Exploring Higher Education Business Models (If Such a Thing Exists)

The global economic recession has caused students, parents and policymakers to reevaluate personal and societal investments in higher education—and has prompted the realization that traditional higher ed “business models” may be unsustainable.

Jay A. Halfond of Boston University and Peter Stokes of Northeastern University recently conducted a non-scientific “pulse” survey of presidents at smaller New England institutions about their views of new models. The presidents generally agreed that to become more sustainable, colleges need to change their financial model, lower discount rates, reach new audiences through online learning and strengthen their institution’s competitive differentiation.

Too many institutions each year raise tuition beyond the rate of inflation and look to get more students, despite demographic forecasts promising fewer traditional college-age students.

Predicting a shakeout, most of the presidents expressed confidence for their own school’s ability to adapt, but only 57% agreed that, “the small New England college will remain an important fixture within the academic landscape for many years to come.” (It’s a bit like Americans voicing disdain for Congress as they reelect their own representatives.) As one respondent put it: “If your institution does not have a well-defined market niche … that is robust, be that market in or out of New England, it is toast.”

Meanwhile, innovators and entrepreneurs are using multiple technologies to make available freely or cheaply, the things for which universities charge significant money. “MOOCs,” free online courses, lecture podcasts, low-cost off-the-shelf general education courses, online tutorials and digital collections of open-learning resources are disrupting higher education’s hold on knowledge, expertise, instruction and credentialing.

Business model vocab

In a sense, everything NEJHE has ever covered over the decades—from classroom teaching to university research to town-gown relations—has been about higher ed business models. Yet the business model concept itself was largely unarticulated in academia until people—mostly business people—started telling higher education to act more like a business (ironically, around the time business meltdowns were fueling the recession).

Even today, elements of business models, including differences in institutional control, segment and mission, are not widely appreciated in higher ed. But there’s a perceived need for a common vocabulary and analytical framework to support dialog among diverse stakeholders including students, faculty, staff, administrators and trustees.

Still, “institutional diversity” is a hallmark of American higher education—with institutions ranging from community colleges to global research universities, religious and secular, public and private, nonprofit and, increasingly, for-profit, online, bricks-and-mortar or hybrids. And big differences in institution kind must inform any business model discussion. As Catalogue for Philanthropy founder George McCully noted in a recent NEJHE forum: “The business model is a major challenge for higher ed. At the same time, major institutions which have very large endowments are in a positive feedback loop that is intrinsically inefficient. Harvard earns more from the yield on its endowment in a single year than its development officers can raise in five years.”

Among questions that arise:

  • What is the future sustainability of higher education institutions (HEIs) in a world where higher learning is free and widely available beyond the academy’s walls?
  • How does the issue of “quality” figure in the equation?
  • How about social and cultural aspects of college life?
  • Do these factors alter what people expect from college and are willing to pay for it?
  • Will the accelerating profusion of open-learning opportunities, innovations and new providers displace traditional HEIs?
  • Will such forces cause HEIs to reconsider their fundamental business models?

Genesis of NEBHE-Davis work

Recently, NEBHE was awarded funding by the Davis Educational Foundation to jointly convene higher education leaders for a frank and compelling conversation about costs and the higher ed business model. An October 2013 Summit on Cost in Higher Education will convene higher ed leaders to discuss costs and, by extension, business models.

One catalyst for this investigation was the Davis Educational Foundation’s November 2012 report, An Inquiry into the Rising Cost of Higher Education. As one New England college president noted in the report: “I think all of us who work in higher education understand that the financial model for most universities and colleges in our region is no longer feasible.”

NEBHE aims to build upon the insights and concerns expressed by HEI presidents in that report and pursue additional research before and after the October summit. Among other things, a multimedia “whitepaper” will synthesize key findings from a literature analysis, survey and interviews with summit participants, Davis grantees and regional and national collaborators.

