Private colleges and universities share a set of unique academic and cultural values. As business enterprises, however, they are vulnerable to typical business and economic forces. The changes in the higher education industry over the past few years continue to move these organizations toward a business model change never before considered.
Here are four reasons private colleges and universities should move with constructive impatience into deep collaboration and ‘Grow Big Now’ with a new business model.
- An unrealistically heavy focus on new revenue sources.
- Increasingly obvious evidence that the current business and financial models are not sustainable.
- The lack of ability to differentiate degrees and programs in a crowded, over-served market.
- Intense competitive pressure on tuition discounts.
These four reasons are intended to help move the discussion forward that non-elite private colleges and universities should grow big by collaborating – not competing.
First, the current response patterns to financial and operational challenges are weak and non-distinguishing. Here is a list of the most common responses by colleges and universities to address today’s financial challenges:
- New courses
- New degrees
- New sports programs
- New clubs and organizations
- New facilities
- Enrollment focus on ‘students who can pay’ demographics
- Cost control management
- Unrestricted gifts
- New grants
Higher education expert Jeff Selingo noted in a November 2017 article that these responses from colleges focus almost exclusively on revenue generation. A close look at the list shows there are 9 revenue generating responses, but with only one cost focus. This focus on revenue solutions won’t improve competitive position, and does not take into account that most, if not all, of these financially challenged colleges are responding with similar revenue-focused solutions. Such a typical response will only exacerbate the challenging financial situation.
These do not become innovative solutions to acute and chronic financial challenges. These are unimaginative responses that everyone else is doing. Thus, each college’s methods to either differentiate itself or find new sources of revenue does neither. The competitive differentiation hoped for is just not materializing. As a result, these options have no realistic chance of bringing financial salvation. They are balloons of hope that will turn into sinking rocks of despair.
I also know from experience that the ability to cut costs has now reached the stage where any substantive cost savings cut into the essence of the organization. In other words, there is no more cutting to be accomplished with the current business and financial model.
I have compiled the 2015-2016 audited financial statements of more than two dozen non-elite, private colleges in the middle of the country. Here are three scary observations.
- 10 had negative net cash from operations for at least one of the two audited years.
- 8 of the schools showed less than 31 days of cash on hand. 15 had less than 61 days cash on hand.
- 18 private colleges and universities had a decrease in net assets in at least one of the two audited years reviewed.
Here are some additional considerations to add to the mounting evidence that change is needed very soon. The items below are from Kaufman Hall’s December 2017 report: Financial Outlook: 2018 Report for Higher Education.
- There are not enough graduating high school students for every college and university to increase enrollment.
- 47% of respondents (N=183) the current model is not sustainable in the next 5-10 years.
- Competition for college-bound students will intensify, along with pressure to retain students for their complete program.
- A University Business survey asked presidents, provosts, and chancellors to choose from 20 issues that could harm their institutions’ names or stability.
- Seventy percent of respondents cited enrollment declines as their biggest concern for 2017.
- Seventy-one percent of survey respondents said they are pursuing better reporting and analysis to support decision making. An associated challenge is access to high-quality data. Most respondents (87 percent) want better data and analytic based insights about their institutions’ performance. (It is interesting to speculate on how much better – and affordable data collection and analysis would be if these organizations collaborated on both collection and analysis.)
Third, I compiled degrees, for 11 non-elite private colleges in the Midwest. I counted the degrees that had the word noted in this table. These were predominantly undergraduate degrees.
|Total degrees offered|
A reasonable argument can be made that private colleges in this geography have a small number of common majors chasing a decreasing number of students. In every college offering these ubiquitous degrees there is a cost structure to support it. In addition, it is equally reasonable to assume that revenue to cost ratios are not as good as they need to be. On the other end of the spectrum, ‘allied health’ had 1 degree, ‘BSN’ had 5, ‘Biochemistry’, 2; ‘Statistics’, 0; ‘Data’, 6; and ‘Cybersecurity’, 4;
Shedding more light on the low economic value of many college degrees is a study done by the Federal Reserve Bank of New York that looks at underemployment by student majors. Among those with the highest rates of underemployment are: (Source)
- Criminal Justice (75 percent)
- Performing Arts (65 percent)
- Leisure and Hospitality (62 percent)
- Communications (57 percent)
- Anthropology (56 percent)
- Sociology (52 percent)
But the study found surprisingly high percentages of underemployment even in fields where the academic demands are pretty rigorous:
- Economics (39 percent)
- Mathematics (29 percent)
- Aerospace Engineering (23 percent)
- Chemical Engineering (16 percent)
As both traditional and non-traditional students continue to absorb these sobering numbers, it is reasonable to presume that there will be a negative impact on enrollment. This will, of course, put even more pressure on the ubiquitous plans of many colleges to survive with enhanced revenue from these diminishing student populations.
Why grow big now? The financial cost model cannot work to provide substantive relief amid the common responses of many colleges and universities to focus mostly on growing revenue. This only ensures additional development costs with only the speculative hope that the students and associated revenue will follow.
As higher education moves forward, private colleges and universities can lead the way in making degrees more affordable. This leadership can come to pass when an initial group of these organizations come together and learn that they cannot individually afford to replicate each and every cost historically undertaken. Private institutions of higher education cannot successfully choose to spend time and finite resources competing instead of collaborating. Working together in a deeper collaborative manner will improve both operations and outcomes.
It is denying a business and economic reality that most higher education providers can survive as stand-alone organizations. History shows that industry after industry has consolidated smaller organizations into larger ones. The arguments made that ‘higher education is different’ are made in the context of an industry culture that is parochially insular. The first private colleges and universities to accept this inevitability and move forward with constructive impatience to bring together a set of college partners under one operating environment will be the ones leading far into the future.
Those that dig in to deny this reality will be the ones who become irrelevant – and suffer the associated consequences.
About the author
As Chief-of-Staff to a small college president, Dr. Stocker researched the feasibility of a variety of private college alliance business models. His familiarity with private college financial statements and work on data from NCES and IPEDS compiling education statistics for individual colleges led to the creation of the College Viability App.
As a program director and full-time faculty at Lindenwood University Stocker developed and implemented of a wide variety of data and analytical tools for course scheduling and course demand forecasting. He was also recognized for his skills in using educational technology to enhance the quality and efficiency of learning for his students.
Stocker plans to use his experience in developing new business models for higher education that allow for greater efficiency and long-term growth. Stocker says: “In the 21st century, geography is not a limiting factor to business growth in higher education. Colleges and universities should focus on technology infrastructure, collaboration, and business consolidation to leverage available technologies to create a new and stronger business model.”