The End of the Business Model?

Posted by on Apr 17, 2013 in Grant Thorton, SACUBO Annual Meeting, Uncategorized | 0 comments

By Larry Ladd, Director, National Higher Education Practice, Grant Thornton LLP

It’s the question most talked about within the industry:  is the business model outmoded?  Will we see fundamental change?

 First let’s be clear about what is meant by the current business model, or more accurately the “typical” business model:

  •           Land-based classrooms, with faculty teaching and students learning, on a fixed schedule.
  •          Extensive physical plants that include not only classroom, offices, libraries, residence halls, and athletic and recreational facilities.
  •          Faculty who are rewarded for research more than for teaching
  •          Growing administrative staff and costs
  •          Net prices that are growing faster than the rate of income growth and faster than inflation.  The extent of student debt in particular has come under withering criticism.

Second, let’s also be clear about what is meant by a future business model, recognizing that we can only be speculative.

  •           Courses with a “blended” or “hybrid” pedagogy between online and land-based instruction, using technology where it can work best and lower costs.  Fully online courses will also apply in many situations.
  •          Courses with far larger enrollments than previously conceived, using leveraged technology.
  •          Limited physical plants, with more leasing and owning.

Critiques of the current business model come mostly from observers of higher education, rather than from participants.  The observers have been very outspoken.

A nationwide opinion poll conducted for Northeastern University reported that while three in four respondents said American colleges outranked those in both emerging and mature economies, 83 percent said American higher education “needs to change to remain competitive.” That view was even more prevalent among adults ages 18 to 30, 90 percent of whom agreed with that statement.

Within higher education itself, however, there is a generally more conservative stance.  A survey of presidents indicated that the four major concerns were Federal student aid, budget shortfalls, decline of state support, and rising tuition/affordability, which are all important effects of the current business model but don’t necessary address the model itself.    A survey of chief business officers of colleges and universities showed that most business offers see the business model as strained but workable.  And two thirds characterized their institution’s financial health as either excellent or good.

Trustees are caught in the middle between public opinion and campus opinion.  When the Association of Governing Boards of Universities and Colleges issued the results of its survey of 2,500 trustees this year, they found that trustees think that college costs are too high at other institutions but not at their own.  They also view educational outcomes more favorably for their own institution than in higher education generally

It’s certainly easy to believe that we are trapped in a bubble, not unlike the dot.com bubble or the mortgage bubble, where all signs pointed to collapse but participants kept behaving the same.  Immediately after each bubble burst, all of us said “what were they thinking?” and self-righteously condemned them for their foolishness and greed.

In the last year I’ve becoming far more sympathetic with the participants in recent “bubbles” that burst, now that my own industry is a likely candidate.   Why?  Because there are severe penalties if you act any differently than to continue to stay in the bubble.  If you stop raising tuition so rapidly, you just lose revenue (you don’t actually get much else).  If you control academic or administrative costs, you get campus turmoil which few are prepared to face.  If you limit your facilities growth, prospective students go elsewhere.  If you start to shift the faculty reward balance toward teaching, faculty revolt and the best might leave.

So we know we are in a bubble and must take action, yet we also know that action spells short-term trouble for our institutions.

I recommend following two parallel strategies. 

First, maintain the status quo to as limited a degree as you can.  Don’t directly confront the status quo if you have the luxury to continue to enjoy it.

Second, develop and nurture alternative “business models” in parallel to your existing “status quo” model that is likely to evolve into your institution of the future.

Institutions as different at Harvard and Southern New Hampshire University are both following this two-pronged approach. 

Harvard, along with MIT and other research universities, have announced the creation of edX, a well-capitalized joint venture to begin offering MOOCs (massive open online courses) by their faculty.  These courses likely to compete, for better or worse, with courses at other colleges lower on the prestige ladderHarvard has partnered with a variety of other high-powered universities to create edX, a well-capitalized initiative in online education using massive open online courses (MOOCs) taught by their very best faculty.

Southern New Hampshire University is now two separate educational enterprises, a traditional campus program and an online program, with cross-fertilization of both academics and finances.

Another strategy worth watching is the New Paradigm Initiative, where a consortium of 16 liberal arts colleges and universities in the South that will offer online and blended courses to students on any of the campuses within the consortium, meaning students at one institution are no longer limited to the courses offered just at their college.  “In an effort to maintain the feel of small liberal-arts classes, professors on the home campus of a course will teach in a classroom outfitted with conference capabilities and students on other campuses will take part in real-time, synchronous discussions.” 

Institutions that can’t afford a parallel of two separate strategies, such as the Meadville Lombard Theological School, have opted to follow the second path (blended instruction exclusively), so far to resounding success.

These examples are just a few of the many places where new business models are emerging.  It is highly likely that the pace of adoption of the new models will accelerate rapidly in the next year.

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