Costs and prices

There are two main angles to any inquiry about higher ed costs. One is cost-containment by institutions. The other is price affordability for students and families.

The institutional cost angle encompasses everything from the sensationalist stories about spending for luxury dorms and overpaid administrators on the one hand to the eternal fact that intellectual talent (traditionally professors and instructors) costs a lot of money to hire and retain.

In NEJHE, a feature by higher ed policy guru Jane Wellman described ways to increase college attainment by restructuring costs and increasing productivity despite an academic culture that views these strategies as code for budget-cutting.

The student and family angle is told by stories of rising tuition prices, stagnant aid and student loan debt now staggering to the point where graduates are delaying buying homes, cars and other big items and are steered by salary pressures into occupations that help them pay back their loans.

As higher education democratizes, future students are likely to have less means. The Pell Grant program, meanwhile, is unlikely to get richer, and tax credits may disappear in the interest of budget balancing. So how will we make sure students have access to all the newly freed-up content?

The traditional system of students who can afford to pay for college subsidizing those who cannot is thrown off kilter by various forays into merit-based over need-based aid. Institutions know that offering some merit-based aid to students who would probably go to college anyway, leads to more revenue for the institution than offering a full boat to someone who couldn’t pay. As Phil Wick, former financial aid chief at Williams College, wrote in NEJHE (Connection): “Institutions use ‘merit’ scholarships to boost tuition revenue. For example, a college that charges $20,000 in tuition knows that it can realizes $60,000 in additional revenue simply by replacing one $20,000 scholarship, which is need-based, with $5,000 merit awards to four students who could afford the full cost” and will pay what net price remains.

Some money-saving strategies may force students to do things they may not want to, such as trimming unneeded credits. Others would include reverse transfer, in which students en route to bachelor’s degrees get an associate degree on the way, or prior learning assessment, in which college credit is awarded for college-level learning from work and life experience.

One business model phenomenon that colors both institutional cost containment and student price savings is online learning. It’s new and improved since the days of being  disparaged as somehow not as real as learning from an in-the-flesh prof lecturing in a bricks-and-morter classroom. In “Rethinking Higher Education Business Models,” University of Illinois at Urbana-Champaign director of research Robert Sheets, George Washington University professor Stephen Crawford and Center for American Progress senior fellow Louis Soares argue that “information technology’s potential to dramatically improve the performance of higher education will be realized only when new business models arise to harness it.” The piece published in 2012 by the Center for American Progress and EDUCAUSE states: “Clearly, the great challenge facing higher education today is to contain costs while at the same time improving outcomes—in short, to increase productivity.”

In “University Business Models and Online Practices: A Third Way,” Beth Rubin of DePaul University argues: “In the world of higher education, the third way lies between the efficiency-oriented market perspective aimed at adults, as taken by proprietary universities, and the traditional approach that focuses on research and teaching young students.”

Containing costs for institutions

Profs to adjuncts

The proposed solutions to making higher ed sustainable sometimes involve dissing professors, taking specific aim at tenure and sabbaticals. And indeed, there has been a move from tenured professors to adjuncts, who are usually paid by the course and don’t get benefits. Non-tenure-track faculty account for almost two-thirds of teachers in higher education Their average hourly wage is $8.90 an hour, with 80% of them earning less than $20,000 annually, according to the Adjunct Project. For the institutions, the adjuncts not only save money, but also appeal to career-minded students and families because they are tethered to the “real world” of work, rather than theory.

Competencies not credits

Southern New Hampshire University (SNHU) President Paul LeBlanc is the closest thing to a rock star in the arena of higher education business model innovation. SNHU became the first university eligible to receive federal aid for a program not based on the “credit hour,” the time-based unit that underlies courses and degrees. As the Chronicle of Higher Education summarized it, “The low-cost, self-paced education lacks courses and traditional professors. Instead, students progress by showing mastery of 120 ‘competencies,’ such as ‘can use logic, reasoning, and analysis to address a business problem.’” SNHU had already pioneered a cheaper, more flexible “no-frills” option for students who get access to the same SNHU faculty but don’t want to pay for amenities nor take time away from their jobs.

