I have learned a lot recently participating in a project on Global Higher Education led by Paul Jansen and Debby Bielak of McKinsey &Co. The project is sponsored by the Forum for the Future of Higher Education. Paul and Debby have collected a group of university CFO’s, a college president, and an old provost (me) together to apply a McKinsey sector-wide analysis to higher education. It is fascinating to see what such an analysis tells us about our world.
The team recently made a presentation entitled Higher Education Trends and Risks: Implications for Leading Institutions and Sector Performance at the annual Aspen Symposium of the Forum. My assignment was to talk about trends and risks for private research universities - in 15 minutes. I approached this impossible task by first apologizing to the audience for the egregious simplifications that I would have to make in order to describe the situation in 15 minutes, and then introduced my simple one-parameter model to describe the problems facing the research university. Since this model met with some approval at the Symposium, I thought it might be worth repeating here.
I began by describing what I called our Mission Box. Excellence - as defined by us in a very self-referential way - has become the visible driver of our mission. Our mission, in a very general way, focuses on traditional undergraduate education, graduate and professional education, and research. Focusing on excellence means that if it is worth doing (i.e. one of our mission foci), it is worth doing better. Doing it better costs more money, so at some point the customer can’t, or won’t pay for it, so we lose money. As a consequence, over time, losing money has become our very visible surrogate for excellence (my one parameter model). (Clayton Christensen, who also spoke at the symposium, has pointed out the often catastrophic outcomes of making your product better than the customer wants or needs. See also Disruptive Technologies:when great universities fail? March 3, 2006)
Although this sounds somewhat outrageous, think of the number of times you have heard a university administrator tell an audience “ your daughter’s education will cost much more than the price of tuition” as a key point in a spiel describing the excellence of the institution. And what discussion regarding the quality of for-profit higher education does not end with the telling point that “they can’t be giving a good education because they make a profit on it”? So we are proud that we lose money on our mission goals, that is why we tell donors we need big contributions to balance the budget, and it helps denigrate the for-profits. But we have also convinced our customers that this is a valid surrogate for excellence, which limits our freedom in the future.
As a consequence of this mission box, the few things we may make a profit on (e.g .continuing education), are not really important parts of our mission. These are areas where we don’t mind announcing that excellence -at least as defined for our core mission activities - is not really our goal.
Among the “Risks” defined in the McKinsey analysis is what we called the Price-Productivity-Cost Squeeze. I felt that this was perhaps the most critical risk facing private research universities, and so focused most of my attention on this point. The private research university is certainly an enormously expensive model of research and teaching. Faculty, who move in a worldwide market, are quite expensive. Their salaries average about $40,000 a year more than the salaries of faculty in private colleges, and their teaching loads are much lighter than those of their colleagues in colleges. Graduate education brings in very little tuition, but is very demanding of the time of the expensive faculty. Infrastructure costs are huge, and only partially supported by external grants and gifts. And, of course, the “arms race” for more financial aid at all levels, better residence halls and athletic facilities, etc. hits private research universities as it does all other sectors of higher education. Since we lose money on almost everything we do, making up the loses falls primarily to philanthropy, either in terms of annual giving or endowment pay-out. However, for all but a handful of research universities, philanthropy contributes a rather small fraction of the unrestricted budget compared to tuition. Thus, the better endowed universities can afford to lose much more on their mission activities than can the vast majority.
