Rethinking the Business Model

Responsibilities of Governing Boards

By AGB    //    Volume 20,  Number 4   //    July/August 2012
Rethinking the Business Model: Responsibilities of Governing Boards, July/August 2012

The Panelists

Todd Hutton, president of Utica College

Austin Ligon, member of the board of visitors of St. John’s College and former member of the board of visitors of the University of Virginia

Sidney Ribeau, president of Howard University

Holden Thorp, chancellor of the University of North Carolina at Chapel Hill

James Wagner, president of Emory University

Jane Wellman, executive director of the National Association of Systems Heads and founding executive director of the Delta Cost Project on Secondary Education


Gwen Ifill, moderator and managing editor of Washington Week and senior correspondent for the PBS NewsHour

Colleges and universities are thinking strategically about their business models. Reductions in state and federal appropriations, endowment volatility, fundraising uncertainties, and limits on tuition increases are creating persistent shortfalls in operating budgets. This all comes when institutions are being called upon to enroll and graduate more students. Each college or university has its own challenges, and boards must work with administrators and faculty members to determine the strategies that best support shared governance and their institution’s mission.

Greater attention to productivity and efficiency are clearly part of the solution, as are business models that look at revenue streams and expenditures in new ways.

At AGB’s National Conference on Trusteeship, Gwen Ifill, moderator and managing editor of Washington Week and senior correspondent for the PBS NewsHour, led a special panel of higher education leaders who explored the current environment and discussed how best to deal with it. Parts of that discussion are highlighted in this article.

IFILL: What is the steepest barrier that you see to providing the most affordable education to the broadest array of students?

WELLMAN: We must ensure that more students enroll and succeed in college and that it remains affordable. But we don’t have a consensus in our country about those goals. We can solve the money problem in higher education. It’s a matter of public will and institutional practice.

THORP: The biggest barrier is getting people who work inside the university to understand that we are facing fundamental challenges that we haven’t faced before. Since 1976, when state funding for higher education peaked, we’ve come up with all kinds of different tricks to keep going. We started charging for more products and services. We built our endowments and worked to do a better job of getting higher returns from them. And so on.

But this time, we don’t have another trick up our sleeve. We’ve run up student debt, so we’re not going to get more resources from tuition. We’re not going to reinvent the endowment model. We’ve spent 40 years figuring out how not to get to this point, but we’re here now.

WAGNER: If the question is “How do we move more people through our colleges and universities?” then the answer is different for different institutions. Would we achieve such a goal if, say, flagship public institutions like the University of North Carolina or top private institutions like those in the Ivy League all dropped their tuitions to zero beginning next fall? No, those institutions are already full, with students competing to enroll. Whereas, at other institutions, lagging completion rates may be the issue, and some of the reasons could be financial. So individual institutions need to define the big questions for themselves and use their ingenuity to find the answers.

RIBEAU: You need to have a clear definition of your institutional mission and what that really implies. Our mission at Howard is to create access to high-quality education for students who have historically been underrepresented in higher education.

Then, once you provide access and students are enrolled, you have to have the resources to fulfill that mission. At Howard, 48 percent of our students are eligible for Pell Grants. If there’s a significant change in Pell eligibility or the amount of Pell financial aid, it has a major impact on students’ ability to enroll and persist through graduation.

Finally, everyone involved with the institution—the faculty, staff, groundskeepers, alumni—needs to understand the urgency of the moment. My mantra is: “It’s not going back to whatever it was before. So let’s figure out how to make what we have today work effectively.”

HUTTON: If the business model of higher education were broken, the entire system would be falling down around our ears right now, and it’s not. American higher education has been very resilient. A lot of what we’re hearing today you heard in the 1980s.

But the character of what we’re hearing from the public now differs from what we heard then. Sixty-eight percent of the students at my institution receive Pell grants. The word affordability means something to them and their parents. Every January, several dozen students return from holiday break, and they don’t have enough money to pay tuition, so they come to my office looking for help. It breaks my heart to have to say to those students and their parents, “I’m sorry. I cannot help you.” That’s a message that parents are beginning to identify with. They’re worried about their ability to send their children to college, and if we can’t make ourselves affordable, they’ll question our value to them.

