Evolving Higher Education Business Models

Evolving Higher Education Business Models

Anyone concerned about how colleges and universities can remain viable, and indeed thrive, in the face of today’s many challenges should read this paper carefully. The ideas are profound and the recommendations are potential game-changers that challenge the conventional wisdom. They will help institutions transform themselves—in ways appropriate to twenty-first-century values, market conditions, and technology—to become better and more innovative.

The authors call for rethinking the university’s “business model.” The idea is not to become like a business, but rather to analyze how processes, technologies, and resources are used to deliver value. The model begins with the institution’s “value propositions”: in particular, meeting the needs of traditional and post-traditional students. (Research and scholarship also are important, for their own sake as well as contributing to education.) Next come resources: the mix of people, technology, products, partners, facilities, and equipment necessary to meet student needs. Processes use resources in particular ways to deliver on the value proposition, and the so-called “profit formula” considers the revenue needed to cover the cost of delivering services and maintaining sustainability. The traditional business model remains fit for purpose in many ways, but the current challenges have revealed significant flaws. My own work (Massy 2016) examines these flaws in detail, and proposes some practical solutions. This paper addresses similar issues as it considers the business model, the cost of teaching, and the need for “networked leadership.”

“Illuminating the ‘Black Box’ of College Spending” may be the paper’s most advanced and provocative section. Institutions cannot innovate effectively without knowledge of costs in relation to revenue: both historically, in terms of what they have actually done, and prospectively in terms of what they might do in the future. This is particularly important for the cost of teaching, the “business of the business.” The required data go far beyond what can be gleaned from financial statements or even from conventional cost accounting. What’s needed are structural models that describe how resources are applied to particular activities in sufficient detail to allow in-depth understanding of what’s being done at what cost, and “what-if analysis” of what might be done to effect improvements.

The needed results can be obtained from a new generation of activity based costing (ABC) models, applied at the level of individual courses, which provide bottom-up information about modes of teaching, the resources consumed by each mode, and the cost of the resources—plus revenues earned and the margins generated (Massy 2016). These highly flexible models can include quality-related variables such as numbers of sections and breakouts, average class size, use of teaching assistants and adjunct faculty, and whether the classes involve online work or special technology. They can readily incorporate learning metrics when they become available in particular fields. It is still early days for these models, but institutions that learn to employ them effectively will empower faculty and department chairs, deans and provosts, financial executives, and governing boards to fulfill their responsibilities more effectively.
The paper points out that achieving these benefits will require a working knowledge of activities, costs, revenues, and margins by faculty and staff across the institution. Such internal transparency means, inevitably, that the information will become available to external stakeholders—including government funding agencies. This challenges the traditional view that internal data should be held closely in order to avoid criticism and second-guessing. However, the modern view holds that such problems must be dealt with on their merits—using evidence-based arguments—because eschewing transparency makes it impossible for internal parties to use the data effectively.

The last main theme of the paper is that “network leaders” are needed to unlock the value of financial transparency. Such leadership broadens participation in shared governance and, at the same time, organizes it around coordinated information and criteria for systemic improvement. The new leaders “awaken” networks of faculty, administrators, and others—both within institutions and across groups of institutions—to create deeper insights about best practices and financial consequences. These networks exist already, but they operate in an uncoordinated fashion without benefit of common data. Indeed, the paucity and concentration of data mean that even shared governance (a kind of network) works mainly through proxies rather than wide participation. One of the network leaders’ key jobs is to “orchestrate” the development of common data sets and decision support tools like the ABC models described above, and use them to help people align objectives and get things done. The idea of networked management provides important insights about how universities can fix the flaws in their academic business models.

William F. Massy
Professor Emeritus, Former Vice President for Business and Finance
Stanford University (CA)