Costs quit naturally increase considerably faster than the CPI, since salaries of this in-demand class of faculty increase rapidly because of global competitive pressures, and state of the art infrastructure is always at the forefront of cost increases. How to increase revenues to meet the increases in cost? Since for most institutions, undergraduate tuition is by far the largest contributor to the unrestricted budget, the response over the past few decades has been to increase net tuition per student faster than the CPI. Over the past two decades, real tuition, fees, room and board at private institutions of higher education has gone up 66% - while real family income has gone up only 9%. If financial aid is figured in, the increase in real net tuition, etc drops to about 55%, still a large number compared to 9%. (see also Price and cost in higher education:Price , Jan 5, 2007 and Real income vs educational level - a problem for higher education, July 25, 2007)
We are now beginning to see serious push-back at the Federal level to large tuition increases. This Federal response is driven by voter concerns over the increasing fraction of family income required to get a college education, and by the necessity that the Federal government assure access to higher education in a knowledge society. Someone must pay for increased access, but in this new environment, it will not be the government.(see Price and cost in higher education: Price and the political-economic system, Jan. 11, 2007) All eyes turn to higher education, itself, as the source of funding required to assure access. However, our traditional business model necessitates our raising tuition in order to increase revenues, an act which decreases access. We thus arrive at the “crash- point” for our business model.
Evolving our business model to meet this new challenge is difficult because of our mission box. We need to make a profit somewhere in order to make up for future constraints on tuition increases, but most areas where making a profit fall outside of what we generally view as our real mission. For example, a large part of the predicted future growth in higher education enrollments will be due to adult learners seeking additional skills. Continuing education is not a core part of our missions, however, and so we do not focus on it with anywhere near the attention we give to e.g. undergraduate education. Part of the problem is that these adult learners generally do not share our definitions of excellence- they want to learn to fill a specific need, and are less interested in our telling them what they should know. They are also more interested in such things as convenience, and less interested in hearing how many Nobel Laureates are on the faculty. Thus our lack of mission interest in this large group of new students means we are likely to forgo a major opportunity to diversify revenues. And in doing so, we will add millions of potential customers a year to the pool that supports what we called “new paradigm competition”, primarily for-profit higher ed.(again, see Christensen(above) for why this is a really bad idea) Our mission box also makes it difficult to carry out radical experimentation in globalization. We carry our definitions of excellent with us as we move offshore, constantly asking if the offshore program is “of the same quality as” our home campus programs. This greatly limits what we can try to do, and assures that we will be unhappy with the amount of money that the offshore program is costing us.
So what changes do we need to make in our mission and our business model? First, we should embrace the development of meaningful outcomes measures. We need to get away from surrogates for quality, so that losing money on a program is no longer the measure of excellence. We can then begin to search for productivity increases in a much more aggressive way without fear that our results will be labeled as inferior simply because we lose less money in the process.
We should also pay attention to Clayton Christensen’s warnings that industries that offer products that are better (and thus more expensive) than the customer wants are at high risk of being supplanted by a more entrepreneurial and lower cost competitor. For example, many parents and students find little value in the very expensive research component of our universities, and this is an area where we may well have overshot the interests of many of our customers and driven up costs significantly. We need to consider the possibility that “excellence” in some of our programs should be defined with input from customers, rather than based entirely on our own needs, desires, and prejudices.
We need to evolve our missions such that there are some core areas where making a profit is both possible and desirable. I believe that an evolution of mission is critical, because we will only invest the attention and resources necessary to achieve a significant success in a new area if its importance is truly on a par with that of our other core activities. For example, one area that could fairly easily be incorporated into our missions is lifelong learning. The customers for this are savvy people who do not want the expensive frills of campus life or faculty research, but are seeking a well defined product that helps them to accomplish something they want to do. They understand that it is not wrong to make a profit if they are given value. By redefining “excellence” as fully meeting the needs of our customers in this area, we can continue to strive to provide a better education than our competitors, while creating an approach that is much more effective, efficient, and less costly.
I think we can also use globalization as an opportunity to reconceptualize our mission and our business model. We should not simply export our present approaches, which are very much products of our universities’ needs and desires. Rather, we should try to create new and more efficient models focused on enabling us to meet the needs of our new students overseas. Again, new definitions of excellent need to be considered that take into account the strategic goals of the globalization effort, and the needs and desires of the new customer base.
Time is not on our side in facing these problems. Numerous global trends are leading to increasing pressures on our price-productivity-cost model, and we must begin to consider alternatives in order to be more in control of our own fates.
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