewed and reduced,
but the viability of institutional programs needs to be carefully
considered as well. Chief ?nancial of?cers have an important
part to play in these reviews given their role as custodians
of the university-wide enterprise. In short, the fundamental
question of mission must be dealt with, and in light of the
current economic outlook, the reality is that only those insti-
tutions that become mission-centered will survive.
PAUL MARSHALL is the MBA Class of 1960 Professor of Man-
agement Practice at Harvard Business School, and is af?liated with the
Entrepreneurial Management Unit there. He teaches a course, The En-
trepreneurial Manager in the Turnaround Environment, on the role of
managers trying to execute an operational turnaround in a company
in distress. Marshall is also faculty chairman of the Global Colloquium
on Participant Centered Learning, a program that teaches professors
from around the world how to teach using the case method. He can be
reached at [email protected].
WILLIAM MASSY is Professor Emeritus of Higher Education
and former vice president for business and ?nance at Stanford Univer-
sity, where he also served as vice provost for research, acting provost,
professor and associate dean at the Graduate School of Business, and
Director of the Stanford Institute for Higher Education Research. His
most recent books include Academic Quality Work: A Handbook
for Improvement (2007) with Stephen Graham and Paula Short, and
Remaking the American University: Market-Smart and Mission-
Centered (2005) with Robert Zemsky and Gregory Wegner. Massy is
currently an independent consultant to universities worldwide, focus-
ing on quality and productivity issues in higher education. He can be
reached at [email protected].
doc_410752090.pdf
Given the fallout of the financial crisis, including widespread and dramatic declines in university endowments, increased demand for financial aid.
F
O
R
U
M
F
O
R
T
H
E
F
U
T
U
R
E
O
F
H
I
G
H
E
R
E
D
U
C
A
T
I
O
N
It is appropriate that execu-
tive vice presidents and chief
fnancial offcers adopt a com-
prehensive view of the entire
university—one that encom-
passes the academic as well
as the business and fnance
side of their institution.
The frst step a president of
a university facing the need
for cost reduction should
take is to create a sense of
urgency about the crisis—
without instilling a feeling of
hopelessness.
There is a natural tendency
for costs to grow in any orga-
nization, and for those costs
to be defended and justifed
as necessary and prudent.
Leaders of troubled organi-
zations need to overcome
this natural inertia to cost
reduction.
Labor costs should not be
considered fxed over the
long run. For example, fnding
more productive tasks for less
active tenured faculty (so-
called “fxed cost” employees)
can enable reductions in other
labor categories.
In the end, most people
can accept layoffs, even
when they lose their jobs, if
they trust the organization’s
leadership and the layoffs are
done according to a plan that
is perceived as fair.
CASE STUDY: WINNINGTON UNIVERSITY
This case was written for the Master Class by William Massy, former chief ?nancial of?cer and associate
dean of the Stanford Graduate School of Business, and Professor Emeritus of Education and Business
Administration at Stanford, with assistance from Paul Marshall, Dean Curry, vice president for business
and ?nance at California Institute of Technology, and John Curry, former executive vice president at MIT.
Master Class participants were asked to consider three questions as they read the case:
• What are the major causes for the gap between costs and revenue at Winnington?
• What advice should Chuck Oversight give to the president of Winnington to
improve the university’s position?
• What specifc actions should the president take?
or several years, the Forum for the Future of Higher Education’s Annual Symposium has
been preceded by a Master Class that examines current management and fnancial issues.
Recent classes have addressed endowment spending policy, capital structure, and risk
management. Given the fallout of the fnancial crisis, including widespread and dramatic
declines in university endowments, increased demand for fnancial aid, and severe liquid-
ity problems—as well as steadily rising operating costs—it was ftting that the Master Class
focus on managing in turbulent times. The class began with a short case study, reproduced
here, followed by a discussion that highlighted the need for executive vice presidents and chief f-
nancial offcers to adopt a comprehensive view of the entire university—one that encompasses the
academic as well as the business and fnance side of their institution. This broadens the view typi-
cally taken by these offcers; yet such a perspective is crucial to their fulflling their roles as custodi-
ans of the overall university enterprise. Paul Marshall, MBA Class of 1960 Professor of Management
Practice at the Harvard Business School, led the case discussion. He also described important char-
acteristics of leaders in turbulent times and addressed the harsh realities of cost reduction—includ-
ing making the diffcult decisions that one must face when laying off employees. In the end, perhaps
the most important leadership skills are the ability to engender trust and a sense of integrity and
fairness throughout the diffcult times and the changes they demand.
