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.
In good times and bad over three decades, I have been involved in college financial decision-making as a faculty member and administrator. Whether it was at wealthy institutions like Harvard University or Bowdoin College, places of moderate means like Guilford College or public institutions like Michigan State or the University of Massachusetts, budgeting always involved not enough revenue and too many expenses. Frequently, trying to achieve a balanced budget was equivalent to trying to get 10 pounds of sugar in a 5-pound bag.
Those decisions have become far more difficult in the present economic maelstrom as revenues have deteriorated along with the stock market and tax base and expenses, especially for financial aid, threaten to skyrocket. The difficulty multiplies if the institution uses participatory budgeting processes in which the community from faculty to students gets involved.
Now I lead a college that uses principles from our Quaker heritage to make many decisions including the strategic plan, long range financial plan, and annual budget. Let me disclose that I am a Roman Catholic. As the first non-Quaker chief executive since the college started as a boarding school in 1837, I needed to learn about Quaker principles and practices, and how to apply them in my new role. While only 10 percent of our employees and students formally describe themselves as Quaker, and the community includes many faith traditions, we strive to maintain the principles and practices of our history. We use them for the Board of Trustees and its committees, faculty meeting, and campus committees of every kind including budget. Which might be applicable on your campus? With apologies to Quaker colleagues for probable oversimplifications, let me suggest seven principles as this non-Quaker has experienced them in budgeting and financial decision-making.
(1) Sense of the meeting. With colleges and universities threatened by economic catastrophe, momentous decisions about where to find the revenue and how to spend it loom large. The “sense of the meeting” is equivalent to a decision but is not handled like the typical motion. It arises out of a sense that the truth of a “best” solution exists if we enter discussion with open minds and a willingness to be led by others, even if a proposal is already under consideration. Participants are asked to share their own views, not to characterize or critique the views of others. After identifying themselves if the meeting is large or the membership new, participants frequently are asked to talk once on a topic until others get into the conversation. Although there might be informal ballots, or a show of hands, to see where people stand during the discussion, we never vote. Voting negates the power of the whole group and may lessen the sense of responsibility of the minority.
(2) Decisions by consensus. This does not mean that everyone has to agree but that there is “substantial unity” about what to do. People either endorse the proposal or, if opposed, agree to “stand aside” and not prevent consensus. This principle prevents a majority opinion from dominating the meeting and decision because any one in opposition can refuse to stand aside, prevent consensus, and defeat the proposal. Dissent is viewed as a sign that the truth has not been discerned. This principle encourages respect for the minority, openness to new information, and serious consultation. It does not mean chronic compromise until a common position is reached but a search for truth and how to serve the financial interests of the community most effectively.
(3) Moment of silence. Some Quakers worship in silence and only speak when the “Spirit” moves them. At Guilford, moments of silence open and close many meetings, classes, and events. These moments allow meeting participants to transition from what they were just doing to focus (or “center”) on the purpose of the meeting, and then at the end to transition from the meeting to another activity. I have found that even 30 seconds of silence improves meeting participation and productivity. It helps students in the political science class I teach every spring even more because of their hectic lives and shorter attention spans. The same benefit accrues to budget and trustee finance committees and senior staff. Moments of silence assist in centering on seemingly intractable financial issues amidst economic tumult and everything else that competes for their interest.
(4) Queries. Decisions about tuition and fees, endowment spending, employee salaries, and other budget items result from complex strategic, financial, political, and other factors that are too often implicit rather than explicit. “Queries” are questions with no simple or standard answers that promote self- and group examination through inward reflection. Queries remind us that our actions are proper because they are done thoughtfully and conscientiously and not because they conform to abstract rules. For example, a budget committee might ask itself as it neared consensus on the annual budget: What have you done to balance the financial needs of your own work or department with the financial needs of the entire college? How do you work to influence investments of college assets toward socially desirable ends, avoiding speculation and activities wasteful or harmful to others? Do you assume your fair share of financial support? Do you support the concept of inter-generational equity that avoids meeting today’s needs by selling assets or irresponsible borrowing that mortgage the college’s future?
(5) Influence of testimonies. Core values are the essential and enduring tenets of the organization that guide decision-making and behavior. A budget might be guided by the core value of “sustainability” in support of environmental investment or “stewardship” to ensure that maintenance was not deferred. Quaker testimonies—simplicity, peace, integrity, community, and equality— are the equivalent of core values with even more emphasis on living them in practice. Here is how I have witnessed testimonies influencing budgets.
“Simplicity” contributes to lean budgets and plain speech during debates.
