Regular readers of this blog know how often I call upon Clayton Christensen's ideas regarding disruptive innovation as described in The Innovators Dilemma. Christensen has now turned his focus to higher education in a superb, must read white paper called Disrupting College:How Disruptive Innovation Can Deliver Qualityand Affordability to Postsecondary Education , published by the Center for American Progress and the Innosight Institute. The report is coauthored with Michael B. Horn, Louis Soares, and Louis Caldera. This white paper does a great job of succinctly describing the challenges and issues facing American higher education today, outlining the concepts of disruptive innovation, and then applying those concepts to higher education.
The Executive Summary begins by describing some of the challenges facing the US because of globalization. It then moves on to a discussion that sets the stage for the analyses that follow:
The institutions to which the country would turn to help tackle this challenge—its colleges and universities—are facing a crisis of their own. There is a rising chorus of doubts about how much the institutions of higher education that have been such a part of the country’s past successes can be a part of the answer. Graduation rates have stagnated despite a long track record of serving increasing numbers of students over the past half century. None of America’s higher education institutions have ever served a large percentage of our citizens—many from low-income,African-American, and Hispanic families. The institutions are now increasingly beset by financial difficulties, and the recent financial meltdown is but a shadow of what is to come. The further looming state budget crises spell difficult times for many colleges and universities. And there is a growing acknowledgement that many American universities’ prestige came not from being the best at educating,but from being the best at research and from being selective and accepting the best and brightest—which all institutions have mimicked.
Our country’s dominant higher education policies have focused on expanding access for more than half a century—allowing more students to afford higher education.Yet changing circumstances mandate that we shift the focus of higher education policy away from how to enable more students to afford higher education to how we can make a quality postsecondary education affordable.
In the report itself, the authors quickly idenfify the disruptive innovator in higher education - for-profit higher education institutions, and particularly those that have emphasized online learning:
The fastest-growing for-profit universities have driven innovation with online learning more aggressively than their not-for-profit and public university counterparts—and their growth has coincided with the explosion in enrollments in online learning, which itself grew 17 percent from 2007 to 2008.....
The success of these online attackers and the crisis among many of higher education’s traditional institutions may seem unusual, but it is far from unique. We are seeing steps in a process called disruptive innovation that has occurred in industry after industry....
What the theory of disruptive innovation suggests is that the business model of many traditional colleges and universities is broken. Their collapse is so fundamental that it cannot be stanched by improving the financial performance of endowment investments, tapping wealthy alumni donors more effectively, or colleting more tax dollars from the public. There needs to be a new model.
Strong words- and conclusions- indeed!
The authors provide an excellent "CliffsNotes" discussion of disruptive innovation in general, and then apply it to higher education. One very important point that they make is that almost every institution tries to improve something - improve profits, improve reputation, etc. In doing this, they use "sustaining innovation", innovation that does not change the rules of the game, but makes something in the existing system work better. In many industries, economies of scale can come into play that enable this continuing sustaining innovation to be carried out without increasing the cost of the product. However, higher education has traditionally been an area with few economies of scale. And for those areas without economies of scale:
Our observation has been that as a general rule, head-on, sustaining competition among competitors with comparable business models, which lack economies of scale, drives prices up 6 percent to 10 percent per year in nominal terms.
Thus the 35-40 year period of rapidly increasing price in higher education (3% above inflation/year) is what might be expected in an industry that has sustaining competition and no economies of scale. The only way to break out of that box is to find disruptive innovations that bring with them economies of scale. And the authors think they have identified one:
Although the absence of an upwardly scalable technology driver has rendered higher education impossible to disrupt in its past, we believe that online learning constitutes such a technology driver and will indeed be capable of disruptively carrying the business model of low-cost universities up-market.
Part of their evidence for believing this is what they call a "substitution curve", which plots the time evolution of the market share of the new innovation divided by that of the older paradigm, plotted on a log scale. Past disruptive innovations have produced a linear progression on the substitution curve - and that is what they see when plotting the rise of online learning.
The authors point out that it is imperative to have a business model innovation in order to exploit the disruptive innovation. History has shown that the disruptive innovation cannot be forced into the existing business model. The "CliffsNotes" description of business models is also extremely well done, and worth reading on its own.
There are three generic types of business models: solution shops, value-adding process businesses, and facilitated user networks. Each of these is comprised of its own value proposition, resources, processes, and profit formula. Universities have become conflations of all three types of business models.
Solution shops are institutions focused on diagnosing and solving unstructured problems; reasonably, the authors identify "solution shops" with the research function of universities. Organizations with value-adding process business models bring in things that are incomplete or broken. They utilize their resources and processes to transform them into more complete outputs of higher value; the teaching function of the university is identified with this model. And finally, the facilitated user network is an enterprise in which the participants exchange things with each other; or, in other words, the "socialization" function of the university. The difficulty is that previous studies have shown that organizations that contain multiple business models simultaneously have extremely costly overhead - not because of managment inefficiencies, but because it is very difficult to manage the resulting complexity. And based on these previous studies:
Our best guess is that the overhead burden rate in conventional universities is between 4.0 and 5.0. In otherwords, universities spend four to five dollars on overhead for every dollar spent in teaching, assessment, and research.
Thus, an obvious way to cut back on costs significantly, and to get better results for each model, is to decouple the functions and create single-model organizations.
Traditional universities trying to emulate the prestige of Harvard are structured ...in order to optimize the “solution shop” activities of their faculty. The value-added process activities of teaching students are sub-optimally force-fit into this structure...
Low-cost—meaning the amount the university spends per student, which is different from low-tuition or low-price—schools such as Laureate’s Walden University and Apollo Group’s University of Phoenix are structured ...as value-adding process organizations, structured to optimize the flow of students through the university. The impact of this simplicity is stunning. A typical traditional university incurs operating deficits of 10 percent of revenues, even while Laureate and Apollo both report operating profitas a percentage of sales to be roughly 30 percent. The cost advantage of these disruptive low-cost universities, in other words, is more than 40 percent even as they often charge roughly the same tuition as those four-year traditional universities.
The authors go on to consider issues of perceived quality of low cost universities. They emphasize that it is important to understand the job that students (and by extension, society) hire the university to do, and to judge universities on how well they perform that job. Those who are hiring the university in large part to provide an out-of-home transition to independent adulthood may well find a traditional university works best. On the other hand, the job that students typically hire low-cost universities to do is laser focused: Help me get better employment. Thus the metrics of quality should reflect these differences. However, the authors warn that history of disruptive innovation in other industries suggests that low-cost universities will figure out how to do the “transition to independent adulthood” job better and better over time. So watch out!
The authors close with a section on advice to policymakers and traditional universities. They pose some very difficult, but extremely important questions for the policymakers, e.g.officials must ask is whether their primary stewardship is to facilitate the best possible postsecondary education and training for the people in their state or whether they are appointed to be the caretakers of the specific institutions that have historically provided higher education. If it is the former, then low-cost, disruptive institutions are a critical partner in meeting that stewardship, and regulations must create conditions in which those partnerships can thrive and grow. Assessment driven, competency based models should become central to the education enterprise, and rigid input measures such as seat time and dollars spent per student should evolve out of the system.
It is not necessary to agree with everything in this white paper, of course. However, it presents a very clear and powerful set of arguments about what is wrong with the business model for higher education, and what can be done to fix it. A real "must read".