Making a profit on the core educational function

 Following my posting the article Unexamined premises in reporting on the for-profit higher education front, I received an email from an old mentor of mine, John Lombardi.  Like any good mentor, he praised my efforts in that post before gently pointing out that I have missed a key nuance or two in the discussions of the for-profit vs the non-profit sector.  His insights were very interesting, and serve as a springboard for this discussion.  However, he bears no responsibility for distortions of his viewpoints that I might purposely or accidently set out below.

I have often commented that we in the non-profit world of higher education lose money on education.  John pointed out that that is not literally true.  We lose money on the bundled degree product that we sell, which includes education, socialization, athletics, housing, student services, support for professors to create and disseminate knowledge, student recruitment, etc. But if we do the bookkeeping in a different way, we see a different picture. 

Consider first an abstraction that I will call the core costs of instruction.  John argues that these core costs are very similar institution to institution, for-profit and non-profit. That is, the core of education is essentially a commodity. These core costs are always less than the revenue that comes in to pay for the educational product, creating a profit to the institutions. What varies, institution to institution and for-profit to non-profit, is how this profit is used.

Typically, in the non-profit sector, the instructional profit is used to subsidize the various components of the bundled degree.  Some of the subsidized components are themselves part of the instructional “center”. For example, some of the profit is likely to be used to broaden educational offerings beyond the core of profit making offerings, e.g. to support low enrollment majors, and increased breadth of electives.  However, much of the profit goes to non-instructional areas such as student services, student recruitment, athletics, buildings and support for professorial knowledge creation and dissemination by faculty.  Putting all of this together, we over-subsidize. That is, we spend more than the profit made on the core instruction, thus losing money on our now- bundled degree. This deficit must be made up from additional resources (e.g. philanthropy).

In the for-profit sector, some of the profits gained from the core instruction are spent on student services and recruitment, as in the non-profit sector. However, typically student services are focused much more on getting the student through the degree and much less on student life than in the non-profit sector. Comparatively little is spent on broadening curriculum beyond the core, even less on housing and similar infrastructure, athletics, and support for creation and dissemination of knowledge. Thus most of the for-profit sector sells what is basically an unbundled product focused on core instruction.  This leaves some of the instructional profit to be returned to investors.  

Viewed in this way, the old argument that “for-profit higher education can’t be good because it makes a profit “(see The breakdown of the price-productivity-cost model of the private research university) can be seen to be overly simplistic.  Both sectors make a profit on their core educational function.  What varies is how that profit is utilized, and how that utilization meets the needs of students.  For many traditional students (18-24, full time, residential, etc), the typical non-profit, which pours much of its instructional profits into student life areas and a rich set of curricular choices, is a great match.  However, the percentage of students in the US that are non-traditional has risen to more than 80%. For many, if not most of these non-traditional students, student life expenditures and to some extent rich curricular choices are of relatively little value. Thus, the typical non-profit utilization of its core instructional profits is not particularly well suited to the needs of the non-traditional student, thus opening the door to competition from the for-profit sector for this segment of students.

Lombardi also noted that this viewpoint gives insight into the way many non-profits are handling difficult financial times when the core instructional profit decreases: they begin to unbundle their products, deemphasizing elements of the bundle that are not related to core instruction. The creation and dissemination of knowledge component is unbundled through the hiring of non-tenure track teaching faculty rather than research oriented tenure-track faculty. Majors with low enrollment are dropped, and institutions search for ways to charge separately for student life amenities such as recreation centers and student centers. 

Interestingly, this economically-forced unbundling makes these non-profits more closely resemble their already unbundled for-profit cousins.  As I have commented before, the top 50-100 non-profit colleges and universities have sufficiently strong brand recognition that they typically are not really competing with the for-profit institutions for students.  However, the thousands of remaining non-profits that don’t fit into this elite set and don’t have the protective “moat” of strong brand recognition are much more likely to find themselves competing with the stronger for-profit institutions for students.  As the unbundling of the traditional product of this lower ranked group of non-profits increases their similarity to the for-profits, the growth of competition they will encounter from the for-profits will accelerate.

 

Comments

[Sarah Elaine Eaton]

Really enjoyed this post. I explored some of these very issues in my Ph.D. dissertation and some of my other research. In my work I try to differentiate between "revenue-generation", "surplus" (a term more palatable to the social sectors) and "profit" (a term used in the business world). Fascinating topic. I was glad to find your post.

[Robert Herzog]

Agree with Patrick, fabulous blog Lloyd.

Lloyd responds: Thanks, Robert

[Katie Read]

Great point on "over-subsidization"...

[Patrick Blessinger]

I like your articles because they always attempt to look at the facts of the issue in what I believe is an unbiased manner. Your willingness to issue correct/update your blogs based on feedback from your colleagues make it a blog I can trust. My guess is that this probably comes from your scientific background where one is trained to be objective and factual. Your articles are not over-simplistic in their discussion of the issues. Yours is one of the few blogs that I trust reading.

Lloyd replies: Thanks, Patrick, for your kind words. I will try to continue listening to my readers, and responding appropriately.

[Daniel Clark]

As a Ph.D. student in the field of Educational Psychology and former community college faculty member, I have a vested interest in this topic. However, the problem that I see is attrition due to difficulties in self-regulation. Research appears to say that attrition in online learning is quite more excessive than traditional instruction. How do for-profit systems respond to this difficulty? It seems like they take the shotgun approach and get as many in as possible. Am I wrong?

Lloyd replies: good questions, Daniel. I find the data on attrition in online courses rather squishy. The recent Dept of Ed study that did the best job to date of matching and comparing online and traditional courses did not report attrition results. Most of the other studies seem to me to be comparing apples and oranges. Whatever the actual numbers may be, there is a huge effort going on to improve retention in online courses, so retention will almost certainly improve. The better for-profits actually put in a lot of effort to see that students persevere in their courses - they want them to succeed and take more courses, thus creating more income. I would guess that the majority of online courses, both for- and non-profit, are part of programs that are indeed essentially "open admissions". This, of course, complicates the problem of perseverance.