65
PAuL MARSHALL And WILLIAM MASSy
HARvARd BuSInESS SCHooL And
STAnFoRd unIvERSITy, EMERITuS
Managing in Turbulent Times
F
O
R
U
M
F
O
R
T
H
E
F
U
T
U
R
E
O
F
H
I
G
H
E
R
E
D
U
C
A
T
I
O
N
66
F
o
R
u
M
F
u
T
u
R
E
S
2
0
1
0
The case:
Charles F. (“Chuck”) Oversight, Executive Vice President
at Winnington University, stared again at the latest admission
and ?nancial aid report.
At best the news was mixed. The applicant pool was almost
steady but yield was down again, more sharply than in prior
years, and the ?nancial aid budget was under heavy pressure
due to the economy’s effect on parental assets. Enrollment tar-
gets had been inched up in recent years and tuition boost-
ed faster than the competition in order to make ends meet,
but now that strategy appeared to
be reaching its limits. There would
be an immediate budget gap, which
would only get worse as the smaller
freshman cohort propagated to the
upper-class years.
The endowment also was in trou-
ble. Its market value was down 25%
and allocations to private equities
had produced major liquidity prob-
lems. And if that wasn’t enough,
working capital was dangerously
short because a substantial portion
of the Expendable Funds Pool had
been invested alongside the endow-
ment. (See Table 1.)
Chuck believed, based on a re-
cent Forum meeting at the Brook-
ings Institution, that this would not
be a V-shaped recession but rather a
U-shaped one (with a broad bottom) or maybe even L-shaped
(open-ended). Things seemed likely to bottom out by the end
of the year, but instead of an endowment bounce-back he’d
been told to expect “normal” 6-8 percent returns going for-
ward. Although it would be many years before the losses from
2008-09 worked their way through the smoothing formula, the
handwriting of a structural de?cit was on the wall.
Chuck doubted that Winnington could increase revenue
enough to “sell its way out” of the de?cit. The University expect-
ed to achieve some success from the Obama economic stimulus
package’s call for “beaker-ready” research projects, but to sustain
the extra volume in the face of growing competition would re-
quire substantial cost sharing. And while any new sponsored re-
search was welcome, there was no doubt that it would increase
the risk pro?le of Winnington’s operating revenues—a point
Chuck recalled vividly from the Forum Master Class of 2007.
Finally, gift receipts were more likely to slow than to accelerate,
and further enrollment hikes probably were not feasible.
Winnington had substantial borrowing capacity that could
be used to weather its short-term problems and provide gener-
ous phase-in time for solutions to the structural de?cit. How-
ever, because no one expected a sharp rise in revenue or asset
values to cover balloon payments, borrowing now would im-
pact the University’s budget for years to come.
So where might a long-term solution be found? Chuck
was reminded of two operating trends that might offer clues.
First, the ratio of administration and support cost to total
operating expenditures had been growing steadily. No sim-
ple cause could be assigned to the increases, but they were
troubling given the expectations for ef?ciencies following the
implementation of new enterprise administrative systems. He
worried further about the fact that lots of the administrative
growth had taken place in schools and academic departments
rather than in central offces. Could these costs be rolled back?
Second, teaching loads for research-inactive faculty were
down signi?cantly. Chuck harbored the uneasy feeling that,
given the absence of demonstrable quality improvements, this
represented a drain on productivity. Average class size was
down too as more professors taught their specialties, even
though some departments bucked the trend with ever-larger
lectures and fewer faculty-intensive assignments. The use of ad-
junct faculty was up as well—especially the kind that could be
hired cheaply for a course or two on the “spot market.” In other
words, unexamined trends on the academic side of the enter-
prise seemed inconsistent with the University’s ?nancial pros-
pects and might even threaten its position in the marketplace.
