Let’s Talk about the Consolidation Era in Higher Education

By Rick Beyer July 26, 2021 Blog Post

Opinions expressed in AGB blogs are those of the authors and not necessarily those of the institutions that employ them or of AGB.

Rick Beyer, is a senior fellow and practice area leader for mergers and affiliations at AGB Consulting.   A former college president, board governance chair, successful technology CEO, and senior operating executive of a $1-billion public company, Rick has consistently been at the forefront of industry-leading initiatives and has a successful history of leading organizations through change and growth. Rick can be reached at: rbeyer@agb.org

Four years ago, Moody’s credit rating agency downgraded higher education as an industry from stable to negative.  Today, that negative credit rating remains in place for our industry.  The latest Gallup Poll of Chief Business Officers noted that higher education is in the middle of a financial crisis; this poll was taken prior to COVID-19.

Higher education budgets are typically attained through continued underinvestment in areas such as new product development, failure to fully fund depreciation, relying on technology that, in many cases, is 20 years old, a lack of depth in human resource capacity, paying employees below-market wages, and fully investing in student outcomes.

A focus exclusively on a balanced budget can provide an institution with a false sense of security.   Continued underinvestment in critical areas is usually not visible to boards but represents a severe quality of earning issue for an institution and our industry.

There are key pathways to prosperity to guide you and your board as you analyze what is best for your institution’s future.  You can read more about these in the latest issue of Trusteeship or attend one of my upcoming webinars:

  • Affiliations vs. Mergers: Over the past three years there have been 100 mergers, closures or affiliations announced. The loss of identity, mission, governance, and employee redundancies prevent a board from seeking merger alternatives until it is too late, which results in very few strategic mergers. For institutions, affiliations are becoming a more attractive alternative compared to mergers as they preserve the legal entity, identity, mission, governance, president, and senior executive team.
  • Qualifications and Value Proposition for Affiliations: Joining a private system is not a bail-out. Private system affiliation (PSAF) organizations are hesitant to take on institutions that do not have a strong vision of their future and must have the resolve to transform their business model and think about long-term prosperity versus survivability. Today there are three private system affiliation (PSA) organizations in the market: TCS Education System, Core Education Foundation, and National University System.
  • Becoming Affiliation-Ready: For some institutions, becoming affiliation-ready will make the difference between finding the right partner and becoming a “late-life” merger casualty. For board and senior leadership, time is the enemy.  Institutions that have received recent government PPP funds can be lured into a false sense of security by believing “we are ok for now.”  Those institutions should use this valuable time to consider becoming “affiliation-ready.”

For those institutions seeking to become affiliation-ready for long-term prosperity, there are three important milestones:

  • Prosperity gap calculation and board education;
  • Revenue growth and a diversification plan for success—development of strategic growth building blocks; and
  • Developing a “decision matrix” to identify the best alternative pathways.

The unique nature of governance in American higher education has served the nation well in the past, and while the challenges facing the sector today are unprecedented in their scope and complexity, trustees today must lead in this era of significant change and with a broken business model.

While institution closures will continue to accelerate, there remains great opportunity for long-term prosperity.

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