Report on the work undertaken by Cal alumni from Bain and Company on the financial outlook and challenges for Intercollegiate Athletics

We are very pleased to share the findings of the work that Cal alumni and employees from Bain and Company recently undertook (on a pro-bono basis) to examine Intercollegiate Athletics' (IA) financial outlook, opportunities and challenges. This work was initiated by the Vice Chancellor's office in the fall of 2011 in order to examine the expenses and revenues of IA, compare us with other similar institutions, benchmark our performance against best demonstrated practices and make recommendations designed to enhance our financial sustainability.

The working group was given complete access to the department's information base and worked alongside IA staff for about four months. They interviewed a comprehensive list of key stakeholders (alumni, donors, Cal Athletics staff, University staff and industry experts) and were able to benchmark Cal against 20 similar public and private universities.1

Point of departure
In a 2009 survey of 100,000 UCB alumni conducted by UC Berkeley Alumni Relations, Cal Athletics was ranked as the most identifiable aspect of UC Berkeley, second only to the "university as a whole," for the most valuable donor group. While Cal Athletics is clearly important in terms of establishing and maintaining a connection and sense of community with current students and alumni, IA faces some difficult financial challenges, as does the campus as a whole. The very significant and, in our opinion, unwise disinvestment by the State of California in higher education, has resulted in a 70% decline in real terms in state appropriations for UC Berkeley over the past decade. This has required the campus to find alternative sources of revenue to maintain its standards of "access and excellence." Thus far, Berkeley has done an outstanding job in weathering an unprecedented storm. This is captured in the rankings Berkeley achieves across a wide spectrum of academic and athletic measures of performance.

IA's performance has been achieved despite significant financial challenges. While the economic recession has had a negative financial impact on many units, IA is particularly vulnerable because approximately 85%2 of its revenue is self-generated, e.g. from tickets, philanthropy and concessions/media rights. In addition, since 2009 the level of budgeted institutional support has been on a mandated declining path, with the objective of reaching $5 million in institutional support by 2014.

The campus administration believes deeply in the value of a robust intercollegiate athletics program and, together with IA's leadership, we are determined to sustain the program's record of excellence and ensure it remains an integral and fully integrated part of UC Berkeley.

What follows are the key findings from the research and analysis:

  1. At the macro level, the analysis suggests that IA must aggressively pursue measures to enhance its revenue. Projections based on the most likely path of both revenues and expenses suggest that IA will need to generate additional net revenue of $6-8 million by 2016. As explained below, it does not appear possible for IA to maintain its current level of performance and number of sports by making additional reductions in expenses. The comparative data show that significant institutional support for IA programs is common across peer institutions, and that the current level of support provided to Berkeley's IA program is towards the middle of the range. The 2014 target would put Berkeley at or near the bottom of the range. The analysis also indicates that Cal is unusual in terms of both the number of sports it supports and its commitment to reduce the level of institutional support over time.3
  2. In terms of costs, the analysis indicates that Cal Athletics is a relatively efficient operation, ranking second among peer institutions in terms of expense per student-athlete. This partly reflects the fact that IA runs 29 sports, which is far above the median number of sports for the comparative group. Other indicators - such as the number of coaches per sport or comparative coach's compensation - also support the finding that Cal Athletics is relatively cost efficient.
  3. At a disaggregated level, football and men's basketball generate net revenue. Other sports, such as men's golf, tennis, and rugby, are just above or very close to breakeven if all costs and revenue are allocated across all sports. The working group recommended that all revenues and costs be allocated on a sport-by-sport basis. The group suggests this would be a valuable management tool to support communication and planning for each sport. We have already adopted a variant of this approach this year.
  4. On the revenue side, ticket revenues from football and basketball are the most important drivers, followed closely by NCAA/Pac-12 revenue, sponsorships/royalties, annual contributions and endowment payouts.
  5. Total revenue in 2012 is roughly the same as in 2009, after dipping to a low point in 2011. This reflects a number of factors including the planned reduction in institutional support, a decline in ticket revenue from football resulting, in part, from the one-year move to AT&T Park in San Francisco and the negative impact that ESP/SAHPC contributions have had on annual donations previously directed to fund ongoing operations.
  6. In terms of philanthropy, while Cal has a large alumni base, the study indicates that the extent to which our alumni participate as donors to the program is lower than many other universities in the comparator group, while dollars raised per donor is only average. In addition, the data suggest that our fundraising efforts may be overly focused on large donors to the extent that 80% of donations come from 20% of donors. These factors appear to account for a great deal of volatility in giving on a year-to-year basis and the fall-off in annual giving as the same donors participate in the ESP/SAHPC programs.
  7. The data also indicate that IA has been less successful in soliciting giving in certain regions relative to its alumni base (e.g. Southern California) and that we have experienced a significant donor churn rate (30-40% of first-year donors lapse). This is a particular lost opportunity because donors who do stay in the program tend to increase their level of giving over time.
  8. Although former student-athletes donate at a much higher rate (9.5%) than all alumni (1.9%), there is wide variability in the level of giving across the teams, ranging from a 1% participation rate at the low end to 23% at the other end of the scale. This has a significant impact on the extent to which many of our teams are able to achieve robust fundraising results on an annual basis. In any given year, only five to 10 of our 29 teams raise more than $100K per year.
  9. The interviews conducted indicate that trust and credibility with many IA stakeholders can and must be reestablished. This deficit of satisfaction may be partially driven by the cancellation and eventual reinstatement of the five teams.
  10. Offsetting these negative factors are the opportunities they represent in that these are areas with significant room for improvement. In addition, the report notes there will be substantial incremental revenue produced by the Pac-12 national media contract (beginning in the 2013 fiscal year), as well as anticipated future revenue from the Pac-12 Networks that was launched in August 2012.

