What’s Wrong With Higher Education?

Observations from Industry Insiders

A white paper authored by Jeff Rich, VP from Stamats Higher Education Research and Consulting

One might pose the question differently, asking what’s working in higher education these days; the list might be quite a bit shorter. With universities unable to balance their budgets, state and federal funding diminishing, affordability making it harder and harder for students to pay for college, and commercialization and technology disrupting an industry that’s changed very little in hundreds of years, it’s no wonder university leadership teams are so stressed these days. We offer this white paper with observations, data and insights that can help frame the problems university leadership teams are dealing with.

We start with the premise that higher education is in the early stages of massive transformation. Like many things in our polarized society, the top 10% to 20% will be just fine, whether large comprehensive state institutions with athletic programs that rival the pros, or prestigious Ivy League schools with billion dollar endowments. These schools will not find themselves desperately fighting for market share. It’s just about everyone else that should be worried. For those not as familiar with the higher education landscape, and for purposes of this discussion, here’s a quick summary of how to view the marketplace. This is an oversimplification but for our purposes there are basically four categorizations of schools:

1. Private schools often focused on liberal arts that emphasize their four-year undergraduate curriculums. These schools often develop a small to medium sized portfolio of graduate level programming that tends to skew towards business and education. These schools are generally tuition dependent and also focus heavily on developing donor bases through aggressive alumni outreach. These schools tend to be expensive, often costing $30,000 to $50,000 a year before financial aid kicks in.

2. Comprehensive state institutions that generally offer undergraduate and graduate programs and rely heavily on state funding to sustain operations. These schools are still considered generally affordable, costing perhaps $10,000 to $20,000 a year and in many cases getting far more applications to enroll as undergraduates, then slots available to admit students.

3. For-profit institutions that are generally run like a business, often spending 30% to 40% of their revenue on marketing and are often focused heavily on online learning. This compares to not-for-profit schools which may spend 2%-4% of revenues on marketing. This is a key competitive advantage for the for-profits, as the perception that holds true today that traditional colleges and university degrees are more desirable diminishes.

4. Community colleges and vocational schools that are often either prepping students for entry into a four-year institution, or preparing students to enter the workforce through vocational training. Enrollments at many of these schools has exploded as many students look to defer costs by completing credits at community colleges, or seek training to enter a career path requiring vocational training.

Note - Within these categorizations there are many sub-segments that can be broken down into smaller categories based on size, or academic focus, etc..

To understand what’s happening in the market place we need to look first at the factors colleges and universities can’t control. These external market forces are at the heart of many of the problems in higher education and many schools don’t as yet understand what they are. A student of economics would look at what’s happening and say the problem is quite simple, and it’s one that just about every other industry has gone through at some point. For the first time ever, colleges and universities are susceptible to the laws of supply and demand. Just think about this, schools have until very recently enjoyed absolute protection in their geographic markets. New market entrants were virtually nonexistent. Not-for-profit traditional colleges seldom thought about geographic expansion outside their primary trade area and getting accredited in new states was an expensive, multi-year process. As a result, things moved slow in higher education and this made it easy to forecast enrollments year-to-year, and operations could glide along smoothly as major shifts in the market were few and far between. Enter the for-profit university…. Schools like the University of Phoenix, Cappella University and Rasmussen were able to expand geographically and fund aggressive media campaigns to begin to gain market share. Traditional schools have never viewed for-profits as legitimate contenders for the traditional high achieving, college-bound high school senior. Plus, academic traditionalist often snubbed their noses at the quality of for-profit education and many continue to insist that quality education cannot be delivered online, or that a for-profit school is more focused on turning a profit than student outcomes. Then there’s the prestige factor, regardless of the quality of the education you receive at a for-profit, top employers would still view a job candidate with a degree from a traditional school as a better hire than a candidate coming from a for-profit school, particularly if the degree was conferred from an online program. What traditional higher ed was not seeing because it’s generally an inward facing industry was the shift in the market occurring, driven by the change in the consumer perspective. The economic implosion of 2008 turned our society almost overnight from one driven by conspicuous consumption, to one focused on affordability and value. As Chris Farrell the former chief economics reporter for Minnesota Public Radio put it in his book The New Frugality, “we’re entering a cycle where consumers are becoming more inwardly focused and are less concerned about outspending their neighbors. In other words it’s not what you make and spend to demonstrate your success, it’s what you keep”.