Chuck knew his concerns were less about speci?c practices
than about what appeared to be a myopic culture that accepted
or even celebrated the traditional ways of doing things. More-
over, no one had a clear view of the University’s overall business
model—how all the pieces ?t together into an economically vi-
able whole. He worried that the traditional model, which had
served most universities well since World War II, might have
become dangerously obsolete. He recalled from Forum meet-
ings, for example, that information technology and cognitive
science were transforming teaching and learning and that the
U.S. was losing its monopoly over global top-quality higher
education. Even without considering the recent ?nancial prob-
lems, business as usual seemed to be fraught with danger.
Whose job is it to develop and advocate a strategic busi-
ness model for the University, Chuck wondered? Should it be
his? But if so, how could his views about the model’s academic
elements gain traction? Recent conversations with the Presi-
dent and Provost suggested they were beginning to worry as
well—but that, as former professors in the arts and sciences,
how to conceive such a model lay outside their expertise. Just
yesterday the President had asked him for advice. How should
he respond?
Chuck Oversight…decides
to fag the president
on the risks he sees in
continuing to operate within
the traditional model of
higher education, which he
believes is unsustainable
in the long-run. He urges
the president to increase
productivity by adopting
new ways of teaching
and learning…
67
F
O
R
U
M
F
O
R
T
H
E
F
U
T
U
R
E
O
F
H
I
G
H
E
R
E
D
U
C
A
T
I
O
N
CASE DISCUSSION
The major causes for the gap between costs and revenue at
Winnington are clear: The endowment’s market value fell 25%
and, likewise, projected payouts are declining; current year
gifts are down, re?ecting declines in household wealth and
economic uncertainty; and fnancial aid is up, virtually erasing
tuition increases. And, ?nally, expenses continue to increase.
In giving advice to the president, Chuck Oversight dis-
tinguishes between what the institution can control and the
external causes of the problems they face. Broadly speaking,
the ?nancial crisis and the recession were beyond the con-
trol of the institution, and the pace of the endowment’s re-
covery largely will depend upon the pace of recovery in the
wider economy and the ?nancial markets. Declines in gifts are
largely externally driven as well. (While one could argue that
changes in endowment management practices and fund rais-
ing efforts could increase the endowment and level of giving,
changes in these revenue sources were overwhelming exter-
nally driven and likely will continue to be so.)
It would, of course, be possible to increase the endowment
spending rate in order to compensate for the losses. Many in-
stitutions had done exactly this, but Oversight was wary of
this strategy and knew the trustees were too. Everyone ac-
knowledged that one purpose of the endowment was to buffer
the institution from the effects of rainy days—and it certainly
was raining! However, raising the rate could not compensate
for Winnington’s structural de?cit. So doing would draw out
more money than could be expected from investment return
and thus, eventually, spend down the endowment. Oversight
believed the trustees might authorize a higher rate for a lim-
ited time to aid in a transition to solvency, but only after a
detailed plan for eliminating the structural de?cit had been
proposed and approved.
One possibility for eliminating the structural defcit was
to make Winnington’s ?nancial aid policies less generous.
However, cutting need-based aid would con?ict with the in-
stitution’s mission and efforts to recruit more students from
lower-income families—and thus bring on even more outside
pressure to serve a more representative student body. Cutting
merit aid would affect the institution’s ability to recruit high-
achieving students and raise fundamental concerns about
quality. In the same vein, accepting more students to counter
the previous year’s lower yield could negatively affect Win-
nington’s reputation.
Perhaps Winnington could delay capital projects to cut
costs in the short-term, but Oversight is well aware that in
project management, time is cost. Instead, Winnington could
cancel capital projects but, again, concerns about quality and
reputation would have to be taken into account.
Winnington could tweak its business model and generate
new sources of revenue by charging students in higher cost
or higher demand programs more: for example, engineering
students would pay higher tuition than English majors. Win-
nington could also increase its offerings for nontraditional stu-
dents, including retirees and alumni, both during the academ-
ic year and through summer programming. Not surprisingly,
concerns about quality and reputation come into play in this
realm as well, and complicate such efforts to increase revenue.
