The shift to Performance-Based Funding (PBF; sometimes also known as “Outcomes-Based Funding”) as a means of determining state allocations to higher education institutions is one of the dominant trends shaping higher education today, particularly within the public sector. Over 30 states now have some sort of PBF initiative on the books, with others likely to follow within the next decade. Accounting for the impact of PBF has thus become a critical element for university leaders to ensure the financial health of their institutions.
The goal of PBF initiatives is to reward institutions with public funding for high performance on outcomes which serve the public interest. Typically, PBF models allocate funds through a formula based on various metrics of success. While the exact metrics, formulas, and details are specific to each state, common examples of PBF metrics include: number of degrees or credentials awarded, retention rates, graduation rates, course completions, and cost of instruction. Many states also include incentives for the success of particular student populations, such as traditionally under-represented minorities, Pell-recipients, students in STEM+H disciplines, etc.
The most obvious effect of PBF initiatives on institutional budgets is to tie funding allocations to progress on the chosen metrics. In a well-designed PBF program, the budgeting metrics should be broadly aligned with an institution’s existing goals for improving student success in accordance with its academic mission. Thus, institutions will generally find that achieving progress on their existing strategic plans related to student academic success will also put them in good position to benefit from PBF initiatives.
However, a more subtle implication of PBF is that state funding allocations are less certain. No matter how well-defined the system, PBF allocations are inherently variable by design. Not only do allocations depend on the precise values achieved in the metrics, but in many states the funding received by any one institution will vary depending on how well its metrics compare to those of other institutions. These values are, of course, not knowable in advance. Responsible institutional leaders building long-term budgets must therefore account for the downside risk potential of not receiving a full allocation in any given year.
Combined with shifting demographics, increased competition, a growing backlash against rising tuition, generally declining state funding, and the myriad of other factors putting pressure on budgets, the advent of PBF has made the task of ensuring the financial sustainability of higher education institutions more challenging and complex than ever.
Enter Institutional Analytics
Numerous institutions have shown that institutional analytics can be highly effective in improving student success and financial sustainability. These same techniques are well-suited to adapting to the demands of a PBF funding model. Thus, a robust institutional analytics program is the most effective way for an institution to thrive in a PBF environment.
Firstly, an institutional analytics program is one of the most effective ways to improve on the metrics directly measured in a PBF model. For instance, many PBF models incentivize institutions to increase the number of degrees and/or credentials they award. Two primary strategies for boosting the number of completions include increasing enrollments and increasing graduation rates. Increasing enrollments requires a detailed understanding of the admissions funnel, including target market analysis and yield modeling. Financial aid award optimization will improve your ability to attract students without breaking the financial aid budget. Additionally, financial aid optimization can improve retention and graduation rates by ensuring students have the financial resources to succeed. Retention risk scoring allows you to target the right resources at the right students at the right times to ensure their success and ultimate graduation. Thus, along the way to improving on the degrees awarded metric, you’ve also improved on retention rate, graduation rate, and course completion metrics that may also be part of the PBF model. All this in the service of student success in full accordance with your existing strategic plan.
The second benefit brought by an institutional analytics program is improved financial sustainability, irrespective of any PBF allocations. Increased first-time enrollments and retention rates both increase total enrollments, increasing total tuition revenue, and thus driving down the proportion of the overall budget coming from state allocations, whether as part of a PBF program or not. Furthermore, targeted recruitment and financial aid strategies can be used to improve the net tuition revenue generated per student in order to cover any increased instructional costs. Similarly, analytics-based strategies for reducing costs of instruction, managing operations efficiently, improving alumni giving rates, etc. can be used to improve the financial health of the institution. The funding uncertainties inherent in a PBF system are thus mitigated by making the institution less dependent on state-appropriated dollars.
The focus of an effective institutional analytics program need not, and indeed should not, be focused primarily on PBF metrics. Instead, an analytics strategy focused on internal strategic plan goals and success metrics, designed to broadly improve the academic and financial health of the institution, will be most effective in driving an institution to become the best version of itself that it can be. These improvements will naturally be beneficial to PBF success, and be built on a solid foundation that is independent of any particular state funding model.
The imperatives of student success and financial sustainability pre-date the current trend toward performance-based funding, and will continue to exist regardless of whether PBF remains a permanent feature of the higher education landscape or turns out to be a passing fad. Institutional analytics has proven to be a highly successful tool for adapting to the PBF environment while simultaneously achieving fundamental institutional goals. Whether your institution is facing performance-based funding or just looking to achieve its existing strategic goals, a robust institutional analytics program is an essential tool for success.