While academic traditionalists were continuing to insist that the commercialization of education and online learning would have negative impacts on student outcomes, students growing up in the information and technology age were finding these new ways to learn, the flexibility online learning was offering and the innovations brought about by for-profits quite appealing. While I’m not saying the majority of students want to study 100% online, many prefer a mix of online and traditional courses and traditional higher ed was slow to adapt.

*Source Stamats 2013 study of student perceptions

Because the prestige factor was still not associated with for-profit institutions and online degrees were still considered inferior, traditional colleges and universities continued to not consider for-profits as legitimate competitors. These generally well-funded, more nimble and innovative for-profit schools that viewed themselves unabashedly as businesses were about to ride the same wave that had transformed so many other industries in remarkably short times frames. Just ask any out-of-work executive from the newspaper industry, retailers or travel agents how the Internet transformed their businesses.

As the 2008 economic debacle took hold, it masked what was really driving change within the industry. Some schools were seeing enrollment gains, while many others began to see early signs of enrollment declines. Many cited the economy, or pull backs in employers offering benefits such as paying for employee education. A student of history would look to the past to predict the future and say in periods of declining wages and increased unemployment, colleges and universities generally see enrollment increases as workers go back for retraining or young people delay entering the workforce because jobs are hard to find.

(Source needed from Bob)

The mixed bag of results schools we’re seeing was hard to decifer. Laws schools absolutely saw major enrollment declines driven by the poor job market with the leading indicator being the drastric reduction in students taking their entry exams (LSAT’s). Many (not all) graduate business programs such as MBA’s also saw declines in students taking their entrance exams (GMAT’s) and mistakingly thought the same dynamic was at play (fewer students entering business school due to the economy). What in fact was happening with MBA enrollments was much different than with law schools. More and more business schools were dropping the GMAT requirment and as a result fewer students were opting to take the GMAT. Schools that actively promoted a no GMAT required message and/or began to develop online programs generally were the ones that saw enrollment increases or were at least able to fend off enrollment declines. Schools still convinced that online was not relevant or the GMAT necessary generally saw enrollments begin to decline, some severely. To compound the problem, schools in financial duress began to cut budgets needed to market these highly competitive programs and that was exactly the wrong thing to do. Many schools that were ablel to sustain their levels of promotional activity continued to use media channels like billboards and bus wraps, not realizing that the continued fragmenting of the media landscape and the shift to digital made many of these expenditures absolute wastes of money.

The effects of the adoption of online education and the for-profits aggressively expanding into traditional school’s trade areas did not have as big an impact on traditional undergraduate enrollments, yet many schools were also seeing major declines in their undergraduate populations, particularly private schools that don’t have ivy league credentials or division I sports to increase their brand profile. What was driving these enrollment declines was declining demographics (fewer students in most geographic regions going to college) and the annual cost of attending a typical private college reaching the point where the consumer questionsed the value. Students not as familiar with the game colleges play with what’s known as institutional aid would look at the sticker price of a school and determnine

that $30,000 to $50,000 a year was unaffordable to them and eliminated many of these schools from their consideration sets in favor of lower priced private colleges and state schools with tuition, room and board much more reasonabaly priced. Because schools don’t like to talk about price, many refused to educate the consumer that in most cases 50% to 95% of all students at private colleges receive some amount of institutional aid, often with majorities of students only paying 40% to 50% of the sticker price. This meant a student with a good academic record could in many cases attend a private school for almost the same price as a state institution. Rather than recogizing this opportunity and realizing that unlike other markets such as the luxury car market where price truly does equate to prestige, in the education markets the overwheleming majority of students are looking for value and the reputation of a school that has often been around for 100 to 150 years or more will not be bastardized if the school talks about the affordability of their cirruculum. Instead, many college presidents continued to instruct their admissions and marketing departments to focus on recruiting the high acadmic achieiving, low need student that every other school in the country seeks to enroll. These students have their pick of the lot and generally can attend any school they wish as admittance and the funding of their education is not an issue. To capture these students schools would be forced to offer richer aid packages driven heavily by discretionary instituional aid. Institutional aid (or the money colleges discount their product to attract desireable students) was fast becoming the drug that schools needed to have any chance of bringing in their desired number of first-year freshman. As a result, a school’s “net tuition revenue” began to steadily decrease to the point many could not balance their budgets.

