Business / financial management

Gartner Symposium/ITxpo

Sun, 10/01/2017 to Thu, 10/05/2017


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The key trends for all institutions embedded in the Purdue-Kaplan acquisition (essay)

In April Purdue University announced its acquisition of the for-profit Kaplan University -- a bold move, made bolder still by the partnership’s “Morrill Project” moniker. However, the frenzy over what’s most remarkable about the deal -- how much of Purdue will now be “online,” the fate of one of proprietary education’s biggest players, the odd coupling -- has distracted many people in higher education from the more important lessons embedded in the Purdue/Kaplan story. Even those colleges and universities without massive online ambitions should pay heed to five larger higher education trends represented by the Purdue/Kaplan acquisition, trends that are relevant to all institutions.

Trend No. 1: Traditional colleges and universities are renewing their interest in the bachelor’s degree completion market, but the market is not as large as many estimates indicate. The majority of Kaplan’s (now Purdue’s) students are bachelor’s degree completion students, a technical term that refers to adult students who have attained some college but not earned a bachelor’s degree. Unlike direct community college transfers, these students may have been away from higher education for years, earning a potpourri of credits on and off over many years and from a number of disparate institutions. Earlier this year, 80 percent of the continuing, professional and online education members of EAB, where I serve as an executive director, noted a high desire to learn new strategies for success in the degree completion market.

EAB, which works with more than 1,200 college and university members, has some words of caution for any institutions that believe the size of the market is such that degree completion will be the panacea to their revenue woes. Yes, there are 31 million people in America who have some college and no degree -- a number often cited to reflect the impressive size of the market. But the National Student Clearinghouse report (where the number comes from) actually sizes the population of “potential completers” -- or those who have at least two years’ worth of progress toward a degree -- as four million people, a far cry from 31 million.

To be sure, bachelor’s degree completion programs will be vital for achieving state and national access goals, and many institutions will see the financial benefit of increased enrollments. But colleges and universities will need to examine their regional markets and competitive environments, as well as whether they have or can build the recruiting and student success infrastructures needed -- and all those elements will differ from those for traditional students.

Trend No. 2: Different capabilities are increasingly needed to recruit and serve all alternative student segments. Those segments include degree completion students, international, fully online and working adults pursuing professional master’s and postbaccalaureate certificates.

For instance, a desire to meet the needs of adult degree completion students, and a realization that they could not easily build the infrastructure themselves, drove Purdue’s decision to acquire Kaplan. While not every college or university wants to expand in the bachelor’s degree completion market, almost all of them are turning to some alternative segment -- in other words, not first-time, full-time freshmen -- to boost enrollments.

Most prominent is the intensified focus EAB sees across our membership to double down on master’s and postbaccalaureate programs (i.e., certificates) to target working professionals looking to advance or change their careers. Yet many institutions have learned the hard way -- as their programs have missed enrollments or profitability targets -- that their undergraduate enrollment processes simply don’t work for a completely different audience. Since such markets require capabilities that are expensive and time-consuming to build, institutions often turn to external partners.

Purdue’s acquisition of Kaplan may have been headline grabbing, but the financial elements of the deal are similar to what many universities have found in working with online program management (OPM) vendors, such as 2U, that receive a revenue share for helping colleges and universities migrate traditional programs (typically master’s degrees) online. Under the conditions of Purdue’s deal, the Graham Holdings Company, parent of Kaplan Inc. and Kaplan University, will yield 12.5 percent of the new venture’s revenue, but only after the university has covered its operating costs and received $10 million in each of the first five years. It is a more favorable deal for Purdue certainly than many OPMs have historically offered their traditional higher education partners (up to 60 to 70 percent). But most OPM deals don’t include 32,000-plus students from the start, so the reduced percentage share doesn’t seem surprising.

The OPM market is predicted to become a $1.4 billion industry by 2020, and new players are emerging every day. Historically, OPMs have provided full turnkey service to traditional colleges and universities, including everything from up-front capital to marketing/recruiting to instructional design to student services. That is starting to change, as institutions demand unbundled services. For example, our recent national survey of deans of continuing, professional and online education found that institutions are much more interested in outsourcing marketing and market research than instructional design or academic advising.

What will be interesting to watch at Purdue is how the Kaplan capabilities end up being used not only for the traditional adult degree completion programs but also to support other programs at Purdue (such as their existing online master’s programs) that are outside the scope of the Kaplan deal but could probably benefit from certain unbundled elements of Kaplan’s infrastructure.

Trend No. 3: Colleges and universities are turning to creative models outside traditional governance structures in order to meet market needs more nimbly. Currently, higher ed institutions are often hampered in reaching new markets due to not only organizational and operational challenges but also the slow process of shared governance. Besides acquiring a new online and adult-serving infrastructure in Kaplan, Purdue also has created a separate governance structure in the “New U” represented by the partnership, with the New U’s chancellor reporting directly to Purdue’s president, Mitch Daniels. The time span between the initial conceptualization of this idea and trustee approval was five and a half months.