Potential opportunities
While the first part of the report looks carefully at challenges, the second part identifies a large number of opportunities and ideas to increase IA revenues.

The working group identified 23 revenue initiatives, 10 of which were prioritized based on ease of implementation and size of opportunity. The group estimated that these opportunities could potentially drive an annual increase in revenue of approximately $6-8 million by 2016. The high-priority initiatives are focused in four areas: ticket sales, philanthropy, sponsorships and the leasing of facilities for private events. The group's report identifies what it describes as five strategic "levers" the department needs to pull in order to grow revenue:

  1. Increase attendance for football and basketball
  2. Reduce the "churn" of donors, particularly first-time donors
  3. Widen the base of total contributors
  4. Focus on the accountability of each sport for its financial performance and revenue generation
  5. Leverage existing assets, both physical and the brand, to develop new revenue streams

In so far as the area with the biggest upside potential is concerned - philanthropy - the working group identified four key "enablers" that it believes must be addressed to support a more effective development effort:

  1. Data infrastructure. Data related to the alumni donor base and the manner in which it is utilized, needs to be improved, as does coordination with the campus development office. Immediate focus must be placed on using improved data to support the recruitment and retention of high- and medium-potential donors.
  2. Philanthropic rationale (Case for Support). IA must define and highlight the deep philanthropic rationale for donors to provide support, while all of the department's marketing, communication and engagement efforts must reflect and incorporate these core messages.
  3. Deeper donor engagement. IA must deepen donor engagement by creating a compelling value proposition that reflects the unique needs and interests of every segment of the donor community. With a donor community that extends well beyond the Bay Area and incorporates a diverse set of interests in terms of particular sports, we cannot use a one-size-fits-all approach to fundraising. The report also urges better utilization of social media to improve and sustain our engagement with every segment of the community.
  4. Trust and credibility.IA must continue to build on the recent progress that has been made in restoring trust and credibility in so far as its financial management is concerned. This is best achieved through transparency and by improving the frequency and quality of communications with all of the department's key stakeholders, including alumni, faculty, students and the campus administration.

Even as IA begins to address the identified Development "enablers," the department is already evaluating and, in some cases implementing, the 10 high-priority/high-yield revenue initiatives identified by the working group:

  1. Proactive Outbound Ticket Sales. IA is already fully engaged in taking the steps necessary to improve its cultivation and retention of new and existing customers. The report indicates that this effort that could potentially produce $1-2 million in incremental ticket revenue.
  2. Address Annual Donor Churn. This will require analysis in order to fully understand and address the reasons donors cease to participate. While the Cal churn rate is similar to the national average, we have reason to believe we can significantly improve in this area if we fully address the aforementioned "enablers."
  3. Sport Responsibility. This initiative would provide each sport with the tools and support necessary to assume greater responsibility for annual fundraising and net operating cost (fully allocated revenue less fully allocated costs). This will require creation of a full picture of sport profitability based on both direct and indirect costs, with indirect costs allocated on a rules-based method. Each sport will have a "profit" target and coaches would have some discretion to manage their funds. This will require a higher level and quality of information and business development for each sport.
  4. Target mid-tier donors. Expand the targeted donor base from the top 100 donors to the top 1,000. Focus on improving connectedness and satisfaction through the value proposition. Analysis indicates that this initiative could increase revenue by $1-2 million by 2016.
  5. Improve connection and engagement with the Southern California alumni community. Suggested tactics for increasing satisfaction and philanthropy include onsite development efforts and appropriate value propositions for non-local alumni. For example, focus for this population might be re-directed from football and basketball season tickets to partial ticket plans or better access to single games. This effort is already underway with both IA's Development and Sales and Service units.
  6. Create engagement strategies for "Calafanatics." There are individuals and families who have demonstrated a deep interest and commitment to Cal Athletics through event attendance, merchandise purchase and contact with the department, but may not currently be in position to make sizable donations. However, these individuals and families represent a potentially large population and could, through small donations, establish a large, reliable base for our donor pyramid.
  7. Personal naming rights. There is potential to generate additional revenue through naming rights for various aspects of the California Memorial Stadium (CMS) and Simpson Center projects. While the CMS financial model already includes a goal for naming rights, new efforts could help the department to surpass that goal and provide incremental funding.
  8. Additional revenue opportunity exploration. We are already in the process of stepping up our efforts to rent our facilities, particularly new CMS spaces, and will be examining the feasibility of increases in new or renegotiated partnership agreements related to corporate sponsorship, apparel, concessions, etc.
  9. Corporate Naming Rights for CMS. While this may be explored, the department and the campus recognized that this could be a highly controversial and ultimately undesirable step whose costs would far outweigh any potential benefits.
  10. Modify Student Sections in Memorial Stadium. The report suggests that moving the CMS student section from the 50-yard line would open high value seats for sale to the public with donations attached. IA will not pursue this recommendation at this time, but it remains and option that will be explored if necessary.

IA Operations
As mentioned previously in this Executive Summary, the working group found that IA is operating a relatively efficient operation. For a 29-sport, 850-student-athlete program, the current costs are relatively low when benchmarked against competitor programs on a per capita basis. Therefore, while further cost containment and efficiency gains are crucial, this will not, by itself, address IA's financial challenges.

The working group recommended continuing the operational improvements that have been made in IA through the recent hiring of key personnel in development, finance and operations. There is a continuing need to create goodwill among key stakeholders including donors, faculty, coaches and IA staff. Goals and metrics need to be defined and staff held accountable for their areas of responsibility and appropriately rewarded for performance. As part of this, decision rights and processes should be clearly defined. Authority at appropriate levels should be pushed down to those individuals who have the information to make an informed decision, with a system of escalation for major decision points with only one person clearly identified as the one with the final say.

It is quite apparent to the working group, as well as IA and campus leadership, that Cal Athletics must couple cost containment with steps to aggressively increase revenue to create a sustainable financial model that includes an appropriate level of central campus support. At the same time, however, it is apparent that increasing revenue will require new, carefully calibrated short-term investments in personnel, infrastructure and technology in order to realize long-term gains. The reversal in IA's fortunes cannot happen overnight and will require a strong and lasting commitment to a plan of action.

The initiatives to increase revenue, coupled with the incremental revenue that is expected to flow from the Pac-12 TV Networks beginning in 2015 indicate that, overall, IA's financial goals appear to be realistic and attainable. At the same time, we should not underestimate the size or extent of the challenge given the volatility of ticket revenue related to team performance and the difficulty of managing financial outcomes absent financial reserves. But neither the working group nor IA management believes there is a viable alternative.

The working group also noted that while the degree of difficulty is quite high, ultimate success would make Cal a best-in-class example among public universities competing in intercollegiate athletics at the Division I Football Bowl Subdivision level. While we understand that the onus is on IA to effectively implement these initiatives, along with other steps already in progress, success will still require support from and collaboration with our stakeholders and the broad community of Cal fans. It may be a cliché, but failure is not an option and the status quo will not stand.

We have learned much in the last few years about our community and the extent to which its members are connected to and deeply passionate about Cal Athletics and the university as a whole. One of the most valuable lessons has been the degree to which Cal Athletics is an integral and inseparable part of who we are as a university. It will take commitment on the part of IA and the collective patience of our community, but there is a pathway forward to a sustainable financial model for which the working group has provided an ambitious outline. IA is committed to the success of this plan. At the end of the day what is at stake is our ability to provide a world-class, life-changing student-athlete experience that combines the campus's academic rigor with a commitment to high performance athletics and realizes IA's mission "to teach, serve, compete and excel."

Benchmarked Institutions: UCLA, North Carolina, Michigan, Virginia, Georgia Tech, Wisconsin, Washington, Maryland, Stanford, USC, Vanderbilt, Colorado, Boston College, Minnesota, Arizona State, Arizona, Oregon State, Utah, Washington State, and Oregon.

2Based on FY2011 financials.

3Institutional support has fallen from $12.1 million in 2010 to $9.5 million in 2012 and is targeted to fall to $7.5 million in 2013. It should be noted that this is a gross number; it ignores the $2.5 million that IA returns to central campus every year via the Administrative Full Costing (AFC) assessment.