(source)

When businesses experience periods of declining revenues they begin to cut expenses and/or develop new products they think the market seeks. Well managed, innovative schools did just that, conducting audits of their exisitng acaedmic programs to determine market demand, quality and pricing

competitiveness. Many came to the determiniation that they needed to cut some programs, launch new ones and begin developing online programs since that was the segment of the market that was expanding. Hard choices now needed to be made and with a culture of shared governance a foundation of higher education, universty president’s ran the risk of losing the confidence of their faculties if they became too heavy handed in cutting programs or mandatng new ones. Schools are not run like corporations and the president who tries to may soon find themselves out of a job due to a formal vote of no confidence from their faculty.

This led to the second wave of disruption that we find oursleves dealing with today. The adoption of online education initially driven by for-profit schools considered less pretigiuous, now being carried forward by traditional schools with strong brands and funding to go after the market share. Schools like the University of Southern California, Arizona State University and their partnership with Starbucks, the University of North Carolina, and ivy league schools like Yale and Cornell represented a new breed of not-for-profit. They embraced online education, MOOC’s and other technological innovations and further erroded the market share of schools still stuck in their outdated perspective. Some schools like Southern New Hampshire University and Grand Canyon University went all in and saw their enrollments grow by tens-of-thousands. Compare this to the modest enrollment growth most private schools seek and can’t even maintain. For these schools a 5 or 10 student increase in a given program year-over-year is all that’s expected and in many cases even this modest goal in unachievable. This dynamic further reduced traditional school’s market share leaving many in the situations they’re dealing with today and driving some towards an inevitable permanent turning off of the lights.

If revenues are declining, why not just cut expenses to balance the books? This is easier said than done in higher education. With approximately 70% of an average school’s expenses tied up in salary and benefits and a good portion of these salary expenses tied to tenured faculty, the ability to reduce academic staff was limited and many schools already found their administrative staff cut to the bone. Some schools had the added problem of dealing with unions where collective bargaining made it virtually impossible to gain reductions in salary and benefit costs. What also fueled many school’s unwillingness to address the issues created by the institiuon of tenure was the belief that the number of full-time tenured faclty was directly related to the perceived quality of the education and the prestige of the brand. They also believe that eliminating tenure would make it impossible to attract the best professors. While most would agree the ratio of full-time tenured faculty to students or the ratio of tenured faculty to adjucts is important for schools focusing on liberal arts-based undergraduate programming, many were again missing the consumer’s point of view. When it comes to graduate level programming, many students actively seek programs taught by those that have been there and done it in the real world vs. just academic theory. Schools with marketing strategies that recognized this broke from the pack and began talking about affordability, and the value of professors who practice their acaedmic theory in the real world. Many schools continue to compound these problems adding more and more tenured faculty to their ranks each year, or blindly asking the question at their finance and enrollment committee meetings “how much should we increase our tuition costs this year?” often choosing the default norm of annual 3% and 5% increases because they believe that’s what their competitor schools will do. Other schools missed the mark by focusing financial resources on build-outs

of nice-to-have facilities like student unions, dining halls and even rock climbing walls. (reference Mark Cuban’s article Will Your College Go Out of Business?)

One school that broke from the pack on just rolling with annual 3% to 5% tuition hikes was Concordia University St. Paul who rolled out a 30% tuition decrease for the 2014 academic year.

(insert interview with Concordia)

What can colleges and universities do to change their trajectories?

Having now read dozens of school’s strategic plans I can tell you most say exactly the same thing, increase the quality of their programs and student outcomes, focus more on hands-on or experiential learning, increase their selectivity (college speak for only admitting the best students and creating ethnic and racial diversity), increase donor support, etc.. Most would consider these activities obvious and imperatives rather than initiatves that can create true distinctiveness in the marketplace. Further, very few offered actionable concrete strategies and activities to accomplish them. I would submit that even if many of these objectives were accomplished, few schools would see their enrollments and revenue increase as a result. What’s needed are operational overalls such as centralization or outsourcing of some services, infusions of technology to create automation, new expertise, a product the consumer truly wants and an understanding that all enterprises must susatain their operations without being reliant on aid from the government and donors.