IFILL: People have always assumed that it’s good to go to college. But some politicians this year have said that’s not necessarily the case—it’s a kind of snobbery, for instance, to encourage it. So what is the argument that higher education is a public good at a time when people perhaps can’t afford it or think it’s not necessarily the best thing for everybody?

WELLMAN: Higher education is a public necessity in a way that it wasn’t 20 years ago. The options for people to get a good job and make a decent living without some kind of post-high-school credential are slim to none in most parts of this country. If you look into the future as to where we need to be and the rest of the world is headed, it’s going to require higher skill sets. College is no longer an option or luxury.

Does that mean everyone has to have a bachelor’s degree from a private liberal arts institution? Of course not. High-quality postsecondary education can mean many things, including receiving a nursing credential at a community college.

Much public good comes from a collective investment in higher education. Many points of evidence show that people who have been to college pay it back in a number of ways. For instance, they make more money so they pay more in taxes. Their levels of volunteerism are higher. Of course, college is also a private good, which is why it’s appropriate to pay for it through both public and private resources.

THORP: A point that gets lost is that everything that gets taught in the classroom—whether at a K–12 school, community college, or research university—comes from discoveries that were made at research universities. So one of the most important public goods is knowledge—not just for inventions and innovations, but for what we teach. Where is that information going to come from 20 or 30 years from now if we don’t continue to support higher education?

Also, it’s important to remember that a liberal arts education, which embodies the whole notion of citizenship and the public good, is practically useful. If you look at the great stories of innovation in this country, they involve not only scientists and engineers, but also people who have had a broad understanding of the human condition and what specific innovations society has needed.

Indeed, many other countries have produced lots of scientists and engineers. If that were the determining factor, then we wouldn’t still be leading the world’s economy. The liberal arts are actually the defining difference that has made the American economy what it is.

IFILL: Sidney, do you make that argument at Howard—and, if so, how?

RIBEAU: Having educated citizens who are literate and engage in critical thinking and decision making in a reflective way is a public good—and has always been viewed as crucial for the foundation of a modern democratic society. Now, a different discussion is, how do you adapt that educational approach to 2012 America? What kind of outcomes are we achieving as a result of our curriculum? What are students able to do as a result of it in their careers and community life?

The parent writing the check for X amount of money wants to know, “What is my child getting for this money?” One thing is, obviously, a job. But what else has their son or daughter obtained? Is he or she more mature? More reflective? Wiser? More compassionate?

We must be able to demonstrate that our missions and learning outcomes are being acted out in real life—that our students develop the habits and abilities that we identify as vital for our graduates. If we just quietly share that among ourselves in the same way that we always have, and don’t consider how colleges make a real difference in our society, then we’re going to continue talking to a smaller and smaller audience. And the supporters we desperately need in Congress, on school boards, and elsewhere in our communities are not going to be able to make the case for us.

LIGON: If there’s a single advantage that the United States has over the rest of the world, it’s that we have a diverse university system that includes small liberal arts colleges, as well as places like the University of Texas, and many other types of institutions. The diversity of the opportunities is in the public good.

And I’d like to focus for a moment on large public research universities. Most of their students have relatively high incomes, but they don’t pay to go to a public university what they would pay at an equivalent private university. As a result, poor kids borrow money to attend so that the rich kids can get a tuition discount.

We must develop a new, transparent pricing model that will reduce costs for lower-income kids—and in ways politicians understand, because they see us as being somewhat profligate and inefficient. And the fact is that the great public research universities don’t need state money. They can charge the students who can pay it the full price and gather enough money from them and other constituents to support their missions.

IFILL: I get the sense that Sidney may disagree.

RIBEAU: Many students who attend large public research universities can’t afford to be there without significant financial assistance. If it weren’t for state support, they wouldn’t be going to a top public university.

THORP: I understand what Austin’s saying, but his recommendation is dangerous for several reasons. First, we would be entrusting a bureaucracy—governing boards, legislatures, university systems—to ensure that we don’t mess up access. At North Carolina, 11 percent of our students attend for free. Another 15 or 20 percent receive significant financial aid. Our low tuition is one of the ways that we make sure that we remain affordable and accessible for many students.

