Why Business Model Innovation Is Essential for Financial Sustainability

By David Rowe, Ph.D. March 22, 2021 May 11th, 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.

Dr. David Rowe, Sr. Consultant AGB Consulting

David Rowe, PhD, is the interim president of Lancaster Theological Seminary, the immediate past president of Centenary College of Louisiana, and of Lake Highland Preparatory School. He is the principal and chief executive officer of The Development President as well as a senior consultant and the adaptive governance practice leader for AGB.

The higher education business model is broken.

This has been the opening line in lobby bar conversations among college presidents at professional conferences for more than a decade now—remember when they weren’t online? The commiserating CEOs would nod knowingly and take another sip.

The problem is that the business model is so complex and so bound up with the education model of the institution that it is difficult to know how to fix it without making things worse. Financial statements look like a Jenga tower. Who wants to risk pulling out one block just to take a closer look at it?

It helps to name the Jenga blocks and know what each one of them does. I find a simple breakdown of the business model from Harvard Business Review, “Reinventing Your Business Model,” to be helpful when diagnosing which parts of a particular institution’s business model could benefit from closer examination. (Johnson, Christensen, and Kagerman, Harvard Business Review, 2008). I’ve adapted a couple of the terms to fit higher ed, but the four components they discuss are:

  • Student Value Proposition
  • Revenue Formula
  • Key Resources
  • Key Processes

Boards should work with their presidents to look at each of these components to overcome the paralysis that can be induced by the dizzying complexity of most academic operations.  Instead of lamenting sector disruption in a generalized way, it is possible to zero in on what’s wrong and what to do about it.

We will be looking at all four of the components of the higher education business model in depth at our March 25 Workshop: Adaptive Governance: The Key to Strategic Innovation and Institutional Transformation.

Student Value Proposition

Students aren’t our only stakeholders, and each business unit should look at its value proposition relative to those they serve.

Declining enrollments and the demographic cliff ahead signal sector disruption and the need to pay attention to the question: What are students and their families willing to pay you to do?

Increasingly, the answer to that question is less philosophical than it used be and that most of us dedicated to liberal education would like it to be. Financial security after graduation is on the minds of those ponying up the large investment or taking out the big loans for a college education.

It’s time to transform our thinking about the student value proposition from one that values inputs: test scores, selectivity and rankings (an amalgamation of input indices) and focus on student learning outcomes. Moreover, we need to translate those outcomes to employers who want to know that we are graduating professionals ready for today’s rapidly changing workforce.

Revenue Formula

Once emergency pandemic funding goes away, the challenge posed by expenses exceeding revenues will be exposed again. We’ve disrupted each other with pricing competition disguised as scholarship. Small institutions have pushed discount rates higher to counteract declining enrollments. It is extremely difficult to push those back down.

The operative question when examining an institution’s revenue formula is: Will enough students and families pay you enough money to exceed your costs? Sadly, for many institutions net tuition revenue may not even cover the delivery of the core enterprise: instruction, academic support, and student services.

Broadly, higher education suffers from a mind-set, driven by the tax-funded universities that educate most of our faculty and administrators, of seeing programs as “funded” by some imaginary well of resources. The transformation we need to effect relative to revenue formula is to begin thinking about programs as generative in terms of revenue production.

Not every program in a university has to make money, but something does.

Key Resources

Most industries view resources as variable to meet demand, allowing expenses to scale up for market surges and scale down in lean times. Higher education is good at many things, including turning what most industries see as variable costs into fixed costs. Our payrolls mostly grow no matter what demand for our services is and we maintain expensive, aging facilities.

Deferred maintenance is not the only indicator of costly fixed overhead, but it is daunting enough all on its own. Our past decisions and traditions are disrupting our future potential.

Focus in on this question: Do you have precisely the required resources to deliver value with a margin? Most of us are over-resourced in areas that are no longer strategically advantageous and scraping together what we can to launch new initiatives. We have a resource mismatch.

Our impulse is to raise more, hire more, and build more. However, accumulating capital only adds to the problem. We need to transform our mind-set to one that is focused on growing the capacity of existing resources and repurposing them for new, revenue generating programs. This may take the form of divesting, renovation, and professional development.

If you want to know how to do more with less, ask your librarians. They have been successfully responding to that call for decades.

Key Processes

Most small to midsize institutions are competing with scale. Honors colleges within land grant institutions are providing experiences similar to those of residential liberal arts colleges. And they are doing it for free, in many cases, for the brightest and most affluent students in any given state. Public and for-profit institutions are disrupting the traditional private higher education markets by competing at scale. They’re also focused, nimble and competitive in providing relevant education products to meet the needs of today’s students.

Locked into a selectivity mind-set, our processes are geared to keep people out rather than bring people in. Think about how hard it is for a student to apply, register for classes and, in many cases, even pay a tuition bill. In a world that makes it possible to get a mortgage on a mobile phone we put up archaic barriers at every turn. No wonder we’re being disrupted!

We need to transform our closed systems into open systems, creating new markets and adding value to people’s lives in ways we never before anticipated.

It’s time to move from being disrupted to being disruptive.

Business Model Innovation

If the problem were only declining enrollments, costly fixed overhead, spiraling discount rates, or competing with scale, then maybe old-fashioned technical fixes would suffice. The problem is that in many cases, it is not one part of the business model that is broken, it is the whole thing. This will require boards and presidents to move out of management and oversight mode and adopt an adaptive posture relative to governance – one that asks new questions in new ways.

Business model innovation requires four key institutional transformations:

  • From Inputs to Outcomes
  • From Funded to Generative
  • From Capital to Capacity
  • From Disrupted to Disruptive

Obviously, it will not be business as usual going forward. And the biggest mistake we can make is denying that reality. So before you take another sip in the lobby bar, let’s talk.  Click here to register now for our March 25 complimentary workshop.

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