Business issues

U. of Virginia gives colleges ability to spend money they generate

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Tight times have led many colleges to centralize budget decisions, but U.Va. moves in opposite direction, hoping departmental control over costs will spur creativity.

Colleges Fail U.S. Financial Test

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Latest data from Education Department show scores of private institutions failing to meet disputed metrics aimed at measuring "financial responsibility."

On-Campus Health Clinics -- for Staff

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As premiums soar and cost pressures mount, a small university aims to improve employee health -- and cut insurance costs over the long term -- by providing primary care on the campus.

Academic Finance Demystified

Better understanding of how the money flows can help professors navigate their campuses' budget processes. Elizabeth H. Simmons offers a primer.

Dealing With Fine Print

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Auxiliary service agreements tying vendor spending on facilities to contract renewals raise conflict-of-interest questions -- and may be quite common.

Safer Bets

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Despite holding the same risky assets that led to losses in 2008, universities have learned from experience and have less to fear in current volatility, experts say.

Fixing Debt

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In the face of economic and political uncertainty, colleges are working to convert potentially volatile debt to a more stable form, but peace of mind comes at a cost.

The Inevitable Change Ahead

In most industries, technology-enabled competition is deemed healthy and vital. Accustomed to a hyper-competitive modern world, we expect even the largest and most prestigious companies to be continually challenged by nimbler, more creative upstarts. Economists teach that disruptive innovation by newcomers and creative destruction of entrenched incumbents leads to better products and services. When a century-old auto company, airline, investment bank, or newspaper files for bankruptcy or disappears altogether, we regret the attendant human suffering but count the loss as the price of progress, knowing that without competitive innovation and destruction we would enjoy a standard of living no better than our great-grandparents did.

Higher education, though, has been different. Large universities rarely cease to operate. Nor are the prestigious ones quickly overtaken. Part of the reason is a dearth of disruptive competition. The most innovative would-be competitors, for-profit education companies, find great success among working adults, many of whom care more about the content and convenience of their education than the label on it.

But many young college students still seek the assurance of traditional university names and the benefits of campus life. Because of loyal support from this large group of higher education customers, the incumbents have felt little pressure from the for-profits’ use of potentially disruptive online technology.

Meanwhile, the terms of competition among traditional institutions, the public and private not-for-profit universities, have been set primarily by those at the top. The strategy of most schools is one of imitation, not innovation. Little-known and smaller institutions try to move up in the ranks by adding students, majors, and graduate programs, so as to look more like the large universities. They also task their faculty with research responsibilities. In the process the emulators incur new costs and thus must raise tuition. This blunts the price advantage that they began with. They are stuck in a dangerous competitive middle ground, neither highest in quality nor lowest in cost. The great schools, rather than being discomfited by the imitation, seem all the more desirable because of it.

In their defense, the institutions that emulate Harvard and strive to climb the Carnegie ladder are doing just as conventional business logic dictates -- trying to give customers what they want. The great universities such as Harvard inspire not just administrators, faculty, and alumni at other schools. They also excite the most elite prospective students, who want to win admission to the most Harvard-like institution they can. Thus, less prestigious schools emulate Harvard’s essential features, such as graduate programs and expert faculty researchers and research facilities. They also give students costly non-educational amenities such as intercollegiate athletic teams, which Harvard no longer supports at the level of the most competitive schools.

The result of this competition-by-imitation is to solidify past educational practice among traditional universities, making them increasingly more expensive but not fundamentally better from a learning standpoint. The great-grandparents of today’s students would easily recognize the essential elements of modern higher education. Though the students are more diverse, the shape of classrooms, the style of instruction, and the subjects of study are all remarkably true to their century-old antecedents.

Great-Grandpa and Grandma would likewise recognize the three schools atop U.S. News’s 2010 college rankings: Harvard, Princeton, and Yale. In fact, asked to guess, they’d probably have picked just those three.

Only the costs of a higher education, one can argue, have kept pace with the times. In the 10 years after 1997, the inflation-adjusted price of a year of college at the average public university rose by 30 percent, while the earning power of a bachelor’s degree remained roughly the same. Cost increases derive partly from higher faculty salaries, but more from activities unrelated to classroom instruction. Scientific research, competitive athletics, and student amenities require both large operating outlays and the construction of high-tech laboratories, football stadiums, and activity centers. As a result, the cost of higher education grows faster than faculty salaries or other instruction-related costs.

