Running a college like a business

(Fortune) -- Tiny Berea College had a giant problem. Its endowment had been rich, especially when ranked in terms of assets per student. With an astonishing 80% of its budget coming from endowment income, Berea (pronounced bur-EE-ah) was so well-off that it didn't charge tuition to its mostly low-income Appalachian student body of 1,500. The not-so-good news: When the stock market plummeted, its billion-dollar endowment lost more than a third of its value, leaving the Christian liberal arts college with a crater in its operating budget. Short of instituting tuition for the first time since 1892, Berea president Larry Shinn had the classic predicament for any organization leader facing a troubled balance sheet: how to keep the enterprise viable without undermining its ethos.

When Shinn, president of the rural Kentucky school since 1994, told his board early last year that he wanted to find a more deliberate path than just laying off enough people to make the numbers, he recalls that not everybody bought in. "Why are you going to take three years to make cuts?" asked one influential trustee, a money manager. Shinn pushed back: "Because we have students who are committed to majors. We have to make sure that when we start cutting departments those students get what they need."

Shinn embarked on a remarkable yearlong effort to maintain his college's mission while revamping its structure. The budget had to come down from $43 million -- it will be $37 million next year and even lower in 2011--12. So Shinn borrowed from business, opting to do the kind of "scenario planning" that Shell Oil famously adopted three decades ago. Scenario planning is strategic planning by another name. Rather than trying to predict the future, it aims to get leaders to think about a range of factual contingencies; the military might call it war games. Shinn's chief question: "Are you willing to cut your own department if you need to?"

In the end, the changes enacted will deeply affect the school. Enrollment will rise 6.6%. The student/faculty ratio will grow from 10:1 to 12:1, which means eliminating 13 to 15 teaching positions. Most significant, traditional departments, such as biology and statistics, will be gutted in favor of larger thematic "clusters" (like World Issues). Shinn, a 68-year-old ordained minister, says the business world has taught him a lot. Still, he believes the experience of reinventing Berea might offer lessons to CEOs. "Colleges are not good at substantial change," he says. "It requires creating a capacity for change in people and convincing them the world isn't collapsing." If it's just about cutting back to meet the bottom line, he says, the organization suffers.