Resource-sharing

In interpreting their survey of presidents, Halfond and Stokes called for more “practical opportunities for collaboration, alliances, resource-sharing and outsourcing.” NEBHE’s flagship program, Tuition Break (the Regional Student Program) allows New England states to share costs of many academic programs not offered in neighboring states in the region. More recently, NEBHE began offering New England campuses a comprehensive property insurance program tailored specifically to higher education at costs that have consistently been below industry trends. Established in 1994 by the Midwestern Higher Education Compact, this Master Property Program is based on a no-brainer: use your numbers to drive down prices and get a better deal.

Various consortia have also fought for economies of scale in areas ranging from academics to cell phone services. These groups include: the Connecticut Conference of Independent Colleges; Hartford Consortium for Higher Education; AICUM; Boston Consortium for Higher Education; Colleges of the Fenway; Colleges of Worcester Consortium; CONNECT-Southeastern Massachusetts Higher Education Partnership; the Council of Presidents of the Massachusetts State Universities; Five Colleges Consortium; the New England Higher Education Recruitment Consortium; Massachusetts Higher Education Consortium; the Association of Independent Colleges and Universities of Rhode Island; the Association of Vermont Independent Colleges; and the Cooperating Colleges of Greater Springfield.

MOOCs

In some ways, MOOCs (massive open online courses) are like consortia on steroids. In the past two years, they became everybody’s darling—based at prestigious universities but attracting partnerships with community colleges, rooted in hard sciences but spreading to humanities, originally culminating in certifications but increasingly offering credit toward degrees.

Still, the MOOC idea has felt some growing pains. “It’s time to push the pause button … on MOOC mania generally,” wrote David L. Kirp, professor of public policy at the University of California, Berkeley, in “Tech Mania Goes to College.” Kirp’s piece published in The Nation warned: “While modified MOOCs like the flipped classroom hold great promise, the pure MOOC model looks like a failure. New technologies have indeed made it possible to reach more students—MIT’s OpenCourseWare materials, free to all, have been visited by 125 million people the world over—and, sensibly used, can improve teaching as well. But there’s no cheap solution to higher education’s woes, no alternative to making a serious public investment, no substitute for the professor who provokes students into confronting their most cherished beliefs, changing their lives in the process.”

Other cost drivers

Though they seem hardly to be dignified as “business models,” a variety of different drivers also enter into the high cost of higher education. These include insurance, electricity, broadband, buildings and grounds maintenance, even paperclips. Plus, sports. At some colleges, appealing to students and donors involves building brand-new stadiums and paying head coaches more than top administrators and faculty. At others, the momentum is to eliminate some sports as Boston University did with its football team in 1997.

Ideally, all these cost containment steps could pass savings on to students in lower tuition and fee prices. But there are other strategies aimed more directly at reducing tuition and fee burdens.

Free tuition

The federal government already spends enough on student aid initiatives and tax breaks to cover the tuition of every U.S. public college student—or almost. Consider “How Washington Could Make College Tuition Free (Without Spending a Penny More on Education),” advanced in The Atlantic magazine by Jordan Weissmann and in “From Master Plan to No Plan: The Slow Death of Public Higher Education” in Dissent magazine by Aaron Bady and Mike Konczal.

Pay it forward

A more recent proposal in Oregon would allow students to pay tuition after they graduate based on income. Under the so-called “Pay It Forward” idea, students would pay tuition only as a share of their salaries after graduation. But critics say the idea would give public colleges an incentive to build up programs likely to attract students who will earn the most money after graduation.

New models are being assembled right now. NEBHE’s exploration of these issues will continue to ask key questions: What is higher education’s current business model? What new models will bring access and success to more students. Keep them curious. Employable. And out of debt.

 

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