The problem is not unique to higher education. In fact, in products ranging from computers to breakfast cereals, history reveals a pattern of innovation that ultimately exceeds customers’ needs. Hoping to get an edge on their competitors, companies offer new features, such as faster processing speeds in a computer or increased vitamin fortification in cereals. These enhancements are sustaining innovations rather than reinventions: the product becomes better while its basic design and uses remain the same.

The catch, as Clayton Christensen has shown in The Innovator’s Dilemma, is that these performance enhancements at some point exceed even the most demanding customers’ performance needs. The producer is incurring greater costs and thus must raise prices. That leaves the typical purchaser of a $5,000 laptop or a $5 box of cereal paying more than they want to, given what they actually need.

Much of what universities are doing is standard management practice: improve the product; give customers more of what they want; watch the competition. But it leads even great enterprises to fail, as detailed in The Innovator’s Dilemma. Inevitably, while the industry leaders focus on better serving their most prized customers and matching their toughest competitors, they overlook what is happening beneath them. Two things are likely to be occurring there. One is growth in the number of would-be consumers -- students, in the case of higher education -- who cannot afford the continuously enhanced offerings and thus become non-consumers. The other is the emergence of technologies that will, in the right hands, allow new competitors to serve this disenfranchised group of non-consumers.

Until the relatively recent emergence of the Internet and online learning, the higher education industry enjoyed an anomalously long run of disruption-free growth. In times of economic downturn, there were cries of alarm and calls for reform. But for the elite, well-endowed private schools, a bit of budget tightening sufficed until the financial markets recovered. The demand for the elite schools confer far exceeds the supply, allowing them to cover rising costs with tuition increases and fund-raising campaigns.

Even many less-prestigious universities benefit from accreditation, which has elevated them over unaccredited institutions. Public universities also enjoy the long-term commitment of taxpayers. In the absence of a disruptive new technology, the combination of prestige and loyal support from donors and legislators has allowed traditional universities to weather occasional storms. Fundamental change has been unnecessary.

That is no longer true, though, for any but a relative handful of institutions. Costs have risen to unprecedented heights, and new competitors are emerging. A disruptive technology, online learning, is at work in higher education, allowing both for-profit and traditional not-for-profit institutions to rethink the entire traditional higher education model. Private universities without national recognition and large endowments are at great financial risk. So are public universities, even prestigious ones such as the University of California at Berkeley.

Price-sensitive students and fiscally beleaguered legislatures have begun to resist costs that consistently rise faster than those of other goods and services. With the advent of high-quality online learning, there are new, less expensive institutional alternatives to traditional universities, their standing enhanced by changes in accreditation standards that play to their strengths in demonstrating student learning outcomes. These institutions are poised to respond cost-effectively to the national need for increased college participation and completion.

For the vast majority of universities change is inevitable. The main questions are when it will occur and what forces will bring it about.

Author/s: 
Clayton M. Christensen and Henry J. Eyring
Author's email: 
info@insidehighered.com

Clayton M. Christensen is the Robert and Jane Cizik Professor of Business Administration at Harvard Business School. Henry Eyring is advancement vice president at Brigham Young University-Idaho. Reprinted by permission of the publisher, John Wiley & Sons, Inc., adapted from The Innovative University: Changing the DNA of Higher Education from the Inside Out, Copyright © 2011 by Clayton M. Christensen and Henry J. Eyring.

Collaboration Among Colleges: Impossible Mission?

Bill Bowen, who was a longtime president of the Andrew W. Mellon Foundation, describes getting colleges to collaborate as "a very difficult, much unappreciated" task. From my experience in trying for 25 years to get 37 college presidents to collaborate, I'd go further. I have concluded that real collaboration across institutions is virtually impossible.

Collaboration as a concept is great, but as a reality it rarely exists. Centralization (providing benefits that each college can access) and even cooperation (helping when it doesn't hurt) are far easier practices to implement than true collaboration (working for the benefit of the whole even when some of the individual parts have to sacrifice).

