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Nonprofit colleges should be wary of new breed of for-profit players (essay)

The New For-Profits
May 31, 2013

Southern New Hampshire University is probably the fastest-growing nonprofit institution in the country, driven by the expansion of our longstanding online program.  When it comes to large-scale online programs, for-profit colleges dominate the list, which includes only a handful of national nonprofit players. 

That may change soon. Eduventures, the marketing research firm, predicts that hundreds of nonprofits will seek to move online more aggressively. A good number of them have been visiting us.

From small private tuition-dependent colleges to flagship public universities to elite high-brand schools, we have hosted institutions that are exploring how they might enter the online education market or expand their existing programs.  It’s not as easy as it was even just a few years ago, and with some frequency they ask if we might contract with them to help them grow their online programs. 

We thought about offering such a “services business” and partnering with these institutions to provide everything from marketing expertise to call center support to advising to course development and more, but discovered that we can’t.  U.S. Department of Education rules prohibit one institution from offering “bundled services” to another for a share of tuition revenue (the only sensible way to be paid since services contract and expand with enrollments).  Ironically, while the rule was designed to thwart for-profits institutions trying to circumvent prohibitions on incentive compensation for enrollment activities, it inadvertently keeps nonprofits from working together while protecting that market for a new breed of for-profit players.

While Southern New Hampshire has abandoned the idea of creating a services business, we learned in investigating it that major for-profit companies are rushing into the breach, claiming millions of tuition dollars, and blurring the boundaries between them and their nonprofit partners.  

Though for-profit colleges themselves are reeling and seeing steep declines in enrollment, bundled services providers, as I call these entities, represent a new for-profit sector quietly gaining substantial ground in higher education. Because this sector is doing so in willing partnership with nonprofit institutions, its presence is largely unrecognized and poorly understood. 

A new generation of owners and shareholders is being enriched with tuition dollars, and the nonprofit higher education sector may well be compromising its integrity and values.  This major new for-profit presence is now becoming established, is a magnet for investors, and in many ways raises more difficult questions for higher education and for regulators than did the for-profit institutions that have been so often vilified. 

Bundled services providers are for-profit companies that help institutions establish and grow online programs.  While they can help with course development and conversion, platform and IT needs, compliance and reporting, their real added value is marketing and student recruitment.  As more and more nonprofits look to expanded online programs as a way of extending their reach and offsetting loss of other revenues (state support for publics, shrinking net student revenue for privates), the BSP industry has heated up.  

Publishing behemoth Pearson acquired EmbanetCompass for $650 million. John Wiley & Sons acquired Deltek, another BSP, for $220 million. A number of new BSPs have entered the market place in the last few years -- companies like 2U, Learning House, and Academic Partnerships -- joining longer-term players such as Bisk; heavyweights like Blackboard have announced plans to jump in.

For-profit institutions also have a stake in this business, with Kaplan owning Colloquy and Ivy Bridge College being owned in part by Altius. Udacity, best known for MOOCs, recently announced a partnership with Georgia Tech that really looks like a bundled services deal if you read who will provide what, based on details provided in this recent Inside Higher Ed article. Coursera this week unveiled partnerships with nine state university systems and flagship campuses in which it will provide a suite of services and products including its MOOC platform, entire courses, technical assistance consulting, and analytics – in short, bundled services.

While for-profit institutions have yet to earn much respect from traditional higher education, the BSPs are working with scores of highly reputable nonprofits. EmbanetCompass works with Boston University, Deltak with Purdue, 2U with the University of Southern California and Georgetown, Pearson with Arizona State University, Bisk with Notre Dame -- and the list goes on. 

Eduventures estimates that about 200 nonprofits have partnerships with BSPs and another 500 will entertain such partnerships in the next 12 to 24 months. BSPs generally take 50 percent of all tuition revenues for their services, so this is a very lucrative market. 

How lucrative? According to the Texas Observer, Academic Partnerships collects 70 percent of the tuition revenue from partner Lamar University, the third-fastest growing university in Texas (it started at 80 percent), more than $33 million in fiscal 2012.  

In its partnership with Arizona State, Academic Partnerships collected just short of $4 million or 50 percent of tuition, over $10 million in its partnership with Florida International University, and $18 million, or 50 percent of tuition, for Ohio University’s nursing program. With hundreds of nonprofits hoping to grow online programming and finally shaking off their hesitancy about online education (the real gift of elites offering MOOCs), the bundled services market stands to outgrow the for-profit higher education sector over time. In short, it could be huge. 

Why do nonprofits turn to BSPs for help and thereby surrender huge amounts of tuition revenue (and effectively pass through to the for-profit world federal and state financial aid dollars)?  There are three primary reasons:

  • They have tried to launch online programs and had limited success, or they have never done an online program, so they know there is a lot they do not know;
  • They do not have the internal capacity, whether it be the right people (often the case), technology, systems, data analytics, or processes;
  • They do not have the financial resources to build capacity and support a necessary marketing effort.

