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Is Higher Education Approaching the Perfect Storm?

With costs increasing and economic forecasts pointing to a challenging year ahead, what can colleges and universities do to contain costs and weather uncertain times? The answer may surprise you.
University Business, Jan 2009

As colleges and universities face the sobering realities of the economic crisis, one has to wonder: Is higher education approaching the perfect storm?

For many universities, funding allocations are at maximum levels, while some legislatures are already instituting significant budget cuts. Endowment levels for public and private institutions are questionable as economic woes curtail benefactors’ ability to give. And costs on everything from fuel to health insurance continue to increase with no end in sight.

Tuition rate increases, long considered the panacea when budget woes arise, continue to increase—up 6.4 percent for public universities and 5.9 percent for private institutions this fall according to the “Trends in College Pricing” report from the College Board. These rates follow an average, cumulative tuition increase of more than 40 percent since 2002.

Will parents and students be able to absorb such increases and at what point will the cost of a college education simply exceed what the market can stand? Are we at that point already?

These challenges, of course, aren’t news to university leaders, financial departments and procurement officers who are keenly focused on addressing the financial challenges colleges and universities face. So it should come as no surprise that many are dismayed by what they see as the failure of higher education to adequately address the one business function most capable of providing relief to these financial pressures.

For most institutions, procurement departments operate as a processing function; the office that grants approvals and manages purchase orders. In contrast, procurement plays a very different role in the business world, where it is recognized as the leading edge of efforts to contain costs—in the millions of dollars—and drive greater levels of service.

To date, less than two percent of the more than 4,000 colleges and universities nationwide are implementing a more strategic approach to procurement. For those leaders overseeing these efforts, higher education’s failure to change its approach to procurement is inconceivable, particularly when one considers the facts.

At most institutions, only payroll eclipses spending on goods and services by faculty and staff. Likewise, management of this spending typically represents the greatest single opportunity to generate savings without impacting staff levels or academic programs.

When one considers that the more favorable terms and conditions that result from aggregating purchasing power with preferred suppliers save anywhere from five to 20 percent on everything a university purchases, the sober reality is clear: Through inaction or an unwillingness to modernize procurement practices, schools both large and small are wasting millions of dollars each year, not because of the goods and services they buy, but how they purchase them.

Such lost opportunities stand in stark contrast to operations such as those at the University of Pennsylvania and other innovative institutions. At Penn, procurement is managed with the same aggressive focus on generating savings and efficiencies that one would expect at a Fortune 100 company.

Using SciQuest’s intuitive online shopping platform, faculty and staff shop for the items they need in an environment much like that encountered on popular e-commerce sites. Time consuming administrative tasks such as attaining signatures for approval and paper-based purchase orders are automated. Most importantly, Penn’s Purchasing Services Department acts on the consolidation of the university’s buying power and data from the system to negotiate more favorable terms and conditions with suppliers.

Just how much does this approach save? Penn is currently half way through what its Chief Procurement Officer Ralph Maier deems the Cost Containment Project, a four-year effort to save $50 million through strategic procurement and sourcing. To date, they are $8 million ahead of schedule.

When you consider the average cost of tuition at a private university, $25,143, the impact of this strategic approach is very clear. Fifty million dollars will pay the annual tuition of nearly 2,000 students at the average private college.

So what can colleges and universities do to change? They can start with four steps in mind.

—Automate Procurement Processes: Manual processes are time consuming, labor intensive and hinder cost containment efforts.

—Aggregate Purchasing Power: Suppliers are quick to offer contracted rates in return for preferred supplier status or the opportunity to vie for a greater share of a university’s business.

—Gain Visibility Over Spending: You can’t contain costs effectively unless you have real-time visibility into spending.

—Utilize Available Information: Automation is not enough. The full potential of strategic procurement can only be realized by using the information modern eprocurement solutions deliver to make strategic decisions from sourcing to settlement.

It is time for higher education to significantly and dramatically change its approach to procurement. The status quo will no longer suffice. Eprocurement and the more strategic approach it makes possible are essential steps that can and will empower colleges and universities to more effectively weather the storm. Is your institution ready?

Stephen Wiehe is president and CEO of SciQuest, a provider of eprocurement and supplier enablement solutions to more than 70 institutions in higher education.