Working first as director of a program at a major research university funded (by Mellon) to provide fellowships for faculty at small colleges in the mountains of central Appalachia, and then as president of the consortium that grew from that program, I feel qualified to make a few observations about why collaboration is so difficult:

Presidents of independent colleges are independent; as the primary representative of the institution they have a strong need for autonomy and to claim distinctiveness for their institutions -- even when the institution is very similar to others within the same classification of higher education institutions. While they do not want to disagree with their peers in public and will often appear to be in agreement, promises made in a public setting often do not get fulfilled in a private setting. Similarly, commitments made privately are often changed when a public vote with their peers is taken. As one college president said in a presentation at a meeting of the Association for Consortium Leadership, "We will promise anything to appear agreeable in a meeting of the consortium members."

Rosalynn Carter once said that a leader is someone who takes people where they want to go; a great leader is someone who takes people where they need to go.

Getting 37 presidents to agree on where they wanted to go was impossible for me; finding out where they needed to go -- by asking presidents, foundation officers, program directors in federal agencies and others from outside the Association -- was easier. Some consortium directors talk about the importance of building consensus, but I found the adage that "consensus is what everyone is willing to agree on in public but no one believes in private" was far too true.

I quickly learned that the way to get the presidents of our 37 colleges to make a commitment to a project was to present the project as the idea of another of the presidents or of a foundation representative and ask for volunteers for the pilot stages. I was fortunate to have 37 presidents with which to work because even though there were usually those who had no intention of fulfilling a commitment to the project, there were always enough who did fulfill their commitments to make the project successful. Directors of consortia with only a few members have a harder job. They have to know they have the sincere commitment of all their presidents to assure success; they do have to worry about building consensus.

Presidents do not accept ownership of what they do not control; academic deans, on the other hand, seem to be quite comfortable claiming ownership in situations where they feel they at least have some authority to make decisions. As a program at the University of Kentucky, the Appalachian College Program was guided by the academic deans of the participating colleges; they accepted those rare occasions when some idea they had proposed was vetoed by the university's officials (usually because there were other projects within the university that would be competing for the funding).

Once the presidents met to discuss expanding the program to include more than faculty development (joint purchasing, training for staff, etc.), it was clear immediately that they would not accept with grace a veto of their ideas by authorities at the university. As a result, the Appalachian College Program became the Appalachian College Association, an independent 501(c) 3 organization directed by a board made up of the presidents of member colleges.

Given the need of the presidents for autonomy, there is generally little reason to expect them to be concerned about the impact the program might have on education within the region generally; each president in my consortium was primarily concerned about the benefits his or her institution would derive individually. The question for each of the presidents was almost inevitability, "How will this project impact my institution?" While the mission of the Appalachian College Association was broadly defined as "strengthening private higher education in the region," the primary goal on which the presidents could agree was that the Association should raise money that all the colleges could share -- but only if raising that money did not jeopardize the fund raising of any individual member college.

The only aspect of their operations that the presidents seemed completely comfortable allowing the Association to address was faculty development and, later, centralized library services. At a roundtable session with Bob Zemsky (founding director of the University of Pennsylvania's Institute for Research on Higher Education) to set priorities for the next president of the Association, they quickly concluded that the focus of the Association should remain on faculty, that they did not need another organization that provided a social setting where the presidents could meet, or joint purchasing contracts that would probably overlap with contracts already in place through their state associations. What they most appreciated about the work of the Association was the fellowships and travel grants made available to faculty for individual research and study—a central service not requiring much collaboration.

At that same roundtable session, the question was asked, "If there were a disaster in your region that destroyed one of the member campuses, would the other campuses come together to help rebuild that campus?" After a long pause, a response came: "If the association called us together, we would. " The wise observation made by Zemsky was that the loyalty among the presidents was to the association and not to each other -- more evidence that centralization, not collaboration was the primary benefit they saw for the association.

When college presidents (across multiple institutions including some from my association) at a Council of Independent Colleges meeting were asked, "What is your favorite consortium among those to which you belong?," the answer was always one in which that president's college was the lead institution. A president will usually name a small local collaborative with the county high school over a regional or national one where their voice is much weaker.

Consortia directors or presidents work hard to "fulfill the vision of their members," but many do not seem to know what that vision is -- beyond working together for the benefit of the whole. And, unfortunately, it seems to be the financially weak institutions that are most interested in being active in a consortium because they have the greatest need for help, though they are least able to provide funding for the organization's staff and operations. As a result, many consortia can provide only what the weakest members among them can sustain.