While I would expect my comments to not be popular among academic traditionalists, having had the benefit of working with dozens of schools and having spent equal amounts of time over my 25 year working history in higher education and the corporate world, I would offer the following roadmap back to financial prosperity for colleges and universities dealing with some combination of these dynamics.

1. Realize that even colleges and universities are businesses and begin to run them like a business. This doesn’t mean selling out your values or belief that higher education is above commercialization, but

you do need to realize that this is where the world is moving, it’s irreversible and university leadership needs to understand these dynamics and adopt more of a business attitude.

2. Understand that much like the housing bubble, education has reached a point where the average American familiy cannot afford to send their child to your high-priced institution. Instead of annual 3% to 5% tution hikes, go the other direction and look to reasonably cut expenses and initiate cost saving measures to increase operational efficiency. This can include outsourcing functions such as HR, or consolidating and centralization of admissions and marketing staff that often work in silos across different schools within the larger institution. While this may not turn your bottom line instantly, it will start to change your trajectory and position your institution to be competitive in the future.

3. Leverage technology to reduce staffing needs and automate some services. Even the government has begun to adopt technology to increase efficiency. Why are colleges and universities so resistent? Initiatives like one-stop shops where admissions related activities from applying and registering for classes, to dealing with financial aid, to academic advising can occur online or through the consolidation of these often disparent services. Schools get the added benefit of not forcing their students to visist three or four different offices and speak to staff who often are not coordinating among themselves. This is an example of a consumer-centric strategy as opposed to forcing the consumer or student in this case to adapt to what’s an inefficient and often frustrating process.

4. Address the elephant in the room and begin to phase out tenure, and don’t be afraid to hire adjuncts. I realize this statement will not be popular with academic leadership. But let’s face it, for many institutions this is a life and death issue. My perspective may also be skewed from my corporate experience where no one is above losing their job for poor performance or disruptive behavior. While many might point to these realities as the primary rationale for severely limiting or even eliminating tenure, I would offer an added perspective. Tenure was origianlly developed to protect academic freedom, and to give faculty an unshakeble voice as part of shared governance which is the concept most schools operate under. This concept is foreign to most people from the business world where a company’s CEO and executive team pretty much have the ability to drive their strategies and ideas down through the organization without disruption. Not so in higher education where most things are done by committees that represent faculty, staff, students, and even alumni sometimes. The flaw in the concept is most of the time groups other than executive staff are not party to key information that drives more effective decision making, nor do many of these committees and individuals have experience in the things they’re being asked to weigh in on. Another tennant of tenure is faculty’s ability to speak out against poor or even incompetent management by university leadership. I’ve seen a number of schools rebel against inneffective president’s, going so far as to cast votes of no confidence using tenure as a shield from losing their jobs for speaking out. In most cases I’ve seen the president survive as their boards attribute faculty’s actions as perpetual faculty unrest and kermuginlyness. Schools with boards

made up of clergy or other individuals with more loyalty to the institution then the president and executive team tend to take faculty’s actions more seriously. Boards that have been hand-picked by president’s and often are dominated by individuals from the private sector often side with president’s because it was the president who solicitied them to join the board and they have a strong sense of loyalty to support them. This is a dangerous dynamic and has led to many institutions moving closer and closer to insolvency with no possibility of bringing in more competent leadership.

5. Make marketing a priority in your organization. Because schools historically did not have to fight for students the way they do today, many university marketing departments are ladden with communications staff that don’t understand marketing. With communications departments staffed by people who have no real experience in marketing, they often focus on the wrong activities putting enormous amounts of human and financial resources against things that won’t solve their enrollment problems. One example I can offer is my experience working with a school that saw it’s enrollments in freefall. They were doing absoltuely nothing to market their programs while staff spent all their time developng the best looking alumni publication in the business. They spent their time developing brochures and posters that would never see the light of day outside the institution’s four walls. None of these activities were focused on reaching audiences that were outside the shool’s exisiting community and would therefore have no real effect on attracting new students. What made fixing the problem even harder was the lack of any new funding to intitiate the kind of chnages and new marketing activities that were needed to turn the enrollment picture around. This meant that this particular school had to go through the process of refocusing it’s resources around activities that reached the outside market and would truly have a positive impact on enrollments. I recall one situation where a staff member insisted on maintaining a $60,000 annual photography budget while there was no money left to use that photography on inquiry and enrollment generating media. Rome is burning and it’s inhabitance is still clinging to their decadent lifestyle! Some may have graduated from their school and moved right into marketing departments having gained no real experience in other organizations and because higher education has not viewed marketing as an essentiual activity, their willingness to attract better talent and pay competitive wages makes infusing universities with the human capital to turn it around even more difficult.