So while the prospect of giving up so much of their tuition revenue is not attractive, these institutions have little other recourse.  The BSPs, on the other hand, recognize that they will make major investments to launch and grow these online programs and that over time the institutions will learn from them, so they insist on long-term contracts. Ten years is not uncommon. 

Outsourcing parts of what we do is not new to nonprofit higher education.  We often outsource food service, bookstores, and maintenance.  We increasingly outsource IT, or portions of it anyway.  Outside vendors often create our marketing materials.  We may outsource some HR functions, such as payroll. 

There is little tradition of outsourcing core academic functions and the key engagement with students that begins with recruitment/admissions and extends through the learning experience and advising. Yet nonprofits are increasingly doing just that in their partnerships with BSPs. 

I have elsewhere written about the disaggregation currently under way in higher education and could argue that this is the best example of the phenomenon.  Essentially, BSPs do the marketing, student recruitment, data analytics, course conversion, and other functional processes far better than most nonprofits can. Disaggregating those functions and paying an entity more expert than you to do them makes a lot of sense, and I could argue that doing so provides access to more students, strengthens the participating institutions by building enrollments and increasing revenues (even if they give up a good portion of them), and ostensibly allows the institution to stay focused on what it does best: develop intellectual assets that the BSPs then help to extend to the world.

Yet, the rise of the BSP industry raises a number of important questions that invite exploration by policy makers, higher education leadership, reporters, and others.  To my mind, they are as follows:

  1. Are for-profit companies in the process of claiming another large portion of the higher education pie and doing so largely under the radar screen?
  2. Are BSPs important enablers that will allow nonprofit higher education to reclaim the online marketplace from the huge for-profits, or we trading one kind of for-profit – institutions that are  easy to recognize and understand - -  for another that is more insidiously embedded within our sector?
  3. What does it mean for any institution to give over so many of its activities to a third-party provider?
  4. How will accreditors and regulators come to think about these disaggregated structures given that the regulatory environment is largely built on the notion of the integrated institution?
  5. Are institutions that enter into BSP contracts sufficiently safeguarding their authority over key functions and decisions and against the recruitment abuses that plagued so much of for-profit higher education?
  6. Are we comfortable with so much tuition revenue leaving our institutions to enrich shareholders and owners of for-profit companies?  Put another way, how much do we give away to for-profits before our institutions lose their standing as nonprofits and become fronts for what in reality become much more mixed entities?

BSPs make their profits and meet shareholder expectations by driving growth, and one could argue that when an institution contracts with a BSP there is a perfect alignment of goals: both want to see more enrollments and more tuition revenue.  If the BSP is making a lot of money, so too is the institution: an ostensible win-win. Conversely, when a BSP so entirely takes over the management of a nonprofit’s program, how much nonprofit is left?

If non-profit Institution X contracts for a BSP to:

  • convert its courses for online delivery;
  • provide all learning materials;
  • market and recruit students;
  • process admissions files;
  • hire faculty and oversee the teaching of the courses; and
  • provide assessment,

what is then left for Institution X to provide? Its name, accreditation, Title IV approval, and intellectual property in the form of the syllabuses and program.  Is that not then a kind of franchising in which the student largely engages with the for-profit side of the partnership and very little with the nonprofit?  Is such an effective hybrid program truly nonprofit?

On the other hand, many nonprofits have little alternative. They lack the combination of know-how, capital, and infrastructure they need and a BSP contract gets them in the game and generates new tuition revenues. While the contracts may be lengthy, the arrangements give them time to learn what they need and to eventually take back some or all of that for which they contract.  There is an alternative. 

I propose a BSP cooperative, a nonprofit entity in which nonprofit institutions can be owner/members. From such an entity an institution could buy all the services it needs at a lower cost with a number of benefits:

  1. Because it is a co-op it would have to distribute any “profits” back to the members, thus keeping all tuition dollars within the nonprofit sector;
  2. Institutions would have not have to surrender such large portions of their tuition revenues and, by extension, federal financial aid dollars would stay within the nonprofit sector;
  3. All co-op “profits” could be funneled back into institutions as need-based scholarship support.

Because all members are owners, the earlier cited Department of Education bundled service affiliate rule would prohibit a co-op as just outlined, but I think the idea is compelling enough that (a) the department should find a way to make such a co-op possible and (b) institutions would readily sign on if they could.  In the end, a partnership of accredited nonprofit institutions might not address all the boundary and definitional questions that the new for-profit BSP sector raises, but I would find such a partnership more reassuring than our current state of affairs.

Bio

Paul LeBlanc is president of Southern New Hampshire University.

 

 

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