The reality, Oversight acknowledges, is that 60% of Win-
nington’s total expenses are labor costs. The ratio of adminis-
tration and support staff to total operating expenditures has
been steadily growing and, at the same time, teaching loads
for research-inactive faculty have been declining signi?cantly.
Moreover, the use of adjunct faculty is up, undermining Win-
nington’s reputation at the least, and very likely affecting its
quality too.
Oversight takes a comprehensive view of the entire univer-
sity—including these issues on the academic side of the enter-
prise in addition to his usual focus on the business and ?nance
side—and decides to ?ag the president on the risks he sees in
continuing to operate within the traditional model of higher ed-
ucation, which he believes is unsustainable in the long-run. He
urges the president to increase productivity by adopting new
ways of teaching and learning: methods that use technology to
customize learning, for example, have been shown to be more
Revenues 2009 2010 (est) 2011 (proj)
Student Income
Tuition and fees 317,684 335,157 346,887
Less fnancial aid (128,662) (137,813) (147,615)
Total Student Income 189,022 197,344 199,272
Sponsored Research Support
Direct costs 133,734 138,414 146,719
Indirect costs 40,120 41,524 42,978
Total Sponsored Research 173,854 179,938 189,697
Current year Gifts in Support of operations 27,698 24,375 17,062
Investment Income distributed for operations 198,496 173,684 138,947
Special Program Fees and other Income 106,617 110,349 114,211
Total Revenue 695,687 685,689 659,189
Expenses
Salaries and benefts 415,407 429,946 444,994
Other operating expenditures 223,681 231,509 239,612
Depreciation 55,573 56,129 56,690
Total Expenses 694,660 717,584 741,296
Excess of Revenue Over Expenditures 1,027 (31,895) (82,107)
Table 1. Winnington University Estimated Financial Results
For the years ended June 30, 2009 through 2011 (in thousands of dollars)
68
F
o
R
u
M
F
u
T
u
R
E
S
2
0
1
0
effective than traditional pedagogical approaches—both in the
short-term and in long-term retention testing. And they are
more cost effective, particularly for teaching students introduc-
tory-level material. Oversight points out that advances in the
cognitive sciences have the potential to transform teaching and
learning, making it more productive and effective. He urges the
president to support and embrace new pedagogical methods
informed by such discoveries, which will enable far more stu-
dents to be educated with the same labor force that Winning-
ton currently employs. Greater ef?ciency, for example, could
lead students to earn their undergraduate degrees in three years
rather than the traditional four or more years.
Oversight’s key point to the president is that labor costs
need not be considered ?xed in the long run. Productivity
increases from tenured faculty (“?xed cost” employees) can
allow reduction in other labor categories. Meanwhile, though,
Oversight knows that labor costs need to be reduced quickly.
Hiring freezes can help prevent costs from rising and could
slowly reduce tenured faculty positions (and others), but
those savings are not enough to address the projected $82
million shortfall within the next couple years.
It is time for the president to take the lead, communicate a
sense of urgency, and put forth a plan for layoffs.
LEADERSHIP STYLE AND SKILLS
The ?rst step a president of any university facing the need
for cost reduction should take is to create a sense of urgency
about the crisis. While it’s easy to scare people, the aim is to at
the same time present a plan about how, by doing things dif-
ferently, the university can break the momentum taking it in
the wrong direction and work its way out of the problem. The
key is to create a sense of urgency without instilling a feeling
of hopelessness.
There is a natural tendency for costs to grow in any orga-
nization, and for those costs to be defended and justifed as
necessary and prudent. Leaders of troubled organizations need
to overcome this natural inertia to cost reduction. The best
method is to convince employees—in this case, faculty, admin-
istration and staff—that the crisis is a threat to the institution’s
future survival if some action is not taken. Crises are very use-
ful as motivators for action, and leaders should view them as an
opportunity to create a sense of urgency within their organiza-
tion. With a sense of urgency and some fear of future survival it
is possible to develop cost reductions plans that would, in more
normal times, be dif?cult to envision. Further, the fact that the
current crisis on campus is a result of external issues and threats
presents the opportunity to implement changes while avoiding
the complications of internal blaming and ?nger pointing.
