5 Stressors on the Independent School Business Model

Over the past year, I've spoken with more than 100 heads of schools and industry leaders about the independent school business model.

Two clear themes emerged:

1. Everyone recognizes that we're operating under a challenge model
2. Every head reported that hiring and staff retention is one of the most acute challenges they're dealing with right now

In fact, the National Association of Independent Schools (NAIS) released a 2023 Hot Issues Survey asking heads about their challenges and opportunities.

100% of school heads said that finding and retaining qualified staff as workplace expectations shift is challenging, with 91% saying ensuring the school's financial sustainability is another growing challenge.

So, I asked myself, "Why are we in this situation?"

When I asked this pre-COVID, I likely would have heard something like, "Peter, people have been saying this model has been challenged for at least 20 years, but yet we're still here."

That's no longer the case in 2024. I've yet to hear a single head of school say anything remotely similar. It makes sense for a good reason: circumstances have changed.

We're experiencing multiple stressors related to the independent school business model. Here are the five that I've identified after all my conversations.

• Hiring and retention
• Declining birth rate
• A new generation of parents
• Tightening credit
• Increased tuition discounting

Let's dig into each in a bit more detail.

Hiring and Retention

Most faculty and staff in independent schools choose to be there because they are passionate about serving students, yet retention is becoming increasingly difficult. Why?

• We have a redefined relationship with work post-pandemic. At a time when many businesses are offering hybrid or remote work, schools have a difficult bar to meet. The in-person school experience is critical on multiple levels, but it conflicts with changing workplace expectations.
• The pandemic hastened retirement for some of our most seasoned educators, leaving large gaps in school faculty.
• Younger candidates have different priorities. In arecent Deloitte survey, 49% of Gen Zs and millennials prioritized work-life balance as their top consideration when choosing an employer.
• Schools offer new programs and services to keep up with evolving demands, and teachers are often asked to do more-without additional pay, in many cases-leading to higher burnout and attrition.

Blackbaud has an excellent white paper from a 25-year private school veteran offering some solutions to these hiring and retention challenges.

Declining Birth Rate

As birth rates decline and populations age, the effects on K-12 enrollment, funding, and institutional sustainability are profound. Since 2007, the national birth rate has declined by 23%.

Every state in the U.S. has experienced a double-digit birth rate decline.

Over the last five years, a few states have seen in-migration from other states. But that compensates for only a portion of the birth rate decline. In areas particularly affected by out-migration and dropping birth rates (the Northeast, for example), there's increased competition for students, not just with other independent schools but also with public schools focused on enrollment levels.

A New Generation of Parents

As mentioned above, younger workers think differently about work than earlier generations. That same group is now the majority in our K-12 parent population. Schools have historically marketed their college acceptance and graduation rates, and for good reason-Baby Boomers and Gen X are more outcomes-based. Yet millennial and Gen Z parents tend to have different priorities.

They are keenly focused on values. Not value, meaning: Does your school offer good value? But: Do your school community's values align with ours as a family?

This means we need to begin shifting how we market to prospective families. We should tell stories, show how we live our mission, and focus on our institutional narrative to make it easier to build brand identity.

Tightening Credit

I've repeatedly heard concerns about tightening credit. With an era of historically low interest rates behind us, project financing is more expensive than ever.

Plus, schools that took those low-interest loans are looking to the horizon, seeing significant rate hikes when those loans reset-adding to their expense line and placing even more pressure on the business model.

Increased Tuition Discounting

Lastly, our market has become more competitive. Families have more options, from homeschooling to charter schools and other less expensive options. Add on the increasing economic challenges in certain employment sectors, and the competitive factor ratchets up.

What can we do? One lever has been to discount tuition. This is normal practice, but the gap between our net tuition and fees per student and the total operating expense per student continues to rise, placing more pressure on the model.

As NBOA reported in Financial State of the Industry (2021-2023), the median gap per student at all schools in 2022-2023 increased by 11.8% over the prior year-with the median gap for boarding schools being $14,378 and $5,495 for day schools.

Simply put, the more we discount, the harder it is to cover the cost of educating a student. This is likely why 91% of heads surveyed by NAIS indicated that ensuring the school's financial sustainability was a challenge.

Reimagining the Business Model

In arecent Blackbaud webinar, I expanded upon my research and offered case studies of how schools are beginning to reimagine the independent school business model. From gaining operational efficiencies to managing costs to optimizing revenue to mergers and acquisitions, schools across the country are examining every aspect of their operations.

While each school iterated its business model differently, one clear theme ties them together: they root their strategy in their mission.

This jumped out to me loud and clear. To embark on change, it must fit your mission.

So, when a school asks me where to start the process, I offer three pieces of advice:

• Do a SWOT analysis to understand your organizational strengths, weaknesses, opportunities, and threats.
• Determine what business competency gaps you may have as a team. For instance, you may be strong in marketing but weak in strategy. Whatever the case, determine the areas you can strengthen and empower your team to develop those competencies. Here are the eight business competencies that I believe are critical for independent school leaders.
• Ensure any iterations to your business model are rooted in your school's mission.

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