Also, state investment in universities has been dropping for the last few decades largely because health-care costs have been rising. When politicians have to decide whether to put money into higher education or Medicare, they always choose the latter. That’s true whatever the political party and regardless of whether or not college leaders are good at arguing for support for their institution.

LIGON: My suggestion is that we raise tuition for those who can afford to pay it so that we have more to give to those who can’t. In fact, at most of our big public universities, the majority of the students come from affluent families, and they’re paying too little. As a result, we don’t have enough for financial aid, and that’s the real challenge.

IFILL: Todd, what about the public good?

HUTTON: At the micro level, there’s no question about higher education’s public good. Ask any mayor in America, “Would you want the small college in town to leave?” Towns and cities throughout this country would love to have a university. Yet at the national level, somebody somewhere all the time seems to be questioning it.

IFILL: Let’s assume colleges are a public good. One of the buzzwords that frequently comes up is “cost-effectiveness.” How does higher education best spend the resources it has?

WELLMAN: If you look at every publicopinion poll, you’ll see that the public knows higher education is good for society, not just for the student. They know that we need more of it as a country.

But the public is increasingly questioning the value of higher education because tuitions are going up faster than virtually every other major area of consumer spending. People don’t see that those prices are going up in any way that’s justified. They assume that institutions are feathering their own nests—that colleges are somehow increasing tuitions to maintain an institutional advantage, rather than focusing on what the public needs.

And, at some level, the question of cost-effectiveness always has to come back to the value proposition. Are we able to show that the resources are being invested prudently and producing value—doing things that advance students to degrees and get high-quality outcomes?

As an industry, we haven’t been evidentiary about how the money gets spent or responded to legitimate questioning about whether or not we should be doing more to cut spending and achieve efficiencies. We have a history of not being straightforward about where the money goes or where the value is for the public’s investment. We can do more to be clear about that, as well as to control our spending.

IFILL: Are people tackling that problem?

WELLMAN: In the past, there wasn’t much evidence that institutions were restructuring in any meaningful way. We’d balance our budgets. We’d get through the bad times. When the good times came back—they always did—we’d start spending again. Today, however, the word is out. People know this situation is different.

Around the country, you see much more serious institutional attention to not just managing the cost structure, but changing it. We’re reducing spending where it’s not creating value. We’re consolidating programs. We’re cutting costs. We’re taking advantage of economies where we can. Is it enough? Probably not yet. Is it real? Yes, it’s real.

IFILL: Jim, if there is reluctance to change the business model, is it because colleges are trying to be all things to all people?

WAGNER: There is a temptation to try to do too much. Individual institutions should be focusing on programs that are essential or where they can achieve excellence. At Emory University, we have a study under way to determine just that. The result will be that we won’t be everything to all people.

I’m concerned that the conversations that we have in higher education tend to focus too much on what we need to do to preserve our industry. What we need to preserve is mission. If we can keep our mission in front of us, then our institutions may become more compact and more focused—and also more effective at serving and educating our citizenry.

IFILL: When you say colleges should be more mission-driven, does that also mean consolidation?

THORP: We need to combine different programs and activities within institutions or within systems. At Chapel Hill, we’ve tried to consolidate as many business functions as we can. We invited Bain & Company to evaluate our operations, and they presented a list of things that we needed to do. I put the outgoing chair of the faculty in charge of implementing those recommendations. The Bain people had doubts about that because he didn’t know anything about IT, purchasing, resource planning, and so on. But he was able to convince the faculty that we were not destroying the institution. And we’ve actually captured all the savings Bain said we could achieve.

IFILL: Everybody agrees we have to cut bureaucracy. But at what point should academics be cut or reorganized?

RIBEAU: You have to look at the entire enterprise, including academic programs. This is where the trustees are so important. At Howard, we have an Academic Excellence Committee that is a standing committee of the board, and it is responsible for developing policies related to standards of academic excellence and other related issues. As part of their academic quality review, board members asked, “How do you know that we’re as good as we say?”

Shortly after beginning my tenure as president at Howard, we designed a process to address this issue. I launched the Presidential Commission on Academic Renewal and appointed about 55 faculty and other commission members. They assessed all 175 academic programs that we have at the university. They looked at eliminations, consolidations, and opportunities for integration, always asking, “Are these programs in line with our mission, do they meet our standards for excellence, and are we the best that we could possibly be?”