6. Break-up your “cabals”. Every school has them. These are staff members who have appointed themselves the keepers of their school’s traditions and the purveyors of closed-mindedness and resistence to change. Without question higher education is one of the most resistent industries to change there is and cabals are a major reason why. All businesses must adapt and change to remain relevant. This involves infusing organizations with new ideas and new thinking. Cabals are anti-change agents. They often stiffle change, make new staff members with fresh ideas feel unwelcomed and anchor the organization in antiquated thinking that will push their school eventually to irrelvance. What’s scariest about the power and influenence of these cabals is that more times than not they have the ear of the president and the president often viewes them as positive influences on their cultures. They are not. Higher education needs to learn that some amount of staff turnover is a good thing as the

ability to remove staff members without the skills needed today, or who have extremely disruptive influences on an organization’s ability to change and adapt will cause significnt harm to your organization and cause many talented staff members to seek employment elsewhere.

7. Stop funneling so much of your resources into Advancement offices. Again, a statement that probably won’t make me popular with peers, but something that needs to be said. For those unfamiliar with how universities operate, most schools have significant amounts of staff focused on cultivating donars from their alumni populations and corporations in their markets. While I would not advocate ceasing this function, I would advocate limiting the amount of university resources devoted to it and there are a couple reasons why. First, the return on investment from adequately staffing a school’s marketing, admissions and faculty is far more important. Well run, profitable organizations get there by focusing on their core product, in higher education that’s the quality of their acaedmic programs which is largely contingent in the quality of the faculty. When it comes to marketing, hiring experienced staff and adequately funding a schools marketing and media plan to attract students is now mission critical. The ratio of Development/Advancement staff to the amount of donations they raise pales in comparision to the tuition revenue college marketers can bring in by effectively marketing a school’s programs and brand. The other dynamic that’s working against cultivating donors is the shift in generational willingness to support their alm amater. Generations of 50+ year-olds are much more likely to financially support the school they graduated from than younger alumn. Plus, younger alumn can and would prefer to be reached through new methods of contributing such as crowdsourcing and other online contribution methods. These tactics require less face-to-face donor outreach and cultivation, and more knowledge and expertise in marketing and technology staff to develop and run these programs.

8. Stop resisting online learning. University leadership needs to ignore faculty’s resistence to online learning. Many faculty in traditonal univeristies will continue to believe you can’t deliver quality education online. This is just not true and I would say this objection is irrelevant anyway. There’s no question this is where the market is headed and almost all schools other than the most lofty when it comes to academic prestige must adapt or continue to see declines in their enrollments. While the window of opportunity to blaze the trail and breakway from the pack of schools seeing enrollment declines is closing fast, schools need to now view the migration to online not as a growth strategy, but a necessary expansion of their business model in order to stay competitive and not become one of the victims of the market disruption that will put some number of schools out of business in the coming decade.

About the authors.

Jeffrey Rich is currently the Vice President of Agency Services at the leading higher education marketing, research and consulting organization in the country. Working with Stamats as a consultant and as an

executive administrator within universities, Mr. Rich has worked with dozens of schools across the U.S. experiencing the kinds of enrollment and operational issues outlined in this white paper. His background in execuitve administration at comprehesive universities, executive leadership at Fortune 25 organizations such as UnitedHealth Group and Target Corporation, as well as leadership roles at top marketing and advertising firms has given him unparreled access to many of the top brands in the country and a birds-eye view of how they operate. Mr. Rich can be reached for commentary regarding this White Paper at jeff.rich@stamats.com or at 800-553-8878.