Business issues

Commercialization Is Not the Problem

Encouraged by critics like Derek Bok, Gaye Tuchman, and Jennifer Washburn (who characterizes market forces and commercial values as “a foul wind [that] has blown over the campuses” of our nation’s universities) the commercialization hypothesis has been accepted, often without critical thought, by many members of the academy. They are not big fans of the business community to begin with, and it is convenient to assume our problems come from “outside agitators” like intrusive business people.

We in higher education do have major problems with cost and quality, and they need fixing. But commercial forces are not the problem – our own internal practices are. A major factor in the persistence of our cost and quality problems is too much emphasis on public relations and too little emphasis on introspection.

Having served for over three decades in higher education and almost a decade in publicly held corporations, I have always found the assertions about the dangers of commercialization curious at best, since the way colleges and universities are run bears no relationship to the way corporations are managed.

Serious reflection reveals inconsistencies within the commercialization hypothesis. The corporate model leads to remarkable increases in product quality and lower costs; the record is clear in this respect. So how could such a model have exactly the opposite result (higher cost/lower quality) when applied to higher education?

The exceptional increases in total real expenditures per full-time student and the net cost of attendance are well documented. The only dissenting data with respect to the cost problem comes from the College Board, which claims that the net price (tuition and fees minus all grants, veterans’ benefits, and tax benefits) has declined over the past 15 years. The College Board data come from preliminary annual surveys. In contrast, the actual data reported by all institutions to the federal government institutional and longitudinal surveys reveal a persistent upward trend in real net price.

With respect to quality, I am aware of no scholar who makes the case that the quality of undergraduate education has increased over the past three decades. Furthermore, graduation rates, grade inflation, declining student study time, and lower prose, document, and quantitative literacy among college graduates all suggest at the very least that quality has not improved despite lower teaching loads and smaller class sizes for tenure-track faculty.

Our problems with cost and quality have an internal origin. The chain of causation runs from these problems to outside interference, not from outside interference to cost/quality problems. On the other hand, there has been an ongoing clash of values in higher education for the past three decades. The conflict is between traditional academic values and the values inherent in public relations. The combination of reputation competition and public relations governance makes introspection an improbable task. Building image conflicts directly with candid discussions about campus problems. If faculty members, administrators, and governing boards vigorously pursue cost and quality issues, they appear to admit the institution has problems. Without serious introspection, even the best institutions cannot get better. The first step in recovery is to admit you have a problem.

Reputations rule in higher education competition, and reputations are a factor only in markets where providers sell “experience goods.” An experience good is any good/service where the consumer does not know quality prior to purchase; he has to “experience” the good before he can judge quality. Quality uncertainty leads consumers to use the provider’s reputation for previous quality produced as an indicator of current quality. In extreme cases, the consumer assumes the higher the cost, the higher the quality. The reader may recognize this as the “Chivas Regal effect” among selective colleges and universities. Notice the perverse incentive this creates. If the institution spends more per student, the public assumes quality is increasing; if the institution cuts cost per student, the public assumes quality is declining. Hence, prudent cost control (which might make it possible to lower prices) lowers academic reputation!

Our dismal cost record since 1980 was made worse by the intrusion of public relations values, and those values are now comfortably at home in the academy. The reason the public relations people came to dominate campus administration is that reputations rule and reputations are built (at least temporarily) by public relations. This also explains why governing boards prefer presidents with fund-raising skills over presidents with either managerial skills or higher education experience.

Rather than a commercialization model to explain higher education’s woes, a better analogy is a political campaign, where the focus is to raise all the money you can and spend all the money you raise to create an image that may or may not accurately reflect reality. The conflict of values is between public relations expediency and the academy’s traditional regard for quiet substance. As faculty, we acquiesced in this takeover because it was in our financial interest to comply; more fund-raising meant more money for salaries and perks.