The skill needed by leaders to create an environment con-
ducive to change and cost reduction is the ability to articulate
the problem being faced and to bring the organization to an
understanding of the seriousness of the threat, while at the
same time offering a plan or at least a short-term agenda that
will guide the organization towards a solution to the problem.
Further, leaders must be both candid about the problem
and optimistic about its resolution. They need to be energetic
and willing to put in the long hours necessary to understand
just what needs to be done, and in contact and communica-
tion with employees. Now is the time to dig down into the de-
tails that otherwise would be ?ltered up by deans, vice presi-
dents, and the like.
Now is not the time for leaders to delegate. They need to
be informed and decisive, and build trust in their leadership.
Trust is built by increasing the perception of the leader’s abil-
ity, benevolence and integrity. Ability, of course, needs to be
proven—and is best done at this point by achieving success-
ful outcomes of decisions that are evident in the short-term.
Perceptions of benevolence ?ow from displays of understand-
ing employees’ concerns and by acting fairly. Integrity is evi-
denced by acting with openness, honesty, consistency and de-
pendability, and by the willingness to admit mistakes. Trust
in leadership makes the dif?cult task of cost reduction less
painful for all.
COST REDUCTION
As previously mentioned, no cost is ?xed in the long run:
productivity increases from tenured faculty (“?xed cost” em-
ployees) can allow reductions in other labor categories. In any
case, when labor cost reductions are necessary, ?rst ?nd out
what matters most to employees. Often, they prefer that wag-
es, bene?ts and hours be changed so as to avoid at least some
layoffs. Turning to part-time or job sharing arrangements can
be risky, though, and not as effective as one might think be-
cause bene?t costs tend to remain high.
So now it’s time to face layoffs. Layoffs fall into three pri-
mary areas: voluntary; non-voluntary, but without a plan; and
non-voluntary with a plan.
Voluntary layoffs are the least desirable route to take simply
because most often the worst people who don’t have options
stay, and the best people leave. Voluntary layoffs effectively
lower the average skill level of the workforce. Moreover, it’s
rare that voluntary layoffs achieve the end reduction goal and
so involuntary layoffs need to follow. Further, a hiring freeze
needs to be put in place so that those who left voluntarily
aren’t simply replaced, negating cost reductions. And ?nally,
it’s not uncommon that people who take voluntary layoffs get
69
F
O
R
U
M
F
O
R
T
H
E
F
U
T
U
R
E
O
F
H
I
G
H
E
R
E
D
U
C
A
T
I
O
N
hired back as consultants to do their old jobs—and you’ve
just spent money getting them to leave. Voluntary layoffs are
tempting because they’re not as hard to do, nor is the institu-
tion vulnerable to lawsuits claiming discrimination of many
types. But to ensure the long-term viability of the institution,
hard steps must be taken.
Non-voluntary layoffs without a plan are based on criteria
such as seniority, across-the-board reductions, and personal
relationships with the person making the decisions. These
methods say to those in the organization that the leadership
doesn’t know what to do. Across the board cuts, for example,
mean that no assessment has been made regarding the rela-
tive value of each of?ce, department or school to the institu-
tion and its mission. This approach also fosters deal-making
that could well lead to lawsuits as people talk to each other
throughout the ordeal. Worse, it conveys a lack of leadership
precisely when it is most needed.
The best approach to reducing labor costs is to under-
take non-voluntary layoffs with a plan. First, a reduction
goal should be set for the entire institution based on ?nancial
exigencies. The goal should be signi?cantly higher than one
might think, because all the pressure will be to do less, not
more, when it comes to cutting jobs. Each offce, department,
center, etc., should be reviewed and a reduction goal set for
each. Goals will vary and, in fact, it may be that some units
will not need to make any cuts. The sum of these cuts may
exceed the total goal but, again, that is desirable given the
considerable pressure to do less.
Once goals are decided upon, the managers of each unit
should evaluate and rank their employees along two dimen-
sions, value and commitment, as shown in Figure 1.