Despite my frustration that as a collaborative our colleges never soared beyond 10,000 feet when 30,000 was my goal, our consortium of private Appalachian colleges (most with small endowments and small enrollments) was touted as one of the most successful in the nation. Calls came monthly from colleges outside our region wanting to become members; my advice was usually, "Start your own."

Keeping more than 30 colleges across five states working together on any level was more than a full-time job for our core staff of about five. Several of those calls actually resulted in meetings of groups of colleges anxious to replicate our model -- a regional consortium supported by nominal membership dues and lots of funding from foundations and federal agencies that managed to build an endowment for programs of roughly $25 million and reserve funds totaling over $500,000. None of those who called ever called back for advice, but if any had, here is what I would have told them:

1. Have a specific mission before you meet to organize. Forming a consortium for collaboration without knowing what you will collaborate to do is like having a meeting without knowing what the purpose of the meeting is: not much is likely to be accomplished. Recognize that providing central services or getting cooperation across the campuses is as worthy a goal as true collaboration.

2. Hold the initial organizational meeting with those who will be the primary beneficiaries to be sure they are receptive to the new opportunities provided. With our Association, the primary beneficiaries of the program that started the Association were faculty of the participating colleges. Faculty from the colleges met multiple times in groups on their own campuses and across the various campuses for five years before the academic deans of the colleges actually held their first meeting. The deans and faculty continued to meet for another five years before the presidents got involved, formed the Appalachian College Association and moved the organization away from the university.

3. Find a funding source -- the member colleges or an outside foundation, individual, or federal agency -- to support the first effort adequately. If the first venture fails, the consortium is likely to fail as well. Be sure that the project has appeal that will generate sustained funding -- either by the members or other agencies. Take advantage of the natural appeal consortia have for funders: program officers have to meet with only one consortium director, not with multiple college presidents.

4. Find a strong leader, someone who is able to listen to faculty and students or whoever the beneficiaries are and not be intimidated by those serving on the board of the consortium who may think they best know what the beneficiaries need. Choose someone who is bold enough to be able to solicit honest responses to ideas from the board members but is flexible enough to shape the ideas of those board members into fundable projects that will serve the major constituencies as they want to be served. Find someone who is able to present a good case to funders but wise enough to know that it is the funder who ultimately decides if the project is worthy of funding. Recognize that it makes little sense to argue a case that is not a good match for the funding agency. Someone said as I was leaving the Appalachian College Association that the new president should not allow himself to be controlled by the presidents but he will need to allow the presidents to believe they control him if they feel the need to control him. Ideally the college presidents will have enough confidence in the president of their consortium to trust that he or she will take the colleges both where they want to go and where they need to go. A consortium director or president has to listen to everyone and then do what he or she deems is in the best interest of most. Trying to make everyone happy with every decision is a sure way to slow the productivity of the organization, if not kill it.

5. Develop an organizational voice that is independentof the member institutions and the beneficiaries. For our Association, an Advisory Council was established as a result of the first strategic plan. That council was made up of representatives retired from the foundations and federal agencies that had supported our multiple projects and of other individuals in higher education with a special interest in the region and/or the member colleges, but no ties to any one particular college.

Such a council can help the consortium director consider what the colleges want to do in relation to broad views of higher education. Appeals to funders can be more convincing if there is evidence of a potential impact on multiple institutions outside the one group of colleges served by the consortium. Advisory Council members can provide positive reinforcement for good ideas and add suggestions for further refinements. They can also challenge ideas that may lead to problems for the colleges or consortium. In short, they can serve as a sounding-board for discussion of ideas before presentation to the college presidents and also present issues at meetings of college presidents to draw out their views before the ideas of the consortium leader are discussed. The same process can be useful when developing a strategic plan. If the planning is not directed by someone completely independent of the association, there needs to be provision for multiple voices from outside the group to be heard.

Working together -- either centrally, cooperatively or collaborative -- is becoming increasingly important, given current economic trends. Perhaps true collaboration in higher education will become more evident as new financing models call upon some institutions to pay a little more than they currently do so the many can pay less.

I hope that the consortium I led (with lots of help from lots of people ) will continue to thrive. I also hope that other consortium leaders may gain from my reflections on what I learned over more than 25 years so they can develop new models of collaboration to strengthen the education of students via working together for the common good.

Author/s: 
Alice Brown
Author's email: 
newsroom@insidehighered.com

Alice Brown retired in July as the first president of the Appalachian College Association.

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