Over the course of the last three days we’ve been talking about all kinds of risks: today, I want to talk about financial risks and particularly how institutions generate income.

Greater institutional income is a panacea for problems facing institutional boards: the more income you have, the better position one is in to deal with all those risks we’ve been talking about all week .  A rich institution can pay to attract good staff (both academics and key non-academic positions, like communications and IT), invest in research for quality improvement, pay for good internal auditors, and so on, while those with lower incomes are doomed to live life a little bit closer to the edge, tempting catastrophic risk.

So, simple enough, right?  Just go out there and raise/earn as much as you can and then you’ll be in the best possible position to meet all those threats?  Well, not so fast.

The first thing to recognize is that an institution’s financial health can basically be determined by four simple questions.  And in theory, an institution that is working to get the “right” answers to each of these questions will be more financially secure, better able to pay its bills and – most importantly from the point of view of this series – insulate itself from risk, particularly of the loss-of-prestige variety.  But accompanying most of these revenue sources are – wait for it – more sources of risk!  Irony, or what?

Those four questions are:

 How much is the institution getting from government and how fast is this income increasing or decreasing?  Depending on where you are in Canada, government dollars account for between 40 and 75% of operating revenue.  Where this number is high and rising (say, Newfoundland and Alberta until the oil price collapse), everything is hunky dory.  Where it’s not, problems arise.  There isn’t a whole lot that institutions can do to affect this: government relations teams can lobby and influential Board members can have a word with government ministers, but effectiveness on this score is usually pretty limited (there’s not a lot you can do about an oil price crash).  And what many institutions deduce from this is that they are better off relying on a source they can actually rely on: namely, fee-paying tuition.

How many students do you have, and are numbers increasing or decreasing?  Institutions fight for students because they are a reliable source of income –more reliable than government.  But the problem is you have to be able attract them.  Students must want to attend your institution.  And being desirable is not costless.  An institution has to look attractive, have Wi-Fi everywhere, and so on.  At the extreme, in the United States (not here, thank God), this gets you into an amenities arms race for things like lazy rivers.  The risk here is that at some point the hunt for more student dollars starts to make institutions look less serious as places of learning – and if that takes hold, prestige becomes a problem.

How much money are you able to charge students?  Increasing?  At What Rate?  Higher tuition fees, remember, are at least in part a risk-mitigation strategy.  So, the strategy is to get in as many high-paying students as you can.  But as provincial governments have put more and more restrictions on tuition, institutions have turned to other markets which are not as heavily regulated: mainly (but not exclusively) international students.  But again, this is where the pursuit of cash to reduce risk creates additional risk.  Most universities rely on agents – and my Lord there is a lot of dodgy stuff going on in the world of agents (for a quick overview, see this very pointed 2016 article by Mel Broitman in Inside Higher Education which predictably met with stony silence from Canadian institutions).  Not only are there shady dealings in obtaining international students, but international student flows are more volatile than domestic ones.  Australian universities lost billions after a couple of racist attacks scared Indian students away for a few years.  Several institutions in Canada saw major revenue decreases when they were suddenly taken off the King Abdullah Scholarship eligibility list.  So, in chasing more revenue, institutions open themselves up to more income volatility, and, if using agents, sometimes put their reputations in the hands of agents they cannot control.

How much money is coming in from other revenue streams? Over the past couple of decades, lots of institutions have tried to become more entrepreneurial, getting involved in new business ventures (scientific or otherwise) which are for-profit or cost-recovery.  But again, any effort along these lines create all kinds of potential liabilities and risks.  These are very tricky to run in the context of a non-profit/charitable organization like a university, and – not to put too fine a point on it – university and college admins aren’t (usually) hired for their entrepreneurial prowess.  So how is risk being handled?

Now, I don’t know the ins and outs of every Board in Canada, but in my experience the quality of Board oversight on these kinds of things is pretty mixed.  Some boards have a great handle on risk from things like agents and for-profit ventures, and others don’t.  Some, I suspect, simply ignore them because the lure of more money to help them deal with other types of risks (mostly ones involving prestige) is too great.

But income generation holds peril as well as promise.  Boards can and should be thinking hard about that trade-off and demanding better risk management in this area.

Some wrap-up thoughts tomorrow.