“Peace” is not only about opposition to wars but also the peaceful resolution of conflict and seeing good — something of God — in all people. Thus, participants in financial decisions might question your position but not your motives, and strive to create a budget without threatening speech or unruly behavior.
“Integrity” means that the budget is clear, factual, and genuinely funds the obligations of the institution, and that the process is obvious to everyone.
“Community” argues for participative decision-making and involvement of faculty, staff, and students. A budget that serves community reflects campus input and is transparent in terms of actions and analysis.
“Equality” recognizes differences in responsibility and authority but treats participants in the budgeting process more for the expertise and experience they bring than their rank or position. Almost everyone is called by first names to show equality. A budget debate can be more spirited and honest when I am called “Kent” rather than “President Chabotar.”
(6) Eldering. This technique most often involves a committee of experienced members trying to counsel participants who might be disruptive, absent too often, come unprepared, and other unproductive behavior. In one budget committee, a member always turned the discussion to a personal concern about student fees no matter what the topic on the agenda. To paraphrase Churchill, he would not change his mind or the subject. Being advised by peers outside of the meeting greatly improved behavior and made him more productive and less alienated. Eldering might also occur when the committee queries why colleagues are opposed to a proposal and what it will take them to approve it, or at least stand aside. The chair may call a time out during a discussion or an early adjournment to permit tempers to subside, thoughtful reflection, and opportunities for eldering. Another standard Quaker admonition helped in this and many other fiscal situations: “Think it possible that you may be mistaken.”
(7) Friend speaks my mind. Grandstanding and repetitious remarks slow down the meeting and prevent members from discerning the truth. Instead, when you agree with someone you say simply “Friend speaks my mind” and sit down. Quakers are officially known as the Religious Society of Friends but a Catholic like me or anyone can be a Friend at a meeting. You can also say, “I agree.” This not only saves time but also allows the chair and others to gauge more accurately the sense of the meeting.
The most recent use of Quaker principles occurred last fall 2008 when the trustees, administration, and budget committee worked together to deal with a burgeoning budget deficit for the current fiscal year largely caused by actual and projected enrollment shortfalls. We developed three budget scenarios of increasing pessimism, picked the “worse case” scenario, and cut $2.7 million from the budget including the elimination of 20 faculty and staff positions. Developing consensus on these difficult choices required skilled chairs guiding discussion to a sense of the meeting, participants eldering others to address concerns and gain acceptance, and moments of silence to center ourselves before engaging in honest debates in the context of our core values and testimonies. Thankfully, enrollment has been much better than expected. We may restore some of the reductions, starting with employee pay increases, the possibility of which was anticipated and given top priority in the fall process.
At a time of international crisis in which colleges and universities are under unprecedented financial stress, others might also try a decision-making approach that Quakers have used with success for over three hundred years. It has worked for me for almost seven years. None of these principles guarantees an effective committee or a balanced budget. All are subject to abuse or mistakes. Nevertheless, the process that results encourages more inclusive budgeting in which facts rule, participants listen to each other and are open to new ideas, and people take their time to do right. Try one or all seven and perhaps you too will say, “Friend speaks my mind.”
Kent John Chabotar
Kent John Chabotar is president and professor of political science at Guilford College.
Endowments have plummeted, alumni will donate less, and students won’t be willing to pay as much. Because of all this financial trauma, colleges will inevitably expect more from their faculties. But I urge college presidents and trustees, in responding to this situation, not to make inflexible demands of professors, but to rather empower us to decide which sacrifices we shall bear.
Colleges need to reduce costs, and one way could be to cut professors’ salaries. But some professors would do a lot to maintain their incomes, so why not give us the option of keeping our salaries as long as we agree to teach an extra class or take on significantly more administrative responsibilities? After all, if some professors did more work, a college or university could postpone when it needed to hire new employees.
To make up for a hiring freeze, some colleges might be tempted to force all professors to teach additional classes. But some professors live frugally, have lots of family income, or would do most anything to preserve research time. Why not let these instructors take, say, a 10 percent pay cut in return for not having extra teaching responsibilities?
A hiring freeze might also necessitate some professors taking on more administrative duties. But no school should push all professors into doing what college administrators do. If, for example, one instructor hates meetings while another dreams of being a dean, let the former teach one of the latter’s classes, thereby freeing up the latter’s time for paperwork.
Colleges should present professors with a menu of sacrifices they must pick from. Of course, there will have to be some planning so that not too many professors pick the same option. Perhaps the most senior faculty members would get their first choice from the menu, and less senior members would get to choose only among sacrifices consistent with their institution’s needs.