The board played an integral role in helping to develop the methodology for assessing our programs. We also had a local trustee attend every meeting of the commission. So the board was actively involved in the entire discussion from beginning to end.

IFILL: What are you not doing now that you were doing before?

RIBEAU: We eliminated approximately 40 different programs that weren’t in alignment with our mission or did not meet other criteria developed by the commission. We also came up with new, generative approaches. For example, our Classics program had been an important program but no longer enrolled enough students to be sustainable. So we brought our faculty members together and they broadened their focus to include North Africa. A new program in Mediterranean Studies was created to integrate our Classics program with the university’s emphasis on the Diaspora. The beauty of it was that faculty members were talking to one another across disciplines and in creative and innovative ways. It’s magical what faculty will do. We just need to give them the support to do it.

IFILL: Is the challenge different for public versus private institutions?

LIGON: Private institutions have a simple profit and loss statement, but few people understand the P&L of a major public university. It’s befuddling. That’s why legislators suspect that we have tons of money that we’re not using well. One challenge for large, complicated public universities is to be efficient and demonstrate that.

Also, when we talk about the public good, we should consider types of programs like the one at Stanford University, where professors have opened up their classes to anybody in the world who wants to sign up online. When building a constituency for public universities, we must consider how to share knowledge with not just our students and alumni, but also everyone else in the state.

IFILL: Is there a private-public model that can be emulated?

HUTTON: As a private institution, I’m looking for private-private models. Many innovative hybrids are emerging. For example, Tiffin University, a comprehensive small private university in Ohio, created a for-profit, two-year institution online called Ivy Bridge. Eventually, it will be spun off and add close to $20 million to Tiffin’s endowment. We’re going to see a variety of new business models like that, offering, for lack of a better term, different product lines with different price points.

We’re also seeing students aggregating discrete credentials, or badges, that they gather from different institutions—traditional, online, nonprofit, for-profit—into a larger credential that we call a degree. At some point, businesses are going to say, “The student didn’t get a degree but passed all the courses that are equivalent to one. That’s enough.”

Traditional colleges and universities will not have a monopoly on credentialing any longer. The market is more than ever going to define the nature of American higher education, including our global reach. I was at a summit in Korea several years ago, and representatives from foreign nations were unabashed in saying that their goal was to eclipse the United States in 25 years. So we better watch the competition carefully.

WAGNER: If the challenge to some of our universities is to graduate more students, such online offerings could be just the ticket. Suppose that Emory University were able to require everyone to study abroad for one semester as part of their education. And during another semester, we required students to study away using technology. We would then have basically an entire class of students away from the campus for a year. That means we could educate five years of students using the same buildings and grounds we have traditionally used to educate four years of students.

RIBEAU: As we talk about rethinking the model, I want to ensure that we don’t lose sight of the students that historically haven’t been included as much as they should have been in higher education: socioeconomically disadvantaged students, working-class students, and students of color. We must put mechanisms in place that bring in more of those students.

THORP: We also have many needs in this country, and every state has educated people who are doing things that are not lucrative: rural health-care workers, middle- school teachers, social workers, police officers. If we redo the model so that everybody’s living with a whole bunch of debt, then they’re not going to be able to take a job as a teacher or a social worker and pay off their student loans.

IFILL: Is there a role the federal or state governments should play?

WELLMAN: This is about not only institutional performance, but also public policy. How do we invest in these institutions that serve our society? Especially in the face of rising health-care costs, higher education is falling off the agenda in way too many states. But I don’t believe the public is disinvesting in higher education because they mean to, but because they are rebelling against higher taxes.

College enrollments have grown 60 percent in the last 30 years, and our tax system has not kept up with the increasing demand. We could manage this if we only had to serve the 30 percent of the population that we were serving 20 years ago. But we’re trying to get to 50 or 60 percent. That’s what’s different this time.

Still, we have a huge reservoir of public goodwill if we’re smart enough to keep it. We feel so under siege now that we sometimes forget how relatively privileged higher education is. We’ve been the beneficiaries of years of generous public investment, and we have to re-earn that for the future.

This is the first in a series of occasional articles in Trusteeship examining how various institutions are examining their business models.

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