A recent study, written by Jay Greene and others at the Goldwater Institute, documents the growth of “administrative bloat” in higher education. Greene et al find, “Between 1993 and 2007, the number of full-time administrators per 100 students at America’s leading universities grew by 39 percent, while the number of employees engaged in teaching, research or service only grew by 18 percent. Inflation-adjusted spending on administration per student increased by 61 percent during the same period, while instructional spending per student rose 39 percent.” A study of the Maine university system shows similar results. Further, NCES data reveals full time faculty members represented 64% of total full time professional employees in 1976; by 2007 the proportion had declined to 46%.

Overhead cost (the cost of administering colleges and universities) should benefit from economies of scale and from the significant technological progress that occurred over the last three decades; as “output” increases, the overhead cost per student should decline. Unfortunately, overhead costs per student grew significantly and steadily during this period. By my calculations, as much as two-thirds of the increase in total cost per student came from increased overhead costs.

The Goldwater report raises serious questions about why governing boards allowed such exorbitant increases in overhead costs. After all, most governing boards include prominent business people who pay very close attention to overhead costs in their own businesses. Why would they not ask the basic questions? Is it possible the governing boards did not know what was happening to overhead staffing?

As the size of the administrative staff grew relative to faculty members and as the administration replaced tenure track faculty with contract faculty, the tenure-track faculty’s governance role declined. Curiously, the dominant public narrative concerning what ails higher education is that tenured and pampered faculty members obstruct all the good work proposed by administrators and governing boards; the reality is that most of the cost increases come from rising overhead costs, and tenure-track faculty play an increasingly smaller role in determining how the campus employs its resources.

An individual faculty member’s ability to influence governance is dependent on his or her academic reputation and alternative employment opportunities. Established scholars have alternatives; they can vote with their feet. Established teachers have little opportunity to vote with their feet.

Other things equal, one would expect that faculty governance would be stronger at research universities than at teaching colleges, and Greene’s findings seem to back this up. They show that in 23 of the 198 Research I universities studied, instructional employment grew faster than administrative employment. It is revealing that many of these institutions were elite research universities such as Harvard, California Institute of Technology, Rice, Emory, Cornell, Chicago, Princeton, University of Michigan, and University of Virginia, where faculty governance is stronger than it is in the rest of the academy. Hence, it is likely that growing administrative bloat is driven, in part, by weak faculty governance; precisely the opposite of public perceptions about higher education.

There are two ironies here. First, contrary to public perception, higher education’s chronic cost problems have at least as much to do with administrative decisions as they do with faculty members behaving badly. Second, if the corporate model had been applied to higher education, administrative bloat would not have happened. If governing boards closely followed overhead staffing patterns with respect to numbers and salaries, the explosion in overhead costs could not happen. The mystery is why governing boards did not monitor overhead cost.

The solution to these problems is to align the higher education incentive system with the public interest. The first priority is to move reputation competition away from public relations and toward “value added” competition, by providing more information about teaching value added. Teaching value added refers to the additional new knowledge retained by the representative student in Professor X’s classes or among College Y’s graduates. It also includes the ability to integrate and apply that new knowledge (critical thinking). The second priority is to offer faculty members incentive compensation contracts that lead to greater productivity and lower cost.

The third priority is to reinstate the faculty’s role in shared governance. Governance is shared in higher education because each group (faculty members, administrators, and boards) is supposed to monitor the behavior of the others; since administrative bloat accounts for two-thirds of the cost increases and, at best, the quality of undergraduate education has not improved over that same period, academic governance has not succeeded. Administrators prevent communication between board members and faculty members, and board members believe communication with faculty is a violation of the “chain of command,” a notion at odds with how higher education governance is supposed to work.

In the end, these are our problems and it is our responsibility to solve them. Denying problems exist betrays our students in at least two ways. First, beyond just teaching value added, we claim critical thinking skills, social responsibility, justice, citizenship, etc. are important parts of what we teach students. How can students take us seriously if we are unwilling to critically evaluate our own behavior and our institutions? Second, by our inaction, we deny students access to college. Uncontrolled rising real costs make it impossible for society to ever fully fund college access.

Robert Martin
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Robert Martin is emeritus Boles Professor of Economics at Centre College and author of The College Cost Disease: Higher Cost and Lower Quality, forthcoming from Edward Elgar, Ltd.

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