But a better way to allocate sacrifices would be to have professors bid for what they want. For example, a college could declare that all but 100 members of the faculty must teach an extra course each year. Professors could then bid with their salaries for one of the 100 slots, with some kind of limitations built in so that not too many professors from the same department win the auction. The auction winners would be the professors who value money over time, and the “losers” those who value time over money. Each professor would be making the choice that best suits his or her needs. True, affluent professors might seem to have an advantage in such an auction, but it would be the least affluent who would most benefit if the auction’s revenue prevented the college from cutting everyone’s salary.
Departments, too, should be given choices over how to share their college’s financial hardships. A department, for example, might be told to either postpone its next hire by a few years or give up half of its administrative budget. Each department would use its knowledge of its own needs to make the decision that would best serve it and would probably best serve the college.
Professors care about many aspects of their jobs, including salaries, teaching loads, administrative work, sabbatical opportunities, travel money, office space, research expectations, and grants. Most professors accept that, because of the financial crisis, our terms of trade with employers will become less favorable to us.
By giving professors options over how these terms will change, schools can potentially get more out of their professors while inflicting less harm on them (and so encountering less resistance). And this most holds true if different professors can make different choices, rather than the college negotiating with the faculty as a whole for all professors to make the same sacrifice.
James D. Miller
James D. Miller is an associate professor of economics at Smith College.
You may think things are bad now -- and you’re right, they are. But today’s economic concerns are obscuring what may prove to be even bigger strategic challenges ahead for higher education.
Everyone knows that we’ve entered a period of profound anxiety and uncertainty. Everywhere we look -- from this publication’s own headlines, to university cabinets’ strategy sessions, to our now more thinly attended professional association meetings -- we see people devoting tremendous amounts of energy to the work of decoding the economic predicament in which we find ourselves. We’re working feverishly to understand what this economic downturn will portend for everything from bond financing to financial aid to endowment management to enrollment performance, and much else besides. In many respects, our key focus right now is survival. We are striving to protect the core of our colleges and universities. And we are hoping that higher education may yet again prove to be counter-cyclical to prevailing market conditions – a rare winner in the economic lottery.
Beyond survival, however, higher education has to be thinking about its own sustainability. Even as we struggle with present conditions, a number of farsighted universities are working hard at decoding the future, too -- because change is certainly coming. Demographics are shifting. Competition for talent is global. And the very financial structures that have supported higher education for the past 40-plus years may now be at risk.
In our current circumstances, these forward-looking universities read signs that the old ways of doing things may be approaching obsolescence. As a senior executive at one large, private university recently said to me, “We’re not persuaded that the business model or the economics of higher education are sustainable. We’re asking the question, ‘What if we were to start from scratch?’ ”
In short, now more than ever, we in higher education need to rethink our place in the economy and how we deliver value. What markets will we serve? What programs and credentials should we offer? How will they be delivered? How should we define success?
Faced with these questions, many of us will retreat to our intellectual comfort zones -- those familiar ideas supported by anecdote as often as by evidence. “Why should higher education change?” some of us will ask. “We’re doing just fine.” Others will be certain that we should follow this or that path -- stick to our knitting, or reinvent ourselves completely. But it pays to spend some time with these questions before rushing off to whatever answers may be nearest at hand. As former Secretary of the Treasury Robert Rubin once observed, “Some people are more certain of everything than I am of anything.” In transitional and uncertain times such as these, we should be cautious of following the lead of those who peddle certainty, those who know exactly what they think.
“It’s much harder psychologically to be unsure than it is to be sure,” wrote the investment guru Seth Klarman recently. “But uncertainty also motivates diligence, as one pursues the unattainable goal of eliminating all doubt.”
Diligence is critical to evaluating not only the challenges that higher education faces today, but also the opportunities. In a number of respects, this is a best-of-times/worst-of-times moment in higher education. For example, President Obama has asked “every American to commit to at least one year or more of higher education or career training.” The Lumina Foundation and others have called upon the higher education community to produce 16 million additional degrees by 2025. And old industries -- energy among them -- are about to become new again.
At the same time, we may at last be reaching the tuition ceiling for many parents, and there is the very real prospect of enrollments drifting toward less expensive institutions. Shrinking endowments are creating significant challenges for managing university operations. And a business model based on exclusivity does not scale; it limits the potential for impact -- whether intellectual or economic.
Growing numbers of universities see this special moment as a unique opportunity to reassess their business strategies. Developing a strategy, of course, involves not only deciding what you will offer and how you will serve the market, but also -- and just as importantly -- what you will not do. Many higher education institutions suffer from trying to be too many things to too many people -- a very risky strategy for any enterprise. If we are going to successfully protect the core, and also plan for the new realities awaiting us in the future, then we are going to have to focus our investments of time, money, and human capital.