By contrast, under traditional university governance, single-degree programs can take years to gain approval. Given that many new professional master’s and certificate programs are designed to meet fast-changing work force needs, that long time frame can lead to severe competitive disadvantages.

Many colleges and universities have found ways of creating nimbler governance structures without an acquisition. That can include creating a separate for-profit subsidiary or 501(c)(3) to meet corporate education needs, as Cornell University and the University of Maryland Baltimore County did, respectively. Or they can spin off a separately accredited institution to meet military and adult learners, as Chapman University did with the creation of Brandman University.

Most commonly, institutions develop more agile approval, planning and pricing processes for market-oriented programs, often housed within a dedicated continuing, professional, online or extended education unit. These new types of organizational models and processes can be crucial for stimulating and supporting innovation.

Trend No. 4: Colleges and universities need to be ready as new competitors enter their markets -- whether through mergers and acquisitions, online ventures, or other methods of expansion. The number of college and university mergers and acquisitions in the United States that occurred from 2010 to 2015 was more than double those that took place during the prior five years -- jumping from around 15 to 20 deals to between 40 and 50, according to our preliminary research. Many of those deals represented rescues of institutions that could no longer survive on their own.

The number may seem relatively small, but institutions should pay heed even if they’re not buying, selling or being merged. For research universities, a competitor’s strategic acquisition of a graduate or professional school can boost its prestige and ranking. When Rutgers University acquired the University of Medicine and Dentistry of New Jersey in 2012, for example, it increased its total research spending to surpass Harvard, Northwestern and Yale Universities. And in states with performance-based funding, the best-positioned institutions might acquire the students they need to satisfy requirements for the largest possible appropriations.

Purdue’s acquisition of Kaplan includes 15 campuses and learning centers. How Purdue chooses to use them may have competitive implications for nearby colleges and universities, even those that may never have considered Purdue a direct competitor.

The larger takeaway for all institutions is that what defines each college or university’s “competitive set” has been expanding over time, as more institutions grow their offerings and brand presence in secondary or tertiary locations. Other colleges and universities need to respond by firming up their ties to local employers and organizations in their region, carefully considering whether secondary locations make sense for them, and adapting marketing and recruiting techniques to reach a savvier student customer with more options.

Trend No. 5: Many of the lessons learned from failed mergers and acquisitions are relevant as colleges and universities expand intra- and inter-institutional partnerships more broadly. The conventional wisdom is that at least 50 percent of M&A partnerships across industries fail. Deals that appear to be no-brainers on paper flounder due to poor integration processes.

One example in higher education is DePaul University’s acquisition of Barat College for $6 million in 2001, with additional investments of about $18 million in upgrades. Enrollments never met their intended targets, ultimately leading to Barat’s closure. Marie Cini at University of Maryland University College has written a smart analysis of the different questions Purdue will need to consider in the integration process.

Most higher education institutions will never live through an M&A deal, but all are looking for more partnerships: state system collaboration and consolidation; self-organized consortia; multi-institutional combined bachelor’s and master’s programs (for example, 3+2s or 4+1s) and the like; and better articulation more broadly. Perhaps such agreements won’t require the kind of dramatic change in management as an acquisition. But, in all cases, the vision and strategy on paper often don’t take into account the complexities that come when trying to integrate different day-to-day systems, competing policies and conflicting cultures. Even with interdisciplinary degree programs within a university, students complain about the multiple processes, systems and policies crossing departments, schools or colleges on a single campus.

In short, partnerships -- within campuses, across campuses -- will be increasingly common. For all the time spent designing a strategy and forging the initial relationship, even more time (and probably dollars) will need to be invested in getting the integration right.

It goes without saying that few colleges and universities will pursue partnerships as large scale as Purdue and Kaplan’s. But as traditional demographics shift, financial pressures mount and funding needs for strategic ambitions continue to rise, few institutions will be able to afford not to pursue a new-to-them market in some way. In this increasingly competitive environment, they must take seriously Purdue’s lesson to determine the new -- and often less familiar -- capabilities, organizational structures and strategic partners required to succeed.

Melanie Ho is executive director of research and strategy at EAB, a research and technology company that serves more than 1,200 educational institutions.

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Signs that an institution is on the path toward unrecoverable failure (essay)

In February, Saint Joseph’s College in Rensselaer, Ind., announced that it would suspend operations in May. Although it had an annual operating deficit between $4 million and $5 million, and was heavily in debt and on probation from its accreditor, many of its faculty members expressed surprise at the announcement that it was closing its doors. They had not given sufficient attention to evidence that their employer was in imminent danger of shutting down.

Many small to midsize colleges or universities in America show the same signs of being on a path toward unrecoverable failure. Here are a few of those signs.

An inability or unwillingness to develop academic programs that provide a competitive advantage. Because of biases toward optimism and inertia, people tend to make the same decisions that they’ve made before, but with the expectation of a different outcome. In higher education, that takes the form of refusing to acknowledge sunk costs and relying on traditional revenue streams regardless of market demand. Academic programs that could strategically position an institution in niche markets are perpetually starved of resources, while faculty lines in areas of the curriculum that attract only a handful of students are always filled.