The set of people in the lower left quadrant, low value and
low commitment, are the ?rst to layoff. Any well-run organi-
zation won’t have many of these employees, and so will need
to look further to meet reduction goals. At the other end of the
spectrum, the set of people in the upper right quadrant, high
value and high commitment, need immediate attention. They
need to be reassured and even given incentives to stay. Yet
it’s the group in the upper left quadrant, high value but low
commitment, who often (in better times) are given the best
deals to stay—which in the long run simply encourages lack
of commitment. Further, the high value and high commitment
people are those to whom across-the-board reductions and
“sharing the pain” approaches seem most unfair.
Figure 2 shows the personnel actions associated with each
quadrant.
The high value but low commitment group includes peo-
ple who could leave anytime. They should be closely super-
vised so that someone else can replicate what they do, and
backup plans should be developed in case they leave. The aim
is to avoid losing a valuable person doing an important job
that no one else knows how to do.
The most dif?cult set of people to handle is the low value
and high commitment group. How they are treated is viewed
by the rest of the employees as indicative of your humanity
and fairness. It is very hard because some of these people are
going to have be laid off, and you need to be as fair and con-
sistent as possible with them.
Once each unit has produced a prioritized list for layoffs,
the institution’s president and senior management conduct
a comprehensive review of the lists, and make trade-offs be-
tween units as appropriate. The terms of severance should be
developed based on laws, contracts and standards of fairness,
and then the layoffs should be implemented quickly and si-
multaneously. The president should communicate with the
Figure 1. Layoff Ranking Matrix
Commitment to Organization
High value
Low Commitment
High value
High Commitment
Low value
Low Commitment
Low value
High Commitment
Value to
Organization
Source: Paul W. Marshall.
Figure 2. Personnel Action Turnaround
Commitment to Organization
develop Backup
Supervise Closely
don’t “overcompensate”
develop Incentive to Retain
Act Quickly to Reassure
never give a better deal
to others
First Choice for
Layoff
diffcult Personnel decision
Treatment of these people
gives signal to organization
Value to
Organization
Source: Paul W. Marshall.
Low
High
Low High
70
F
o
R
u
M
F
u
T
u
R
E
S
2
0
1
0
remaining employees to explain the process and clear up mis-
understandings. Although tempting, the president should not
make any promises that there will be no more layoffs.
In the end, most people can accept layoffs, even when they
lose their jobs, if they trust the organization’s leadership and
the layoffs are done according to a plan that is perceived as fair.
CONCLUSION
One of the benefts of a comprehensive and formal review of
any organization’s labor force is that it reveals marginal ac-
tivities. For decades, colleges and universities have engaged
in mission creep, expanding their activities and efforts and
spreading resources among them. Now, in a time of drastically
reduced endowments, declining revenues and budget short-
falls, not only do labor costs need to be reviewed and reduced,
but the viability of institutional programs needs to be carefully
considered as well. Chief ?nancial of?cers have an important
part to play in these reviews given their role as custodians
of the university-wide enterprise. In short, the fundamental
question of mission must be dealt with, and in light of the
current economic outlook, the reality is that only those insti-
tutions that become mission-centered will survive.
PAUL MARSHALL is the MBA Class of 1960 Professor of Man-
agement Practice at Harvard Business School, and is af?liated with the
Entrepreneurial Management Unit there. He teaches a course, The En-
trepreneurial Manager in the Turnaround Environment, on the role of
managers trying to execute an operational turnaround in a company
in distress. Marshall is also faculty chairman of the Global Colloquium
on Participant Centered Learning, a program that teaches professors
from around the world how to teach using the case method. He can be
reached at [email protected].
WILLIAM MASSY is Professor Emeritus of Higher Education
and former vice president for business and ?nance at Stanford Univer-
sity, where he also served as vice provost for research, acting provost,
professor and associate dean at the Graduate School of Business, and
Director of the Stanford Institute for Higher Education Research. His
most recent books include Academic Quality Work: A Handbook
for Improvement (2007) with Stephen Graham and Paula Short, and
Remaking the American University: Market-Smart and Mission-
Centered (2005) with Robert Zemsky and Gregory Wegner. Massy is
currently an independent consultant to universities worldwide, focus-
ing on quality and productivity issues in higher education. He can be
reached at [email protected].
doc_410752090.pdf