Much has been happening recently in higher education - MOOCs, competency based degrees, alternative credentialing, Presidential (of the US, that is) statements that real increases in tuition must stop, etc. This has lead various observers to predict tsunamis, tipping points, crises, and/or disruptions for higher education.
How should one begin to analyze the possible impacts of this seemingly endless set of new "environmental conditions"? I find that a useful starting point is the business model of higher education. The following picture describing the elements of a business model is taken from a recent publication, Disrupting College, by Clayton Christensen, Michael Horn, Louis Caldera and Louis Soares (CHCS).
This picture emphasizes that there are four key components of a business model, and that all of these components must fit together in an interdependent way in order for the model to be viable. The lock on the picture emphasizes that no one component can be changed without causing significant changes in the other components once the model has reached a viable equilibrium.
There obviously are an infinity of possible business models that differ from each other in the ways in which these components are realized and put together. However, CHCS point out that there are only three generic types of business models: solution shops, value-adding process businesses, and facilitated user networks. They give a good description of each. For our purposes, suffice it to say that most of the research done in universities follows the solution shop model; most teaching, the value-adding process business; and the student social growth component, a facilitated user network. CHCS discuss the high costs of running several business models simultaneously, as happens in a typical university - more on this in the section on Profit Formula.
I often use this business model as a prism for analyzing some of the new changes in the higher education environment. In this post, I look at the four components of the model in turn, and indicate for each one of the key external environmental changes that seems to me to be primarily "targeting" that component. One can then use this as a starting point to imagine how the other components of the business model would likely need to respond in order to enable a re-equilibration. This dynamical model provides, I believe, a useful entry into a discussion of the potential impacts of a wide variety of external forces and changes.
The Value Proposition: The first thing one notices from the value proposition is that there is not "A Business Model for Higher Education", but rather many. This follows from the fact that different students are hiring higher education to do different jobs, e.g. education that does not interfere with full time work, a residential experience with the associated social growth, a high brand value certificate that will facilitate entry into upper level jobs. In addition, on a typical campus, students seeking undergraduate, professional and Ph.D. degrees each are hiring education to do a very different job. To further complicate matters, many higher education institutions also emphasize research, and the value proposition for research at a research university is greatly different from that at a college.Thus there are many classes of value propositions in higher education, and these different value propositions will force different ways to resource, produce and pay for that value, i.e. different classes of business models.
The biggest environmental challenge I see to the status quo of the Value Proposition is a move on the part of government, parents and students to demand evidence of the quality, pertinence, and value of the educational products that we sell. The days of "trust us, we are the experts" are rapidly fading. Most available data indicates that we don't do very well many of the things we claim to be doing (e.g. Another study showing students are not learning). In addition, parents and students are increasingly concerned about whether the education we provide is preparing our graduates for a world in which entire job categories are disappearing due to offshoring and technology. There is not any real national discussion of how educating students so that they can thrive in the future may differ from educating them for success in the past (e.g.The real crisis in higher education?). In short, I think that the outcomes evidence that increasingly is being demanded - and the likelihood that that the presented evidence will not always be positive - will put significant pressure on the existing value propositions of almost all the higher education business models.
Resources: We have obviously reached a tipping point in an interesting resource: courses and programs. Not so long ago, if any institution needed a new course, it had to get a faculty member to create one. Courses were scarce. Now, we live in a course-rich world. Textbook companies such as McGraw-Hill and Pearson have become course producers, and even program producers (at a price, of course). The internet is filled with free open source courses (e.g. The Open Courseware Consortium), and the explosion of MOOCs with their high-brand providers adds yet another level of free courseware. The new Semester Online consortium adds a another dimension in the online availability of high brand courses. Obviously, this new resource will impact different classes of business models differently, but will almost certainly lead to some changes across the entire spectrum. Ultimately, one would imagine (and hope) that this new input resource would lead to changes in the current traditional-input-focused accreditation system.
Process: processes in higher education currently are organized around measurements of student seat time required to get academic credit, and number of credits required to get a certificate or degree. The rising acceptance of competency based education greatly changes that key organizational principle of Process. Competency based education depends on a demonstration of competencies that have been defined by experts in a field. Students advance when they can demonstrate those competencies, no matter how, when, and where they learned them. This removes "time" from the definition of a credential, and changes the way we look at transfer credits, prior learning, etc. One of the important efforts in this domain is The Lumina Foundation's Degree Qualifications Profile, which is bringing the competency insights of the European Bologna Process to bear on defining competencies required for many degree programs. Again, competency based education will impact different classes of business models differently, but is likely to have some effect on almost all.
Like the flood of quality online courses, competency based learning will certainly have a significant impact on accreditation standards, which can begin to focus more on outputs instead of inputs. It is worth noting that accreditation standards that take into account the new variety of ways of creating and presenting courses, and the learning outcomes approaches of measuring effectiveness, would certainly lead to a large number of new accredited competitors in the higher education space.
Profit Formula: Here, our problem is simply price, rising prices, and increasing difficulties of society in meeting our prices. Real family income has been remarkably flat over more than 30 years, and real published prices of higher education have risen at a compound rate of more than 3% annually over that period (Update on Perspectives on the elephant of college pricing). Student loans are increasing rapidly (now over $1T) as a way to bridge the widening gap between family income and price of higher education. As Herbert Stein's Law says, "If something can't go on forever, it will stop." Both presidential candidates recently said it must stop now, and parents and students are increasingly recalibrating the value proposition that they are looking for. It is obvious that societal tolerance for the ever increasing price of higher education, and its ability to continue to meet that price, is rapidly disappearing. This means that the current Profit Formula, which depends on 3%/year price increases, is very likely to be unsustainable for most institutions.
Unfortunately, for traditional non-profit higher education, cost=price. Thus 3% real annual increases in cost are built into the business model, increases that are unlikely to be sustainable in the future for most institutions. CHCS present an excellent analysis of institutional changes likely to be required in order to significantly lower costs and restrain annual cost increases. At issue are not only key aspects of the business models themselves, but also the common institutional organization that simultaneously operates multiple business models. But of course, operating these multiple business models simultaneously is for many institutions part of their mission and value proposition, which again emphasizes the close coupling of the elements of the business model.
The ways in which these new pressures on one component of a business model will propagate around the model will depend critically on the specifics of the individual model. However, one interesting general assymetry stands out. The environmental changes in the Value Proposition and the Profit Formula create a challenge for established providers, and the changes in the changes in Resources and Processes give many of those same providers opportunities to rebalance their models through sustaining innovations that do not require disruptive change in the business model. On the other hand, the environmental changes in Resources and Processes open up many approaches for new providers, and the environmental changes in the Value Proposition and Profit Formula provide these new providers additional flexibility to create new, potentially disruptive, business models that fully exploit the new Resources and Processes.
One also must take into account that some existing providers have business models that are more robust than others. That is, they may have a Profit Formula that has considerable resilience and flexibility due to, for example, a large endowment or a very large applicant pool. Similarly, some providers have high brand value that provides considerable resilience against changes in the Value Proposition. The providers with robust business models will be able to accommodate to the new environment by making sustaining innovations in their operations; those will less robust business models will probably need to make some fundamental changes in their business models in order to survive in the new environment. Of course, the dividing line between "robust" and "less robust" in this context will rise or fall depending on the magnitude of the changes in the environment of higher education - and the changes keep rolling out!