Ask yourself how distinctive your institution’s academic programs really are. Do prospective students perceive sufficient value added when universities like Arizona State, Southern New Hampshire and Troy are offering complete degree programs online for $350 to $650 per credit hour? What’s the plan for when a majority of your university’s undergraduate applicants have already completed a full set of general education requirements elsewhere?

Even when a college or university significantly alters its educational product line, the economics of the market can render those changes irrelevant. Marian Court College, in Swampscott, Mass., added a select number of bachelor’s degrees to its traditional menu of associate’s degree programs in 2011. As a commuter college without the overhead costs of residence halls and co-curricular activities, it was able to price its annual full-time day student tuition at only $16,500. But four community colleges were located within 15 miles, with in-state resident tuition of approximately $6,000 per year. Salem State University, less than four miles away, offered a wide range of two- and four-year degrees, plus dormitories, intercollegiate athletics and the other aspects of college that come with an undergraduate enrollment of around 7,500 students. Salem State’s tuition was about $10,000 per year. Marian Court College couldn’t compete on price, and nothing else distinguished it from its nearby competitors. It closed in 2015.

A penchant for mistaking information for communication. If students are going to enroll at a college or university, they have to know it exists. Once they know it exists, they look for a clear, consistent, easily accessible message about the outcomes they can achieve if they attend.

Does your institution effectively advertise the accomplishments of recent alumni, the career-applicable experiences of current students and the ways in which faculty members make these outcomes possible? Or are its webpages and social media streams filled with a confusing jumble of updates on cafeteria operating hours, vapid mission statements and tedious academic jargon? Dysfunctional external communications are a self-inflicted wound: the more money that gets spent to annoy more people more quickly, the greater the damage done.

The academics webpage of Saint Joseph’s College lists four reasons “why our education is different.” Though clearly written, the text could just as aptly describe dozens, if not hundreds, of other small colleges and universities across the country. Maybe current or past students did great things at Saint Joseph’s, but its website didn’t communicate that to the market.

A focus on short-term comparisons instead of long-term trends. Faculty members and administrators often gauge current performance against figures from the previous one to three years. That practice leads to shifting baseline syndrome, in which benchmarks wander instead of being fixed against standards from the more distant past. No need to worry if the current year is just a little bit worse than the year before, because next year will be measured against what’s happening now. And a spate of faculty hires or a raise might make it seem like your institution has finally turned the corner, when in reality it’s a brief hiccup in the downward slide.

We knew in 1999 how many 18-year-olds there would be today, just as we know today roughly how many 18-year-olds there will be in 2035. Did your institution adequately plan 15, 10 or even five years ago for the number and type of high school graduates that currently exist? Are decisions about academic operations driven by the market demographics that will be in place 10 or 20 years from now?

To avoid being the complacent frog in the pot of warming water, look at how your employer’s tuition discount rate and its percentage of Pell Grant recipients have changed over time. The higher an independent college or university’s average tuition discount and the greater the proportion of Pell Grant recipients in undergraduate enrollment, the weaker the relationship between its advertised cost of attendance, the size of its enrollment and its financial well-being. Any independent institution with an endowment of less than $100 million and fewer than 2,000 full-time undergraduates that continues to increase its average tuition discount over the long run is heading for financial difficulties, if not ruin.

Plans for transformation in which illiquid and encumbered assets play an essential role. Most small colleges and universities are heavily tuition dependent, with tiny endowments and narrow operating margins. Yet those same colleges too frequently adopt a “build it and they will come” strategy that ends up being a financial time bomb with a short fuse.

In 2010, Burlington College’s president spearheaded a $10 million debt-financed purchase of lakefront property, as part of a plan to build out a new campus large enough for hundreds of additional students. The problem? The plan to pay off the debt by doubling Burlington’s enrollment in only a few years never materialized. Burlington College couldn’t meet its loan payments, and it closed last year.

Also in 2010, Saint Joseph’s received a donation of 7,600 acres of farmland and later tried to sell off its rights to income from the parcel in exchange for $40 million. But it was only offered $15 million -- not enough to keep the college operating.

What low-overhead but badly managed academic programs can your institution improve with minimal investment? Are the right people in positions of responsibility, are they provided with the information they need to do their jobs well and are they held accountable for their performance? These organizational problems may seem like inconsequential nuisances, but cumulatively they are disabling. Fixing them will return dividends more reliably than speculating on huge capital investments.

Frequently a college or university will exhibit a combination of these signs for several years in a row. Missed enrollment targets, budget cuts and needless inefficiencies become background noise, ignored by administrators and faculty members. Until one day, when they no longer have jobs.

Higher education is changing, and for much of the professoriate, retirement after a comfortable academic career gets less likely every year. Learn about the true condition of your employer, challenge assumptions and plan for the worst. Forewarned is forearmed.

Chad Raymond is chair of the department of cultural, environmental and global studies at Salve Regina University and the managing editor of the blog Active Learning in Political Science.

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