The Independent School Financial Model -- Is It Sustainable?

Summer 2016

By David Lourie

Editor’s Note: The following article first appeared in The Trustee’s Letter, March/April 2015, a publication of Educational Directions, Inc. It is reprinted here with permission. 

Almost seven years removed, the Great Recession still looms large in the minds of independent school trustees and administrators. While not producing many positives in the lives of our schools and the nation’s economy, it did instigate important and long overdue questions and discussions about the long-term sustainability of the so-called independent school financial model — a model that is mostly tuition-driven. 

Edward E. Ford Foundation awarded us a grant to do an in-depth analysis of a single school’s financial model as a case study in sustainability. Key questions included: “How high can tuitions go until they reach a price point? How much can we continue to discount (that is, offer financial aid) on the backs of unsustainably high tuition increases? How will we address the fixed costs of our institutions that are far outpacing CPI and tuition levels?” For individual schools to begin to answer these questions, we felt that looking at one school’s financial past, present, and future would provide a clearer road map. 

Along with matching funds from a donor, we partnered with the University of Virginia’s Darden School of Business to conduct a yearlong study of our own financial model, including a deep-dive into our books, conjoint surveys of our parents, focus groups, and interviews with other independent school heads and trustees. The result was the creation of a financial modeling system that would allow our school to project key financial benchmarks far into the future and a case study that illustrated the unique marketing problems that our schools face. 

Both of these tools would serve as the basis for ongoing discussions about financial sustainability, starting with a recent symposium of eight tuition-driven, K–12 schools with large enrollments. Symposium attendees worked in breakout groups to analyze their own financial profiles and build consensus regarding creative approaches to ensuring that our schools remain financially sustainable. Each group tackled several essential questions relating to financial models and value propositions, including: 

• What is the single most compelling objective metric that proves your school’s success?

• What one program could we eliminate that would result in impactful cost savings with no/minimal/positive impact on mission delivery?

• Is there a price point at which our financial model breaks: yes or no? 

• What is our school’s single most distinctive feature?

• Who is our target consumer?

• What single element in our financial model, if compromised, would be the greatest threat? 

• Complete the following: Our school is worth $250,000 because we_______. 

• Regardless of cost, what is our dream program that, if implemented, could be a game-changer for our school? 

• What is the single greatest obstacle to making the dream program a reality? 

There does not appear to be a single, universal fix to the model, but rather a compendium of decisions and factors, internal and external, and qualitative and quantitative, that must be considered in combination to create, if not hopefully ensure, long-term financial strength. 

Key takeaways: 

1. The key measure of financial sustainability is the annual and longitudinal measure of net vs. gross tuition increases. Once the latter outpaces the former, a school is in trouble. 

2. Schools are struggling to identify the “value-added” objective measure that justifies their costs. 

3. The role of philanthropy is key to the model, and schools are seeing a shift in the kinds of gifts they are receiving and soliciting (less endowment and more current-use support for strategic initiatives largely programmatic in nature). 4. Of the few most impactful financial levers, schools are not pulling the enrollment lever, as overall demographic trends indicate flat to minimal school-age population growth. 

5. There remains debate and disagreement about the proper strategy vis-à-vis tuition increases and tuition discounting. 

6. Quality should determine price, not vice versa. Tuition should be set based on program needs and strategic plan initiatives. 

7. The teacher-student relationship is paramount and remains an important marketing tool. 8. Independent schools increasingly need to provide objective data about student and alumni success to demonstrate value and track program quality. 

Author
David Lourie

David S. Lourie is head of St. Anne’s-Belfield School (Virginia).