Because higher education in the U.S. involves so many diverse types of institutions serving so many diverse markets, the choices we face as a system of higher education are myriad. But among the choices that college and university leaders must face are these: by what means can a quality institution be simultaneously selective and open? Should the institution strive to be “global” in reach or regional? Will it continue to prioritize so-called “traditional” students or adjust its operations to better serve working adults and employers? Will it emphasize a unique, place-bound experience at a single campus or the delivery education services through multiple and widely dispersed sites and online? Will it prioritize research or teaching? Will it be a leader in emerging industries? Fundamentally, what form of value will the institution create?
In conversation with university presidents, provosts, and other academic leaders over the last six months, I’ve often asked what higher education can do to avoid the classic investor error of buying high and selling low. Jack Wilson, the president of the University of Massachusetts, responded to this question by saying that he anticipated a return to “value investing” in higher education -- something akin to the longstanding investor practice of buying stocks in companies that are trading below their intrinsic value. “The last few decades, people have not thought about higher education as a place to look for value,” Jack said. “But now, they’re going to be looking for quality institutions that offer a great experience, and a great value at a great price. There’s going to be a lot of pressure on higher education institutions to get their value propositions in place.”
This is what’s coming down the track at us. We have to protect core. We have to survive. We have to stay in business. And yet at the same time, we have to create more value and become more competitive. We have to develop a focused strategy and choose from among numerous competing opportunities. And if that weren’t enough, we have to achieve all of this in a period of tremendous demographic transition. According to the National Center for Education Statistics, in 2007, 37 percent of the U.S. population over the age of 25 had earned an associate degree or higher. That doesn’t sound altogether bad, but degree attainment rates within the U.S. have been relatively flat for decades while countries such as Canada, Japan, and Korea have advanced beyond 50 percent of their adult populations earning the equivalent of an associate degree or higher. Reading the economic tea leaves and sensing where this growing asymmetry may leave us, the Lumina Foundation has set out what it characterizes as an “audacious” goal of ensuring that 60 percent of the adult U.S. population possesses an associate degree or higher by 2025.
There are numerous challenges associated with meeting this very laudable goal. First, it represents a roughly 50 percent increase in our annual degree productivity on an annual basis for the next 16 years, and would require an effort several times the scale of the post-WWII G.I. Bill. Second, if we were to achieve it, we would have to accomplish it under circumstances in which the demography of the college age population is shifting dramatically.
Today, 29 percent of U.S. adults aged 25 to 29 possesses a bachelor’s degree or higher, according to the National Center for Education Statistics. If we disaggregate this figure by race/ethnicity, however, we see that 32 percent of whites, 19 percent of blacks, and 13 percent of Hispanics in this age group has a bachelor’s degree or higher. What makes this especially significant is that Hispanics and blacks are among the fastest growing populations within the U.S.
According to the National Center for Public Policy and Higher Education, in 1980, whites accounted for 82 percent of our population. In 2020, this figure is projected to be 63 percent. Over the same 40 year period, the proportion of Hispanics in our population is projected to have increased from 6 percent to 17 percent, and the proportion of blacks is projected to have increased from 10 percent to 13 percent. In a paper published in 2005, the National Center for Public Policy and Higher Education goes on to argue that if current racial and ethnic enrollment gaps remain, the net result would be a projected 2 percent decline in per capita income over the period from 2000 to 2020. That may not sound like much, but consider that per capita income grew by 41 percent from 1980 to 2000. If higher education leaders don’t attend to these challenges now, the result in another 10 years’ time may well be a shrinking tax base and a weakened competitive position on the global stage.
Such an outcome would represent a more subtle but potentially longer-lasting economic downturn -- a quieter crisis, but perhaps more profound.
Changing markets call for a change in strategy. Even if it doesn’t prove necessary for most colleges and universities to “start from scratch” to respond effectively to our changing demographic profile or to global competition for the best students, it will be vital for us to move beyond our comfort zones and question some of our basic assumptions about how higher education is financed and managed -- and fundamentally reexamine which challenges and opportunities each of our thousands of colleges and universities is best positioned to address.
Now is the time to reflect on our strategic objectives, our missions, and our success measures. The institutions that are among the future leaders of U.S. higher education are likely to be those who embrace these challenges and reflect upon these questions most seriously. It may well be that we need to do something truly audacious to generate lasting value – for our institutions, our students, and our economic health.
Think about it.
Peter J. Stokes, is executive vice president and chief research officer at Eduventures, Inc., a higher education research and consulting firm.